Is the CFPB Ruling Important for the Future of Fintechs?

Recently a federal appeals court decided that the Consumer Finance Protection Bureau—a federal organization designed to safeguard against some of the pitfalls that led to the 2008 crisis—had been operating unconstitutionally, something which is certainly a blow to the agency itself and will no doubt have ramifications for how it will operate in the future.

But is it important for the future of fintechs—specifically online lenders, which in particular have been subjected to scrutiny by the CFPB? And if it is important, should online lenders be mourning or celebrating?

“Now there are checks—the director [of the agency] now has to answer to the President,” says Scott Wortman, partner at Warshaw Burstein, LLP, adding that previous to the ruling, the President could only fire the director with cause, not at will. “There is also no retroactivity allowed under the new ruling, so if the CFPB decides to go after an online lender it’s now bound by the statute of limitations.”

This again was not previously the case before the ruling, which is over a hundred pages long—the curious can also look at the Wall Street Journal’s breakdown of the ruling; the very curious can find the full decision here—but the retroactivity shift seems to be the pertinent change for fintechs, and was also the reason for the case against the agency.

“This is something the CFPB has done on multiple occasions; regulating through enforcement,” says Wortman. “This ruling is saying that [the agency] can’t do that anymore; the court actually uses the term ‘absurdity.’”

However, there are those who don’t believe the ruling will resonate with fintechs quite the same in the present moment.

“We’re still seeing some fallout from Wells Fargo; I think that’s a little more consequential than the ruling,” said Chris O’Brien, founder of Linchpin Partnerships. “Regulators appear to be doubling down; intensifying their scrutiny, and big banks are struggling to innovate which is particularly challenging in a heavily regulated industry—marketplace lenders have an opportunity to be nimble because of that.”

The two may not be entirely comparable: Wells Fargo is a bank, which means it answers to regulators. The effects of its scandal were for the most part easily and immediately measurable.

Since the story broke, it has led to a general rise in the distrust for “megabanks,” a lack of corporate and public faith in leadership, and a visibly incensed U.S. government—not to mention all of the other banks lunging to reassure everyone on Twitter (and like, other official channels probably) that cross-selling is evil and not something we would ever do ever.

The CFPB, by contrast, is one of the organizations that is supposed to do the regulating, is only five years old, and the effects of the complete reshuffling of its internal structure and policies will only be clear a while down the line—after November, at the very least.

However, both of these events do show that compliance is fast becoming one of the most important areas for financial institutions to focus on. How this will specifically affect the fintech world, which in part exists because of the historic friction between regulations and incumbent financial institutions, remains to be seen.

“The CFPB will still be a face for consumer protection; what [the ruling was] attacking was the governance, the management, not the agency’s function,” says O’Brien. “[Compliance] remains an important consideration for financial institutions.”

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