Once it was 'too big to fail' whereas today it's 'too big to ignore'
The Consumer Financial Protection Bureau recently announced it would start investigating and holding fintech firms and other non-bank financial companies to the same standards as banks. The news comes amid an explosion of growth – with some estimates placing expansion at 25% by 2024.
Mortgage Professional America reached out to Rohin Tagra, CEO and founder of Azimuth GRC, to discuss the significance of the agency’s move toward greater transparency: “Fintechs need to move quickly to determine whether their current compliance regimes are in line with the CFPB’s requirements for effective compliance management systems,” he said. “An ineffective compliance program is one of the easiest ways for the CFPB to rate you a higher risk in comparison to your peers.”
The CFPB is a government agency tasked with consumer protection in the financial sector, with jurisdiction over banks, credit unions, securities firms, payday lenders, mortgage-servicing operations, foreclosure relief services, debt collectors and other financial companies operating in the US. Its creation stems from the Dodd-Frank Wall Street Reform and Consumer Protection Act, created in 2010 as a response to the financial crisis of 2007-08. Since the agency’s founding, it has utilized technology tools to monitor how financial entities used social media and algorithms to target consumers.
Now, the targets are largely on fintechs – the segment alone expected to grow at a compound annual growth rate of 20% over the next four years with expected market value of some $305 billion, according to GlobeNewswire. Notable fintechs on the commercial side are Kabbage Inc. and Square, Tagra offered as examples. “You look at the size of the portfolios,” he said. “Kabbage was one of the largest small business lenders out there.”
How things have taken a 180-degree turn. Whereas in the subprime mortgage meltdown of 2008-09 the mantra was “too big to fail,” today’s proactive guidance appears to be “too big to ignore” as it relates to regulation.
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Discussion to better oversee the industry is not new but has grown of late given the segment’s explosive growth, Tagra agreed. However, it’s no wonder oversight is being talked about in earnest given such entity’s similarities to traditional banks.
“They’ve enforced banks and got into non-bank mortgage companies and now there’s been this big discussion if fintechs are going to get regulated or not,” Tagra said of the US government agency. “Their scope enables them also to enforce or supervise fintechs. Fintechs offer very similar products to banks, if not the same or similar. They do mortgage lending, student loans, or the buy-now-pay-later type stuff. It’s just more that they’re expanding their reach or coverage into an area that has not necessarily seen that regulatory scrutiny in the past.”
Tagra expounded on the point: “If you look at the products they offer, in essence they’re banking products. But they just don’t fall under the fact that the banking entity has a banking charter. If someone’s doing payment applications, that’s the same type of service a bank would offer but because of the entity they are they’re not seeing that scrutiny.”
Asked if the move was reminiscent of safeguards established under Dodd-Frank in response to the excesses of ‘08-’09 enabled by easy credit, Tagra pointed to the growing popularity of today’s “buy-now-pay-later” option for consumers. “You’ve got folks that are in essence taking on consumer debt, but it’s not going through the normal channels. You can get on through your credit card, or Amazon, or other areas. Now, someone may accumulate a large amount of debt that won’t show up in a credit report.”
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The aim of the CFPB move is to level the playing field to protect consumers, Tagra said: “I think what they’re trying to do is put into effect the same rates or requirements that are on a bank institution or non-bank institution that provides these products. Making sure they have credit bureau reporting standards - like whether someone is making a payment or not making a payment. Or fees: Are you charging the appropriate fees? Interest rates? So, it’s to help protect the consumer based on having a level playing field on regulations that would apply to that product if it were withing the four walls of a bank versus a different type of institution that’s characterized as a fintech.”
If it’s sheer size and explosive growth that’s gotten the CFPB to move on oversight, one should expect more. Tagra predicted crypto is likely next to get the regulatory spotlight treatment. “They’ll probably more than likely get into that once they figure out the right approach and as it continues to scale from a transactional standpoint,” he said.
Azimuth GRC is a regulatory technology company self-touted as having “revolutionized the world of regulatory compliance, helping companies in heavily regulated industries comply with applicable laws.
