Q&A with CFPB Director Rohit Chopra
What follows is a lightly edited transcript of the interview:
I’d like to start with overdraft fees. What illegal practices are you seeing in the marketplace with respect to overdraft fees, and what do you think the industry should be doing on its own?
ROHIT CHOPRA: We are actually quite gratified to see where the market has been shifting. You’re now starting to see institutions, especially large ones, starting to compete and change their programs.
The CFPB over the years has done a number of enforcement actions as well as supervisory findings, as well as the other banking agencies as well on specific types of overdraft practices that were found to be unlawful. We are increasing our supervisory scrutiny of the institutions that are most dependent on [overdraft fees] as part of their deposit account fee revenue. I’ve actually met with hundreds of banks on this issue. They want to make sure that overdraft really is a service that people know what they’re getting into.
Ron Sachs/Bloomberg
Overdraft and nonsufficient-funds fees are quite different. In one the payment doesn’t clear and the other one does. There’s also a lot that needs to be thought through and we’re seeing that in our own data and what we’re looking at in terms of systems in the background. How are they actually processing the payments? It’s more than payment order, but how does it flow through the system? How are payments credited versus money taken out? And I do think there are a number of consumers who do believe they have the funds and are surprised by it. So we will continue to report on what we see as the data.
I have to say, across the board, we are seeing a lot of shifts. And ultimately I think those shifts are going to be positive for the marketplace.
The number of enforcement actions has dropped fairly precipitously in recent years. Why has the bureau brought so few enforcement actions in your first year?
Well, I think there’s a couple of reasons. One of which is that it does take quite a bit of time to develop cases. It takes time to look at the body of evidence. It also takes time to really focus resources on our fraud and injury. And I think one key difference [between] me versus perhaps others — and I don’t want to compare myself to my predecessors — but writ large, when it comes to enforcement, is that we’re going to be focusing not necessarily on the number of actions. We’re going to be focusing on the impact of those actions and remedying harm and stopping it from occurring again.
So we have really shifted focus much more on larger actors, and much more on repeat offenders. So if you look in the first six months since I’ve arrived, we’ve authorized litigation against many market-leading firms, and disproportionately they relate to repeat-offender conduct. Not many people have looked at the First Cash action. Not many people have looked at TransUnion and the MoneyGram action. I think it’s important that the agency really be willing to prove its case in court and develop investigations and ways that we can do that.
One thing that I was very influenced by while at the [Federal Trade Commission], was that FTC commissioners across multiple administrations would really see that their role was to strong arm small firms into settlements, and expect that the industry would change its ways because of that.
I think we have more credibility when we can really litigate cases against well-resourced firms who aren’t going to easily just back down and, in fact, will be willing to spend the money sometimes to litigate. Now, that being said, of course we are going to resolve most matters through settlements. We have done a number of settlements, some of them very large. But I do believe that we will be litigating perhaps more than others have been willing to.
Some critics suggest settlement demands are too big and that’s resulting in more litigation. What’s driving your approach to settlements?
I can speak in a broad brush. What we’re doing is we want to get enforcement cases to really be proportionate. And when you compare across firms engaged in similar conduct, we have factors that we look at when it comes to civil penalties. We put a lot of effort into considering redress and other ways to make consumers [whole].
I personally think we’re upping our game when it comes to a rigorous approach to resolving matters. We are finalizing settlements. And to be candid with you, many of the matters that we have are ones that were initiated well before I came.
The U.S. Chamber of Commerce just launched an ad campaign against you, and some say it’s a response to the bureau’s rhetorical tone that is harsh and is consistently negative toward industry — calling bank fees “junk fees,” for example. Tell me what you’re trying to accomplish with that kind of rhetoric?
With the rhetoric? Well, I think we need to be judged by our actions. Look, I get it that the Big Tech firms are certainly pushing back against us. I would question the premise that banks are pushing back. Of course, there are going to be places where regulated entities say one thing, consumer groups say another thing.
The Big Tech piece is a place where the CFPB has not typically focused but there’s no question that the biggest tech companies on the planet are entering financial services. And so it is true: We have ordered large tech companies that are engaged in financial services to turn over information on their payment practices on their payment systems. We have raised questions about data harvesting and monetization. Everyone has seen that they are entering buy now/pay later. Facebook even tried starting a currency.
I think there is a complex set of industries and sectors, whether it’s nonbanks, banks, Big Tech. There’s a lot of different players in this. I don’t see this as the CFPB versus the industry. I think there’s a lot of forces in the industry, whether it’s nonbank versus bank, who are subjected to different levels of oversight; whether it’s Big Tech versus new entrants in fintech.
Can you provide more insight on Regulation E and what the CFPB plans to do about payment apps? Specifically, can you discuss banks’ liability for fraud, and whether it encompasses Zelle? Can the CFPB expand the set of fraudulent transactions that are covered or does the CFPB view apps like Zelle as covered by Reg E?
That’s an extremely complex question. I know you’re trying to nail me [down] on it and I’m not trying to be unresponsive. But here’s the issue. I don’t want to comment specifically on Zelle, but if you zoom out to real-time payments, if you look across the developed world, when real-time payments become ubiquitous, you do see a dramatic increase in scams and fraud.
And the heartbreaking part for us, in the U.S., is that fraud is often disproportionately targeted at older adults — widows or widowers or others who are isolated, and it disproportionately occurs to those who are subjected to identity theft, including members of the military. We are looking at romance scams and payment scams.
We are trying to look at this holistically, beyond any one single app, [to see] what really can be done both by consumers, the industry and policymakers to really rein some of this in. We have made no final decisions on any specific regulatory approach. We certainly observed that there is an increase in real-time payments. And in some cases, smaller banks that have enrolled or participate may not have a lot of leverage to dictate on certain types of policies.
We also observed that some of the real-time payment apps are seeking to take steps to authenticate better or reduce the amount of errors that take place. It relates to other types of payment mechanisms, whether Big Tech companies might put it on their payment platforms, whether stablecoins ever move from more of a speculative trading purpose into consumer use. The issue is bigger than one app or one type of payment.
You’ve made no bones about targeting technology companies from your days at the FTC. Can you give us any hints on what the bureau has found and where it is headed with its various efforts under the 1022 order?
On the 1022 payments order, we’re trying to ascertain what they doing with the data that they’re collecting. Most banks are pretty guarded about protecting consumer financial information because it’s extremely sensitive. How is that data being combined that the Big Tech companies have on your browsing history, on your geolocation, your purchasing?
The questions we have is what’s the implications for how your data is bought, sold, traded and monetized? Could it lead to personalized pricing, and other things that have people really thought about? And then on top of that, what happens if they start putting together a current virtual currency that rides on their rails and does that have a lot of other impacts? We also asked about how are consumer protections being adhered to?
Google Pay, Apple Pay and others primarily attach to the existing banking rails, especially where there is a credit card or debit card number. What happens when that moves outside of the banking rails and what is the implication for the banking system of that?
We are still culling through data that has been produced on that and there’s still a lot of work to be done. Our initial findings really do suggest that there really is a way in which Big Tech is integrated into financial services in China with WeChat pay, with Alipay. I do believe that the current trend suggests that we are lurching toward that and I think there’s some questions about whether that’s the right thing. So stay tuned on it, we will have more to say this Fall about some of what we’re learning.
I really see my time at the CFPB, if we don’t really analyze and address some of the issues that affect consumers and the financial system with Big Tech’s entry, I think it will be really hard to put the genie back in the bottle.
You also have a lot of industry talent gravitating toward that. And also think about the way in which payments can be monetized and combined. A bank typically knows the date and time of a payment, the merchant, the location and the amount. They don’t know your phone calls, and other things like that.
The Big Tech company may actually know SKU-level data, the individual products that you purchase. And that’s something that if it becomes a key way that they compete and serve consumers, it may be hard for banks to step up to that.
No doubt about it. It’s a huge concern.
I think there’s not enough people talking about it, and I worry that in the fintech conversation there’s a big difference between nascent startups offering new products, new services, versus a Big Tech giant extending its reach. It’s a very, very different issue. We’ve been thinking a lot about how do you increase competition and innovation? Is it about picking one winner or loser or is it about fostering and helping all of those little players get in the game and challenge the Big Tech firms?
Let’s talk about the FDIC. Specifically, whose idea was it to put forward a review of bank merger policy without the consent of FDIC Chair Jelena McWilliams?
Well, I would challenge the premise of the question. But we can happily provide you our board statement on this. We are happy to provide you with other information. The statute and the bylaws are clear on this point. There was an assertion that essentially one person could override a supermajority of the board without any legal justification whatsoever.
I am glad that the matter has been settled and that we’ve returned to normal order just like every other board in America.
How will you respond if this is going to become a huge deal for Republicans if they win in November?
I would encourage you to take a look at what is happening at the National Credit Union Administration board. That is a place where there’s a chair and the rest of his board is the opposite party. And what they’re doing is kind of what is normal, which is they work together. Not everyone gets what they want. The majority still has the right to pursue those things and the chair at the NCUA has been in the minority and has had to vote no. My approach during all of this was, you work with all the board members. There was a simple request that the board thought was the right path, which is: Let’s just ask some questions of the public about what’s the right way to do the Bank Merger Act. There was a Presidential Executive Order Act, which we’re not bound by but [that was] a reasonable request asking [us] all take a look at these policies. The agencies work with the Justice Department. The Justice Department was also reviewing its merger review guidelines.
In some ways, not asking questions and not being willing to listen … you know, we have to always be willing to listen.
Let’s talk about the “qualified mortgage” rule. Can you discuss your thinking on what should be changed? Are you looking for a different bright-line QM standard?
We have not really heard any objections from the mortgage industry or others about taking a harder look at that. With respect to QM, there was a lot of work to put together in recent years and there are places in a targeted manner related to streamlined modifications and streamline refinancing.
In terms of rate environment change, right now rates are higher. People who are taking out mortgages now, at some point, may be in a lower-rate environment. And the process by which people can streamline their way to get a refinancing, I hate to see people missing out on a refi cycle because it makes a big difference to a household.
I hope this is clear. With respect to the general QM rule, I’ve only asked the staff to take a look at the streamlined modifications and refinancings. I think we have to let the core of general QM play out in the market a little bit. That’s why my interest has been quite targeted. I have not made any decisions about seasoned QM.
Do you think the industry should consider machine learning models to be disfavored by the bureau, and if so, why?
No. Honestly it depends on what you mean — there’s a lot of jargon and marketing terms. I have tried to be clear that advanced computational models are increasingly going to be a part of not just financial services, but decision-making across sectors of the economy.
However, we do have laws on the books that relate to credit decisioning. We have tried to make clear that you still must provide a statement of reasons in an adverse action notice that explains why the applicant got an adverse decision. You can’t simply use the fact that you have an incomprehensible algorithm to not comply with that. There has been a lot of work across sectors, and from the [Organization for Economic Co-operation and Development] and other global bodies that explainability of artificial intelligence and algorithms and advanced computational methods is really critical.
And so lenders and others do need to be able to explain when someone gets an adverse action.
It’s not prohibited to deny someone credit on a legitimate basis. But you do have to explain why. And our advisory opinion on this sought to complement the existing rules and commentary to give further explanation of how we might apply that in the context of emerging technologies.
One thing people will probably know about me is I’m constantly asking our staff to think about what the future holds. What is it going to mean to bank in the metaverse? What is it going to mean to use more advanced computational methods? What’s it going to mean when lenders have even more data about each of us? I think all of us are thinking about what that world is and how we apply existing law to that in ways that really make sense. We have tried to be upfront and transparent about how we think some of those laws do apply.
What are your views about how the current economic cycle might affect consumers?
The way banks are adapting to the rate environment — there’s a lot of things that are so different from the last cycle. For example, when we look at the data on what’s happening to the consumer and the household, we see they’re borrowing, they’re increasing their credit card borrowing.
But there’s no data on how much they’re increasing their buy now/pay later [use]. There’s not necessarily data on how they are faring post-pandemic when many of them were in forbearance. I’m not in the business of predicting what’s happening in the macro economy, but I have told the staff, “We always need to be prepared for a change in the macroeconomic environment.” What do we spot as the challenges if real estate prices go down? If rates go significantly higher, how is it impacting what products are being offered to people?
I realized there’s always the kind of Washington drama, but there’s also the real world of banking. More banking will be in the metaverse one day. I do think there’s going to be more ways in which digital technologies reshape our experience. There’s going to be different types of companies, including the Big Tech firms playing in this. There’s a lot more trends about the intersection of payments, commerce and banking, especially with the big retailers.
How concerned are you about crypto? You have complaints from consumers who say their money has been stolen.
Well, it’s interesting. Right now, cryptocurrencies are really primarily in the speculative trading markets. There is a question, though, about what happens when some of that is riding the rails of the Big Tech firms or have a place in everyone’s wallet and then all of a sudden it could become a consumer issue. Our complaint database — it’s like a huge surge. It’s also at the SEC.
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