The Consumer Financial Protection Bureau (CFPB) has decided to end temporary “safe harbor” for two fintech companies.
The first such action was the bureau’s decision to terminate the no-action letter that had been granted to Upstart Network, which offers artificial intelligence-generated data banks can use to make consumer credit decisions, such as approving or denying a mortgage application.
The no-action letter is effectively a promise by the government not to pursue enforcement as companies develop untested projects. The use of a no-action letter is meant to encourage innovation that benefits consumers, by easing potential regulatory concerns when a new project might unintentionally violate federal laws or regulations.
The CFPB said it was revoking Upstart’s no-action letter, first issued in 2017 and then extended in 2020, because the company informed the bureau it wanted to update its AI model which would require bureau approval. Upstart described the decision as mutual, done in the name of expediency to avoid being sidelined while waiting for approval.
The second “safe harbor” rescinded by the CFPB was the “special regulatory treatment” for fintech company Payactiv.
The bureau in 2020 had offered the treatment under what’s known as a “regulatory sandbox,” which is similar to a no-action letter in that the firm received a temporary safe harbor from legal and regulatory liability.
The treatment allowed Payactiv to test a product that gives employees access to their earned wages prior to those wages being paid on payday. The company contracts with employers to provide the wage-transfer service, recouping the amount through a payroll deduction from the employee’s next paycheck, according to the bureau. The regulatory sandbox temporarily shielded Payactiv from legal claims its “earned-wage access” product may violate the Truth in Lending Act.
Chopra’s actions on Upstart and Payactiv have raised concerns with congressional Republicans.
“Director Chopra continues to block consumers’ access to innovative financial products and services. Rescinding legal safe harbors under the guise of consumer protection only creates more uncertainty for businesses and their customers,” Rep. Patrick McHenry (R-N.C.), the ranking member of the House Financial Services Committee said in a statement to CQ Roll Call. McHenry said Chopra’s actions “will stifle innovation and limit consumer choice at a time when they can least afford it.”
McHenry also stated Republicans will “hold Director Chopra’s CFPB accountable for harming consumers, while offering thoughtful solutions that embrace the critical role technology and innovation play in our 21st Century financial system.”