Rule2024-27836
Defining Larger Participants of a Market for General-Use Digital Consumer Payment Applications
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 10, 2024
Effective
January 9, 2025
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Consumer Financial Protection Bureau (CFPB) issues this rule to define larger participants of a market for general-use digital consumer payment applications. Larger participants of this market will be subject to the CFPB's supervisory authority under the Consumer Financial Protection Act (CFPA). A nonbank covered person qualifies as a larger participant if it facilitates an annual covered consumer payment transaction volume of at least 50 million transactions as defined in the rule, and it is not a small business concern.
Full Text
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[Federal Register Volume 89, Number 237 (Tuesday, December 10, 2024)]
[Rules and Regulations]
[Pages 99582-99654]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-27836]
[[Page 99581]]
Vol. 89
Tuesday,
No. 237
December 10, 2024
Part III
Consumer Financial Protection Bureau
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12 CFR Part 1090
Defining Larger Participants of a Market for General-Use Digital
Consumer Payment Applications; Final Rule
Federal Register / Vol. 89 , No. 237 / Tuesday, December 10, 2024 /
Rules and Regulations
[[Page 99582]]
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CONSUMER FINANCIAL PROTECTION BUREAU
12 CFR Part 1090
[Docket No. CFPB-2023-0053]
RIN 3170-AB17
Defining Larger Participants of a Market for General-Use Digital
Consumer Payment Applications
AGENCY: Consumer Financial Protection Bureau.
ACTION: Final rule.
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SUMMARY: The Consumer Financial Protection Bureau (CFPB) issues this
rule to define larger participants of a market for general-use digital
consumer payment applications. Larger participants of this market will
be subject to the CFPB's supervisory authority under the Consumer
Financial Protection Act (CFPA). A nonbank covered person qualifies as
a larger participant if it facilitates an annual covered consumer
payment transaction volume of at least 50 million transactions as
defined in the rule, and it is not a small business concern.
DATES: This rule is effective January 9, 2025.
FOR FURTHER INFORMATION CONTACT: George Karithanom, Regulatory
Implementation and Guidance Program Analyst, Office of Regulations, at
202-435-770. If you require this document in an alternative electronic
format, please contact <a href="/cdn-cgi/l/email-protection#91d2d7c1d3ced0f2f2f4e2e2f8f3f8fdf8e5e8d1f2f7e1f3bff6fee7"><span class="__cf_email__" data-cfemail="eaa9acbaa8b5ab89898f999983888386839e93aa898c9a88c48d859c">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Overview
Section 1024 of the CFPA,\1\ codified at 12 U.S.C. 5514, gives the
CFPB supervisory authority over all nonbank covered persons \2\
offering or providing three enumerated types of consumer financial
products or services: (1) Origination, brokerage, or servicing of
consumer loans secured by real estate and related mortgage loan
modification or foreclosure relief services; (2) private education
loans; and (3) payday loans.\3\ The CFPB also has supervisory authority
over ``larger participant[s] of a market for other consumer financial
products or services, as defined by rule[s]'' the CFPB issues.\4\ In
addition, the CFPB has the authority to supervise any nonbank covered
person that it ``has reasonable cause to determine by order, after
notice to the covered person and a reasonable opportunity . . . to
respond . . . is engaging, or has engaged, in conduct that poses risks
to consumers with regard to the offering or provision of consumer
financial products or services.'' \5\
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\1\ Consumer Financial Protection Act of 2010, title X of the
Dodd-Frank Wall Street Reform and Consumer Protection Act, Public
Law 111-203, 124 Stat. 1376, 1955 (2010) (hereinafter, ``CFPA'').
\2\ The provisions of 12 U.S.C. 5514 apply to certain categories
of covered persons, described in section (a)(1), and expressly
excludes from coverage persons described in 12 U.S.C. 5515(a) (very
large insured depository institutions and credit unions and their
affiliates) or 5516(a) (other insured depository institutions and
credit unions). The term ``covered person'' means ``(A) any person
that engages in offering or providing a consumer financial product
or service; and (B) any affiliate of a person described [in (A)] if
such affiliate acts as a service provider to such person.'' 12
U.S.C. 5481(6).
\3\ 12 U.S.C. 5514(a)(1)(A), (D), (E).
\4\ 12 U.S.C. 5514(a)(1)(B), (a)(2); see also 12 U.S.C. 5481(5)
(defining ``consumer financial product or service'').
\5\ 12 U.S.C. 5514(a)(1)(C); see also 12 CFR part 1091
(prescribing procedures for making determinations under 12 U.S.C.
5514(a)(1)(C)). In addition, the CFPB has supervisory authority over
very large depository institutions and credit unions and their
affiliates. 12 U.S.C. 5515(a). Furthermore, the CFPB has certain
authorities relating to the supervision of other depository
institutions and credit unions. 12 U.S.C. 5516(c)(1). One of the
CFPB's objectives under the CFPA is to ensure that ``Federal
consumer financial law is enforced consistently, without regard to
the status of a person as a depository institution, in order to
promote fair competition[.]'' 12 U.S.C. 5511(b)(4).
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This rule (the Final Rule) is the sixth in a series of CFPB
rulemakings to define larger participants of markets for consumer
financial products and services for purposes of CFPA section
1024(a)(1)(B).\6\ The Final Rule establishes the CFPB's supervisory
authority over nonbank covered persons that are larger participants in
a market for ``general-use digital consumer payment applications.'' In
establishing the CFPB's supervisory authority over such persons, the
Final Rule does not impose new substantive consumer protection
requirements. In addition, some nonbank covered persons that would be
subject to the CFPB's supervisory authority under the Final Rule also
may be subject to other CFPB supervisory authorities, including for
example under CFPA section 1024 as a larger participant in another
market defined by a previous CFPB larger participant rule. Finally,
regardless of whether they are subject to the CFPB's supervisory
authority, nonbank covered persons generally are subject to the CFPB's
regulatory and enforcement authority and to applicable Federal consumer
financial law.
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\6\ The first five rules defined larger participants of markets
for consumer reporting, 77 FR 42874 (July 20, 2012) (Consumer
Reporting Rule), consumer debt collection, 77 FR 65775 (Oct. 31,
2012) (Consumer Debt Collection Rule), student loan servicing, 78 FR
73383 (Dec. 6, 2013) (Student Loan Servicing Rule), international
money transfers, 79 FR 56631 (Sept. 23, 2014) (International Money
Transfer Rule), and automobile financing, 80 FR 37496 (June 30,
2015) (Automobile Financing Rule).
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The market described in the Final Rule includes providers of funds
transfer and payment wallet functionalities through digital payment
applications for consumers' general use in making payments to other
persons for personal, family, or household purposes. Examples include
consumer financial products and services that are commonly described as
``digital wallets,'' ``payment apps,'' ``funds transfer apps,'' ``peer-
to-peer payment apps,'' ``person-to-person payment apps,'' ``P2P
apps,'' and the like. Providers of consumer financial products and
services delivered through these digital applications help consumers to
make a wide variety of consumer payment transactions, including
payments to friends and family and payments for purchases of
nonfinancial goods and services.
The CFPB is authorized to supervise nonbank covered persons that
are subject to CFPA section 1024(a) for purposes of (1) assessing
compliance with Federal consumer financial law; (2) obtaining
information about such persons' activities and compliance systems or
procedures; and (3) detecting and assessing risks to consumers and
consumer financial markets.\7\ The CFPB conducts examinations of
various scopes of supervised entities. In addition, the CFPB may, as
appropriate, request information from supervised entities prior to or
without conducting examinations.\8\ Section 1090.103(d) of the CFPB's
existing larger participant regulations also provides that the CFPB may
require submission of certain records, documents, and other information
for purposes of assessing whether a person qualifies as a larger
participant of a market as defined by a CFPB larger participant
rule.\9\
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\7\ 12 U.S.C. 5514(b)(1). The CFPB's supervisory authority also
extends to service providers of those covered persons that are
subject to supervision under 12 U.S.C. 5514(a)(1). 12 U.S.C.
5514(e); see also 12 U.S.C. 5481(26) (defining ``service
provider'').
\8\ See, e.g., 12 U.S.C. 5514(b)(1) (authorizing the CFPB both
to ``require reports and conduct examinations on a periodic basis''
of nonbank covered persons subject to supervision).
\9\ 12 CFR 1090.103(d).
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Consistent with CFPA section 1024(b)(2), the CFPB has established
and implemented a risk-based supervisory program that is designed to
prioritize supervisory activity among nonbank covered persons subject
to CFPA section 1024(a) on the basis of risk.\10\ The CFPB's
prioritization process
[[Page 99583]]
takes into account, among other factors, the size of each entity, the
volume of its transactions involving consumer financial products or
services, the size and risk presented by the market in which it is a
participant, the extent of relevant State oversight, and any field and
market information that the CFPB has on the entity. Specifically, as
the CFPB Supervision and Examination Manual explains in greater detail,
the CFPB evaluates risks to consumers at market-wide and the
institution product line levels. At the market-wide level, the CFPB
considers and compares risks to consumers across different types of
products (e.g., mortgage loans or debt collectors) along with the
relative product market size in the overall consumer finance
marketplace. At the institution product line level, the CFPB evaluates
and compares risks across entities that, regardless of status as a
nonbank or an insured depository institution or credit union, offer the
same or similar products (e.g., providers of mortgage loans). When
evaluating risks across entities in an institution product line, the
CFPB considers which entities have business models and market shares
that pose greater risk of harm to consumers. The CFPB also places
significant weight on ``field and market intelligence,'' which includes
findings from prior examinations and other information about the
strength of compliance management systems, metrics gathered from public
reports, and the number and severity of consumer complaints the CFPB
receives.\11\ Taken together, this approach of assessing risks at the
market-wide level and at the institutional level allows the CFPB to
focus on areas where consumers have the greatest potential to be
harmed, specifically, on relatively higher-risk institution product
lines within relatively higher-risk markets. Finally, as described in
CFPA section 1024(b)(3), the CFPB also coordinates its supervisory
activities at nonbank covered persons with the supervisory activities
conducted by Federal prudential regulators and State regulatory
authorities.\12\
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\10\ 12 U.S.C. 5514(b)(2). The CFPB notes that its
prioritization process is not the subject of this rulemaking.
\11\ See id. For further description of the CFPB's supervisory
prioritization process, see CFPB Supervision and Examination Manual
(updated Sept. 2023), part I.A (pages 11-12 of Overview section),
<a href="https://files.consumerfinance.gov/f/documents/cfpb_supervision-and-examination-manual_2023-09.pdf">https://files.consumerfinance.gov/f/documents/cfpb_supervision-and-examination-manual_2023-09.pdf</a> (last visited Nov. 10, 2024).
\12\ 12 U.S.C. 5514(b)(3). The Final Rule further describes this
coordination in response to general comments about existing
oversight of the market below. As discussed there, the CFPB also
coordinates its supervisory activity with the Federal Trade
Commission. The CFPB notes that its coordination process is not the
subject of this rulemaking.
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The specifics of how an examination takes place vary by market and
entity. However, the examination process generally proceeds as
follows.\13\ CFPB examiners contact the entity for an initial
conference with management and often request records and other
information. CFPB examiners may review the components of the supervised
entity's compliance management system. Based on these discussions and a
preliminary review of the information received, examiners determine the
scope of an on-site or remote examination and coordinate with the
entity to initiate this portion of the examination. While on-site or
working remotely, examiners discuss with management the entity's
compliance policies, processes, and procedures; review documents and
records; test transactions and accounts for compliance; and evaluate
the entity's compliance management system. At the conclusion of that
stage of an examination, examiners may review preliminary examination
findings at a closing meeting. After the closing meeting, if examiners
have identified potential violations of Federal consumer financial law,
they also may provide the entity an opportunity to respond in writing
to those potential findings.\14\ Finally, examinations may involve
issuing confidential examination reports, supervisory letters, and
compliance ratings. In addition to the process described above, the
CFPB also may conduct other supervisory activities, such as periodic
monitoring.\15\
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\13\ For further description of the CFPB's examination process,
see CFPB Supervision and Examination Manual, part I.A.
\14\ See, e.g., CFPB, Supervisory Highlights Issue 8, Summer
2015, sec. 3.1.3 (describing supervision process of sending a
Potential Action and Request for Response (PARR) letter to a
supervised entity), <a href="https://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf">https://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf</a> (last visited Nov. 5, 2024).
\15\ CFPB Supervision and Examination Manual, part I.A (page 12
of Overview section describing supervisory monitoring).
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II. Background
On November 17, 2023, the CFPB published a notice of proposed
rulemaking to define larger participants of a market for general-use
digital consumer payment applications (Proposed Rule).\16\ As described
in part V below, the Proposed Rule would have defined a larger
participant as any nonbank covered person that, in the previous
calendar year, both facilitated at least five million consumer payment
transactions by providing general-use digital consumer payment
applications and was not a small business concern as defined in the
Proposed Rule. The CFPB requested comment on the Proposed Rule. The
CFPB received 59 comments from consumer advocate organizations
(consumer groups), nonprofits, companies, industry associations, State
attorneys general, Members of Congress, and other individuals. The
comments are discussed in more detail below.
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\16\ 88 FR 80197 (Nov. 17, 2023).
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III. Summary of the Final Rule
The CFPB is authorized to issue rules to define larger participants
in markets for consumer financial products or services. Subpart A of
the CFPB's existing larger-participant regulation, 12 CFR part 1090,
prescribed procedures, definitions, standards, and protocols that apply
to the CFPB's supervision of larger participants.\17\ Those generally-
applicable provisions will apply to the CFPB's supervision of larger
participants in the general-use digital consumer payment application
market described by the Final Rule. The definitions in Sec. 1090.101
should be used to interpret terms in the Final Rule unless otherwise
specified.
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\17\ 12 CFR 1090.100 through 103.
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The CFPB includes relevant market descriptions and associated
larger-participant tests, as it develops them, in subpart B.\18\
Accordingly, the Final Rule defining larger participants of a market
for general-use digital consumer payment applications is codified in
Sec. 1090.109 in subpart B.
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\18\ 12 CFR 1090.104 (consumer reporting market); 12 CFR
1090.105 (consumer debt collection market); 12 CFR 1090.106 (student
loan servicing market); 12 CFR 1090.107 (international money
transfer market); 12 CFR 1090.108 (automobile financing market).
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The CFPB is finalizing the Proposed Rule largely as proposed, with
certain changes described below, including changes to increase the
transaction threshold that the CFPB will use as part of the test to
assess when a nonbank covered person is a larger participant of a
market for general-use digital consumer payment applications.
The Final Rule defines larger participants of a market for general-
use digital consumer payment applications. That market encompasses
specific activities. The market definition generally includes nonbank
covered persons that provide funds transfer or payment wallet
functionalities through a digital payment application for consumers'
general use in making consumer payments transactions as defined in the
Final Rule. The Final Rule defines ``consumer payment transactions'' to
include payments to
[[Page 99584]]
other persons for personal, household, or family purposes, excluding
certain transactions as described in more detail in the section-by-
section analysis in part V below. The Final Rule also identifies a
limited set of digital payment applications that do not fall within the
proposed market definition because they do not have general use for
purposes of the Final Rule.
The Final Rule sets forth a test to determine whether a nonbank
covered person is a larger participant of the general-use digital
consumer payment applications market. As further explained below, a
nonbank covered person is a larger participant if it satisfies two
criteria. First, the nonbank covered person (together with its
affiliated companies) must provide general-use digital consumer payment
applications with an annual volume of at least 50 million consumer
payment transactions denominated in U.S. dollars. Second, the nonbank
covered person must not be a small business concern based on the
applicable Small Business Administration (SBA) size standard. As
prescribed by subpart A of the CFPB's general larger participant
regulation, any nonbank covered person that qualifies as a larger
participant would remain a larger participant until two years from the
first day of the tax year in which the person last met the larger-
participant test.\19\
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\19\ 12 CFR 1090.102.
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As noted above, Sec. 1090.103(d) of the CFPB's existing larger
participant regulation provides that the CFPB may require submission of
certain records, documents, and other information for purposes of
assessing whether a person is a larger participant of a market as
defined by a CFPB larger participant rule.\20\ As with the CFPB's other
larger participant rules codified in subpart B, this authority will be
available to facilitate the CFPB's identification of larger
participants of the general-use digital consumer payment applications
market. In addition, pursuant to existing Sec. 1090.103(a), a person
will be able to dispute whether it qualifies as a larger participant in
the general-use digital payment applications market. The CFPB will
notify an entity when the CFPB intends to undertake supervisory
activity; if the entity claims not to be a larger participant, it will
then have an opportunity to submit documentary evidence and written
arguments in support of its claim.\21\
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\20\ 12 CFR 1090.103(d).
\21\ 12 CFR 1090.103(a).
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IV. Legal Authority and Procedural Matters
A. Rulemaking Authority
The CFPB is issuing the Final Rule pursuant to its authority under
the CFPA, as follows: (1) sections 1024(a)(1)(B) and (a)(2), which
authorize the CFPB to supervise nonbanks that are larger participants
of markets for consumers financial products or services, as the CFPB
defines by rule; \22\ (2) section 1024(b)(7), which, among other
things, authorizes the CFPB to prescribe rules to facilitate the
supervision of covered persons under section 1024; \23\ and (3) section
1022(b)(1), which grants the CFPB the authority to prescribe rules as
may be necessary or appropriate to enable the CFPB to administer and
carry out the purposes and objectives of Federal consumer financial
law, and to prevent evasions of such law.\24\
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\22\ 12 U.S.C. 5514(a)(1)(B), (a)(2).
\23\ 12 U.S.C. 5514(b)(7).
\24\ 12 U.S.C. 5512(b)(1).
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B. Consultation With Other Agencies
In developing the Final Rule and the Proposed Rule, the CFPB
consulted with the Federal Trade Commission (FTC), as well as with the
Board of Governors of the Federal Reserve System, the Commodity Futures
Trading Commission (CFTC), the Federal Deposit Insurance Corporation
(FDIC), the Financial Crimes Enforcement Network, the National Credit
Union Administration (NCUA), the Office of the Comptroller of the
Currency (OCC), and the Securities and Exchange Commission (SEC), on,
among other things, consistency with any prudential, market, or
systemic objectives administered by such agencies.\25\
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\25\ Specifically, 12 U.S.C. 5514(a)(2) directs that the CFPB
consult with the FTC prior to issuing a final rule to define larger
participants of a market pursuant to CFPA section 1024(a)(1)(B). In
addition, 12 U.S.C. 5512(b)(2)(B) directs the CFPB to consult,
before and during the rulemaking, with appropriate prudential
regulators or other Federal agencies, regarding consistency with
objectives those agencies administer. The manner and extent to which
provisions of 12 U.S.C. 5512(b)(2) apply to a rulemaking of this
kind that does not establish standards of conduct are unclear.
Nevertheless, to inform this rulemaking more fully, the CFPB
performed the consultations described in that provision of the CFPA.
Some commenters questioned whether the CFPB met its consultation
obligations based on the statement in the proposal that it
``consulted with or provided an opportunity for consultation and
input to'' the FTC and certain other agencies. 88 FR 80197 at 80199.
The CFPB clarifies that it did meet during the rulemaking process
with the FTC and other agencies listed above to consult about the
rule. Some commenters also suggested that the CFPB is specifically
required to consult with the FTC's Bureau of Competition, in line
with those commenters' view that the CFPB must apply antitrust
principles when defining a market for a larger participant rule.
However, the relevant statutory provision, 12 U.S.C. 5514(a)(2), by
its terms requires the CFPB to consult with the FTC, and not with
specific divisions of the FTC. The CFPB addresses comments regarding
the applicability of antitrust principles in discussion of general
comments in part V further below.
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V. Section-by-Section Analysis
Part 1090
Subpart B--Markets
Section 1090.109 General-Use Digital Consumer Payment Applications
Market
Proposed Rule
As described further below, the CFPB proposed to establish CFPB
authority to supervise nonbank covered persons that are larger
participants in this market because: (1) the market has grown
dramatically and become increasingly important to the everyday
financial lives of consumers; (2) CFPB supervisory authority over its
larger participants would help the CFPB to promote compliance with
Federal consumer financial law; (3) that authority would help the CPFB
to detect and assess risks to consumers and the market, including
emerging risks; and (4) that authority would help the CFPB to ensure
consistent enforcement of Federal consumer financial law between
nonbanks and insured banks and credit unions.
To accomplish these goals, the Proposed Rule would have added to
existing subpart B of part 1090 of the CFPB's rules a new Sec.
1090.109 establishing CFPB supervisory authority over nonbank covered
persons who are larger participants in a market for general-use digital
consumer payment applications.\26\
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\26\ As explained in the Proposed Rule and discussed further
below, the general-use digital payment applications described in
this Final Rule are ``financial products or services'' under the
CFPA. 12 U.S.C. 5481(15)(A)(iv), (vii). Nonbanks that offer or
provide such financial products or services to consumers primarily
for personal, family, or household purposes are ``covered persons''
under the CFPA. 12 U.S.C. 5481(5)(A), (6).
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As the Proposed Rule explained, many nonbanks provide consumer
financial products and services that allow consumers to use digital
applications accessible through personal computing devices, such as
mobile phones, tablets, smart watches, or computers, to transfer funds
to other persons. Some nonbanks also provide consumer financial
products and services that allow consumers to use digital applications
on their personal computing devices to store payment credentials they
can then use to purchase goods or services at a variety of stores,
whether by communicating with a checkout register or a self-
[[Page 99585]]
checkout machine, or by selecting the payment credential through a
checkout process at ecommerce websites. Subject to the definitions,
exclusions, limitations, and clarifications discussed in the Proposed
Rule, the proposed market definition generally would have covered these
consumer financial products and services.
The Proposed Rule explained that the CFPB proposed to establish
supervisory authority over nonbank covered persons who are larger
participants in this market because this market has large and
increasing significance to the everyday financial lives of
consumers.\27\ Consumers are growing increasingly reliant on general-
use digital consumer payment applications to initiate payments.\28\
Recent market research indicates that 76 percent of Americans have used
at least one of four well-known P2P payment apps, representing
substantial growth since the first of the four was established in
1998.\29\ Even among consumers with annual incomes lower than $30,000
who have more limited access to digital technology,\30\ 61 percent
reported using P2P payment apps.\31\ And higher rates of use by U.S.
adults in lower age brackets may drive further growth well into the
future.\32\ Across the United States, merchant acceptance of general-
use digital consumer payment applications also has rapidly expanded as
businesses seek to make it as easy as possible for consumers to make
purchases through whatever is their preferred payment method.\33\
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\27\ The Proposed Rule explained that, in proposing a larger
participant rule for this market, the CFPB was not proposing to
determine the relative risk posed by this market as compared to
other markets. It noted that, as explained in its previous larger
participant rulemakings, ``[t]he Bureau need not conclude before
issuing a [larger participant rule] that the market identified in
the rule has a higher rate of non-compliance, poses a greater risk
to consumers, or is in some other sense more important to supervise
than other markets.'' 88 FR 80197 at 80200 (citing Consumer Debt
Collection Larger Participant Rule, 77 FR 65775 at 65779).
\28\ See CFPB, Issue Spotlight: Analysis of Deposit Insurance
Coverage Through Payment Apps (June 1, 2023) (CFPB Deposit Insurance
Spotlight), <a href="https://www.consumerfinance.gov/data-research/research-reports/issue-spotlight-analysis-of-deposit-insurance-coverage-on-funds-stored-through-payment-apps/full-report/">https://www.consumerfinance.gov/data-research/research-reports/issue-spotlight-analysis-of-deposit-insurance-coverage-on-funds-stored-through-payment-apps/full-report/</a> (last visited Oct.
23, 2023); see also McKinsey & Company, Consumer digital payments:
Already mainstream, increasingly embedded, still evolving (Oct. 20,
2023) (describing results of consulting firm's annual survey
reporting that for the first time, more than 90 percent of U.S.
consumers surveyed in August 2023 reported using some form of
digital payment over the course of a year), <a href="https://www.mckinsey.com/industries/financial-services/our-insights/banking-matters/consumer-digital-payments-already-mainstream-increasingly-embedded-still-evolving">https://www.mckinsey.com/industries/financial-services/our-insights/banking-matters/consumer-digital-payments-already-mainstream-increasingly-embedded-still-evolving</a> (last visited Oct. 30, 2023); J.D. Power,
Banking and Payments Intelligence Report (Jan. 2023) (reporting
results of a survey of Americans that found that from the first
quarter of 2021 to the third quarter of 2022, the number of
respondents who had used a mobile wallet in the past three months
rose from 38 percent to 49 percent), <a href="https://www.jdpower.com/business/resources/mobile-wallets-gain-popularity-growing-number-americans-still-prefer-convenience">https://www.jdpower.com/business/resources/mobile-wallets-gain-popularity-growing-number-americans-still-prefer-convenience</a> (last visited Oct. 23, 2023);
PULSE, PULSE Study Finds Debit Issuers Focused on Digital Payments,
Mobile Self-Service, Fraud Mitigation (Aug. 17, 2023) (reporting
that nearly 80 percent of debit card issuers reported increases in
consumers' use of mobile wallets in 2022), <a href="https://www.pulsenetwork.com/public/insights-and-news/news-release-2023-debit-issuer-study/">https://www.pulsenetwork.com/public/insights-and-news/news-release-2023-debit-issuer-study/</a> (last visited Oct. 30, 2023); FIS, The Global
Payments Report (2023) (FIS 2023 Global Payments Report) at 175
(industry study reporting that in 2022 digital wallets became the
leading payment preference of U.S. consumers shopping online),
<a href="https://www.fisglobal.com/-/media/fisglobal/files/campaigns/global-payments%20report/FIS_TheGlobalPaymentsReport_2023.pdf">https://www.fisglobal.com/-/media/fisglobal/files/campaigns/global-payments%20report/FIS_TheGlobalPaymentsReport_2023.pdf</a> (last visited
Nov. 5, 2024); Digital Payment Industry in 2023: Payment methods,
trends, and tech processing payments electronically, eMarketer
(formerly known as Insider Intelligence) (Jan. 9, 2023) (projecting
2023 transaction volume by U.S. P2P mobile payment app providers to
reach over $1.1 trillion), <a href="https://www.emarketer.com/insights/digital-payment-services/">https://www.emarketer.com/insights/digital-payment-services/</a> (last visited Nov. 5, 2024); Consumer
Reports Survey Group, Peer-to-Peer Payment Services (Jan. 10, 2023)
(Consumer Reports P2P Survey) at 1 (reporting results from a survey
finding that four in ten Americans use P2P services at least once a
month), <a href="https://advocacy.consumerreports.org/wp-content/uploads/2023/01/P2P-Report-4-Surveys-2022.pdf">https://advocacy.consumerreports.org/wp-content/uploads/2023/01/P2P-Report-4-Surveys-2022.pdf</a> (last visited Oct. 23, 2023);
Kevin Foster, Claire Greene, and Joanna Stavins, 2022 Survey and
Diary of Consumer Payment Choice: Summary Results (Sept. 17, 2022)
at 8 (reporting results of survey conducted by Federal Reserve
System staff finding that, as of 2022, two thirds of consumers
reported adopting one or more online payment accounts in the
previous 12 months--a share that was nearly 20 percent higher than
five years earlier), <a href="https://www.atlantafed.org/-/media/documents/banking/consumer-payments/survey-diary-consumer-payment-choice/2022/sdcpc_2022_report.pdf">https://www.atlantafed.org/-/media/documents/banking/consumer-payments/survey-diary-consumer-payment-choice/2022/sdcpc_2022_report.pdf</a> (last visited Oct. 30, 2023); FDIC, FDIC
National Survey of Unbanked and Underbanked Households (2021) at 33
(Table 6.4 reporting finding that nearly half of all households
(46.4 percent) used a nonbank app in 2021), <a href="https://www.fdic.gov/analysis/household-survey/2021report.pdf">https://www.fdic.gov/analysis/household-survey/2021report.pdf</a> (last visited Oct. 23,
2023).
\29\ See, e.g., Monica Anderson, Pew Research Center, Payment
apps like Venmo and Cash App bring convenience--and security
concerns--to some users (Sept. 8, 2022) (Pew 2022 Payment App
Article), <a href="https://www.pewresearch.org/short-reads/2022/09/08/payment-apps-like-venmo-and-cash-app-bring-convenience-and-security-concerns-to-some-users/">https://www.pewresearch.org/short-reads/2022/09/08/payment-apps-like-venmo-and-cash-app-bring-convenience-and-security-concerns-to-some-users/</a> (last visited Oct. 23, 2023).
\30\ Emily A. Vogels, Pew Research Center, Digital divide
persists even as Americans with lower incomes make gains in tech
adoption (June 22, 2021) (reporting results of early 2021 survey by
Pew Research Center, finding 76 percent of adults with annual
household incomes less than $30,000 have a smartphone and 59 percent
have a desktop or laptop computer, compared with 87 percent and 84
percent respectively of adults with household incomes between
$30,000 and $99,999, and 97 percent and 92 percent respectively of
adults with household incomes of $100,000 or more), <a href="https://www.pewresearch.org/short-reads/2021/06/22/digital-divide-persists-even-as-americans-with-lower-incomes-make-gains-in-tech-adoption/">https://www.pewresearch.org/short-reads/2021/06/22/digital-divide-persists-even-as-americans-with-lower-incomes-make-gains-in-tech-adoption/</a>
(last visited Oct. 23, 2023).
\31\ Consumer Reports P2P Survey at 2 (55 percent reported
ongoing use and six percent stated they used to use this kind of
service).
\32\ See id. (85 percent of surveyed consumers aged 18 to 29 and
85 percent of surveyed consumers aged 30 to 44 reported using a
digital payment application, compared with 67 percent of consumers
aged 45 to 59 and 46 percent of consumers aged 60 and over); see
also Ariana-Michele Moore, The U.S. P2P Payments Market: Surprising
Data Reveals Banks are Missing the Mark (AiteNovarica 2023 Impact
Report) at 6, 24 (Figure 13 reporting 94 percent and 86 percent
adoption of P2P accounts and digital wallets among the youngest
adult cohort born between 1996 and 2002, compared with 57 percent
and 40 percent among the oldest cohort born before 1995), <a href="https://aite-novarica.com/report/us-p2p-payments-market-surprising-data-reveals-banks-are-missing-mark">https://aite-novarica.com/report/us-p2p-payments-market-surprising-data-reveals-banks-are-missing-mark</a> (last visited Oct. 23, 2023) and
<a href="https://datos-insights.com/reports/us-p2p-payments-market-surprising-data-reveals-banks-are-missing-mark/">https://datos-insights.com/reports/us-p2p-payments-market-surprising-data-reveals-banks-are-missing-mark/</a> (last visited Nov.
5, 2024).
\33\ See Geoff Williams, Retailers are embracing alternative
payment methods, though cards are still king (Dec. 1, 2022)
(National Retail Federation article citing its 2022 report
describing a Forrester survey indicating that 80 percent of
merchants accept Apple Pay or plan to do so in the next 18 months,
65 percent of merchants accept Google Pay or plan to do so in the
next 18 months, and, online, 74 percent accept PayPal or plan to do
so), <a href="https://nrf.com/blog/retailers-are-embracing-alternative-payment-methods-though-cards-are-still-king">https://nrf.com/blog/retailers-are-embracing-alternative-payment-methods-though-cards-are-still-king</a> (last visited Oct. 23,
2023); see also The Strawhecker Group (TSG), Merchants respond to
Consumer Demand by Offering P2P Payments (June 8, 2022) (TSG:
Merchants Offering P2P Payments) (reporting results of TSG and
Electronic Transactions Association survey of over 500 small
businesses merchants finding that 82 percent accept payment through
at least one digital P2P option), <a href="https://thestrawgroup.com/merchants-respond-to-consumer-demand-by-offering-p2p-payments/">https://thestrawgroup.com/merchants-respond-to-consumer-demand-by-offering-p2p-payments/</a> (last
visited Oct. 23, 2023).
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The Proposed Rule described how consumers rely on general-use
digital consumer payment applications for many aspects of their
everyday lives. In general, consumers make payments to other
individuals for a variety of reasons, including sending gifts or making
informal loans to friends and family and purchasing goods and services,
among many others.\34\ Consumers can use digital applications to make
payments to individuals for these purposes, as well as to make payments
to businesses, charities, and other organizations. According to one
recent market report, nonbank digital payment apps have rapidly grown
in the past few years to become the most popular way to send money to
other individuals other than cash,\35\ and are
[[Page 99586]]
used for a higher number of such transactions than cash.\36\ For many
consumers, general-use digital consumer payment applications offer an
alternative, technological replacement for non-digital payment
methods.\37\ Consumers increasingly have adopted general-use digital
consumer payment applications \38\ as part of a broader movement toward
noncash payments.\39\ Amid growing merchant acceptance of general-use
digital consumer payment applications, consumers with middle and lower
incomes use digital consumer payment applications for a share of their
overall retail spending that rivals or exceeds their use of cash.\40\
Such applications now have a share of ecommerce payments volume that is
similar to or greater than other traditional payment methods such as
credit cards and debit cards used outside of such applications.\41\
Such applications also have been gaining an increasing share of in-
person retail spending.\42\
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\34\ AiteNovarica 2023 Impact Report at 8-9 (Figure 1 reporting
66 percent of 5,895 consumers surveyed reported making at least one
domestic P2P payment in 2022 whether via digital means or not, and
Figure 2 reporting that, of consumers who made P2P payments in 2022,
among other purposes, 70 percent did so for birthday gifts, 64
percent for holiday gifts, 49 percent for other gift occasions, 46
percent to lend money, 41 percent to make a charitable contribution,
39 percent paid for services, 39 percent purchased items, 31 percent
provided funds in an emergency situation, and 18 percent provided
financial support).
\35\ Id. at 25 (Figure 14 reporting that, among other payment
methods or sources, 74 percent of consumers made P2P payments in
cash, 69 percent used alternative digital P2P payment services,
defined as services offered by nonbank providers via mobile app, web
service, or digital wallet, and 27 percent used Zelle through a
bank's mobile application).
\36\ Id. at 27-28 (Figure 15 reporting that, compared with 20
percent of P2P transactions made in cash, 37 percent of P2P
transactions made through alternative P2P payment services).
\37\ See Marqueta, 2022 State of Consumer Money Movement Report
(May 26, 2022) at 1 (summary of report describing results of
industry survey finding that 56 percent of US consumers felt
comfortable leaving their non-digital wallet at home and taking
their phone with them to make payments), <a href="https://www.marqeta.com/resources/2022-state-of-consumer-money-movement">https://www.marqeta.com/resources/2022-state-of-consumer-money-movement</a> (last visited Oct.
23, 2023).
\38\ AiteNovarica 2023 Impact Report at 24 (Figure 13 reporting
81 percent of U.S. adults surveyed held one or more P2P accounts and
69 percent had one or more digital wallets).
\39\ The Federal Reserve Payments Study: 2022 Triennial Initial
Data Release (indicating a rapid increase in core non-cash payments
between 2018 and 2021 and a rapid decline in ATM cash withdrawals
during the same period), <a href="https://www.federalreserve.gov/paymentsystems/fr-payments-study.htm">https://www.federalreserve.gov/paymentsystems/fr-payments-study.htm</a> (last visited Nov. 19, 2024).
\40\ PYMNTS, Digital Economy Payments: The Ascent of Digital
Wallets (Feb. 2023) at 16-17 (December 2022 survey finding 6.1
percent of overall consumer spending by consumers with lower incomes
made using digital consumer payment applications, compared with 9.9
percent of consumer spending by consumers with middle-level
incomes), <a href="https://www.pymnts.com/study/digital-economy-payments-ecommerce-shopping-retail-consumer-spending/">https://www.pymnts.com/study/digital-economy-payments-ecommerce-shopping-retail-consumer-spending/</a> (last visited Oct. 23,
2023).
\41\ See FIS 2023 Global Payments Report at 176 (reporting 32
percent share of ecommerce transactions, by value, made using a
digital wallet, compared with 30 percent by credit card and 20
percent by debit card).
\42\ See, e.g., 2023 Pulse Debit Issuer Study (Aug. 17, 2023) at
11 (reporting that mobile wallet use at point of sale nearly doubled
in 2022, representing nearly 10 percent of total debit card purchase
transactions in 2022), <a href="https://content.pulsenetwork.com/2023-debit-issuer-study/2023-pulse-debit-issuer-study-white-paper">https://content.pulsenetwork.com/2023-debit-issuer-study/2023-pulse-debit-issuer-study-white-paper</a> (last visited
Nov. 5, 2024); Digital Economy Payments: The Ascent of Digital
Wallets at 12 (December 2022 survey finding 7.5 percent of in-person
consumer purchase volume made with a digital consumer payment
application). See also CFPB Issue Spotlight, Big Tech's Role in
Contactless Payments: Analysis of Mobile Devices Operating Systems
and Tap-to-Pay Practices (Sept. 7, 2023) (CFPB Contactless Payments
Spotlight) (describing market report by Juniper Research forecasting
that the value of digital wallet tap-to-pay transactions will grow
by over 150 percent by 2028), <a href="https://www.consumerfinance.gov/data-research/research-reports/big-techs-role-in-contactless-payments-analysis-of-mobile-device-operating-systems-and-tap-to-pay-practices/full-report/">https://www.consumerfinance.gov/data-research/research-reports/big-techs-role-in-contactless-payments-analysis-of-mobile-device-operating-systems-and-tap-to-pay-practices/full-report/</a> (last visited Oct. 23, 2023).
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The Proposed Rule would have brought nonbanks that qualified as
larger participants in a market for general-use digital consumer
payment applications under the CFPB's supervisory jurisdiction.\43\ The
Proposed Rule explained that supervision of larger participants, who
engage in a substantial portion of the overall activity in this market,
would help to ensure that they are complying with applicable
requirements of Federal consumer financial law, such as the CFPA's
prohibition against unfair, deceptive, and abusive acts and practices,
the privacy provisions of the Gramm-Leach-Bliley Act (GLBA) and its
implementing Regulation P,\44\ and the Electronic Fund Transfer Act
(EFTA) and its implementing Regulation E.\45\ The Proposed Rule also
explained that, as firms increasingly offer funds transfer and wallet
functionalities through general-use digital consumer payment
applications, the rule would enable the CFPB to detect and assess new
risks to both consumers and the market.\46\ As stated in the Proposed
Rule, the CFPB's ability to detect and assess emerging risks is
critical as new product offerings blur the traditional lines of banking
and commerce.\47\
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\43\ 12 U.S.C. 5514(a)(1)(B).
\44\ See generally 12 CFR part 1016--Privacy of Consumer
Financial Information (CFPB's Regulation P implementing 15 U.S.C.
6804).
\45\ 15 U.S.C. 1693 et seq., implemented by Regulation E, 12 CFR
part 1005. See, e.g., 12 CFR 1005.11 (Procedures for financial
institutions to resolve errors).
\46\ 88 FR 80197 at 80201 & n.43 (citing CFPB, The Convergence
of Payments and Commerce: Implications for Consumers (Aug. 2022)
(CFPB Report on Convergence of Payments and Commerce) at sec. 4.1
(highlighting the potential that consumer financial data and
behavioral data are used together in increasingly novel ways),
<a href="https://files.consumerfinance.gov/f/documents/cfpb_convergence-payments-commerce-implications-consumers_report_2022-08.pdf">https://files.consumerfinance.gov/f/documents/cfpb_convergence-payments-commerce-implications-consumers_report_2022-08.pdf</a> (last
visited Oct. 27, 2023)).
\47\ See generally id.
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The Proposed Rule explained that the CFPB regularly supervises
depository institutions that provide general-use digital consumer
payment applications.\48\ As the Proposed Rule noted, greater
supervision of nonbanks in this market therefore would further the
CFPB's statutory objective of ensuring that Federal consumer financial
law is enforced consistently between nonbanks and depository
institutions in order to promote fair competition.\49\
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\48\ For example, as the Proposed Rule noted, some depository
institutions and credit unions provide general bill-payment services
and other types of electronic fund transfers through digital
applications for consumer deposit accounts. Id. at n.45.
\49\ 12 U.S.C. 5511(b)(4).
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The Proposed Rule also recognized that States have been active in
regulation of money transmission by money services businesses and that
many States actively examine money transmitters.\50\ The Proposed Rule
stated that the CFPB would coordinate with appropriate State regulatory
authorities in examining larger participants.
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\50\ 88 FR 80197 at 80198 n.12, 80214 n.108 (citing CSBS,
Reengineering Nonbank Supervision, Ch. 4: Overview of Money Services
Businesses (Oct. 2019) (CSBS Reengineering Nonbank Supervision MSB
Chapter), <a href="https://www.csbs.org/sites/default/files/other-files/Chapter%204%20-%20MSB%20Final%20FINAL_updated_0.pdf">https://www.csbs.org/sites/default/files/other-files/Chapter%204%20-%20MSB%20Final%20FINAL_updated_0.pdf</a> (last visited
Nov. 5, 2024)).
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General Comments Received \51\
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\51\ Some commenters provided additional recommendations that
are outside the scope of this rulemaking, such as increasing
education of consumers who use general-use digital consumer payment
applications, promulgating new consumer protections for these
consumers, or imposing information collection requirements such as
collecting the legal entity identifier (LEI) of larger participants.
The Final Rule does not address these comments, which are outside
the scope of a rulemaking under CFPA section 1024(a)(1)(B) to define
and establish supervisory authority over larger participants in a
market for consumer financial products and services. In addition, a
consumer group suggested that the CFPB the CFPB expressly clarify
that meeting the definition of a larger participant does not
automatically cause application of exclusions in State privacy laws
for GLBA compliance and that the CFPB coordinate with States to
avoid risk of preempting State privacy laws when the CFPB supervises
for compliance with the GLBA and its implementing Regulation P. This
rulemaking does not establish or interpret substantive consumer
protection requirements and thus does not interpret Regulation P
(including its provision describing its relationship with State laws
in 12 CFR 1016.17); it also does not itself govern State
coordination, which occurs separately when the CFPB carries out
nonbank supervision.
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In this part of the section-by-section analysis, the Final Rule
summarizes and responds to comments about general aspects of the
proposal, including the rulemaking process, the CFPB's general reasons
for issuing the proposal, and certain other general topics.
Comments on Rulemaking Process
Some comments addressed the rulemaking process. First, some
commenters suggested that the CFPB should not have issued, and should
not finalize, the Proposed Rule during the
[[Page 99587]]
pendency of a Supreme Court case concerning the constitutionality of
the CFPB's funding structure under the Appropriations Clause.\52\
Second, some industry commenters, a nonprofit commenter, an individual
commenter, and some Members of Congress asked the CFPB to extend the
comment period, such as by an additional 30 or 45 days. These
commenters cited various reasons for their request, including the
number of holidays during the comment period, the complexity of the
proposed market including coverage of digital assets, the complexity of
the proposed larger-participant test that included multiple steps, a
need for more specifics regarding which products and services were
encompassed in the market and the risks the CPFB believed they pose
that justify the need for the Proposed Rule, and overlap between the
comment period for the Proposed Rule, the comment period for the CFPB's
proposal regarding personal financial data rights, and the CFPB's new
market-monitoring orders covering some of the same entities. One
industry commenter added that the decision not to extend the comment
period formed part of the basis for their view that the CFPB should
withdraw the Proposed Rule.
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\52\ See CFPB v. Cmty. Fin. Servs. Ass'n of Am., Ltd., 601 U.S.
416 (2024) (U.S. argued Oct. 3, 2023).
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Comments on the Large and Growing Market
Commenters agreed that the market for general-use digital consumer
payment applications has grown substantially in recent years. For
example, consumer groups, several nonprofits, a payment network, an
industry association, two banking industry associations, and a credit
union association agreed (and an industry provider acknowledged \53\)
that there has been rapid growth and widespread consumer adoption of
general-use digital consumer payment applications. In support of their
view, these commenters cited data in the Proposed Rule as well as other
public information. An industry association stated that digital
consumer payment applications have helped millions of U.S. consumers to
send money to friends and family and make retail payments more
efficient. A group of State attorneys general noted that a significant
portion of consumers with lower incomes frequently rely upon general-
use digital consumer payment applications. Two nonprofit commenters
also agreed that adoption by younger individuals may drive further
growth.\54\ An industry association observed that the proposed market
has experienced rapid increases in consumer adoption that likely will
continue. As a consequence, this commenter described this market as
still in what industry lifecycle literature describes as a stage of
market growth as opposed to market maturity.
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\53\ As discussed further below, this commenter stated that
growth alone was insufficient to justify the Proposed Rule, and that
the CFPB must make certain specific findings regarding market risk.
The Final Rule responds to those comments further below in the
discussion of general comments about the relevance of risks to
consumers to the rulemaking.
\54\ While not disputing the rapid growth in the market, some
other industry commenters suggested that the broader consumer
payments sector should be considered, including when defining the
market and setting the threshold for the larger-participant test, as
discussed in the section-by-section analysis of those provisions
further below.
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Several of these commenters stated that these general-use digital
consumer payment applications increasingly are accepted by retailers
and embedded into in-person and online commerce, which is itself
growing. They pointed to this as one trend driving existing growth and
future growth in the market. A comment from several consumer groups
stated that as merchants seek to avoid interchange fees, they will
increasingly rely upon digital payment applications as a payment method
at the point of sale. A banking association and consumer group stated
that they also expected the lines between banking, commerce, and
technology to further converge and blur.\55\ A comment from several
consumer groups stated that nonbank providers of consumer financial
products and services have greater latitude under U.S. law to integrate
those products into commercial platforms, and that large technology
firms' business models depend on data collection.\56\
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\55\ One of these commenters pointed to an industry white paper
describing a trend in the market toward ``embedding financial
services into nonfinancial apps and other digital experiences.''
Google LLC White Paper, Embedded finance: The new gold rush in
financial services (2021) (Google LLC Embedded Finance White Paper)
at 4 (``These embedded experiences will soon permeate all aspects of
our lives that involve money--and they'll feel so frictionless that
users won't be aware of the underlying work financial institutions
are doing to support these transactions.''), at 6 (``Embedded
finance means, simply, embedding your financial services in the non-
financial products, services or technologies consumers already use
and love. Since they spend much of their time in non-financial
applications in their everyday lives--but only a fractional amount
of time in financial applications--the growth opportunity for
financial services companies is considerable.''), <a href="https://cloud.google.com/resources/financial-services-embedded-finance-whitepaper">https://cloud.google.com/resources/financial-services-embedded-finance-whitepaper</a> (last visited Nov. 5, 2024).
\56\ One consumer group commenter added that in its view, Big
Tech firms have a business model that seeks to maximize data
collection based on different goals from publicly-chartered and
regulated financial institutions.
---------------------------------------------------------------------------
Another nonprofit commenter suggested in general terms that CFPB
supervision of larger participants in the general-use digital consumer
payment applications market could help the CFPB to detect and assess
risks to the U.S. financial system. It stated that the market may
present such risk, given how general-use digital consumer payment
applications facilitate a high volume of transactions, including flows
of funds through stored value accounts that are not FDIC-insured.
However, some industry and nonprofit commenters stated that the
rapid growth in the market and widespread consumer adoption merely
indicates that the market is successful and popular among consumers. In
their view, as discussed further below, the fact that the market is
large and growing market is not an adequate basis for subjecting its
larger participants to supervision, absent findings of risks to
consumers or markets or market failures.\57\
---------------------------------------------------------------------------
\57\ The Final Rule further summarizes and responds to those
comments in the discussion below of general comments on detecting
and assessing risks (including emerging risks) to consumers and
markets.
---------------------------------------------------------------------------
Comments on Promoting Compliance With Federal Consumer Financial Law
The Proposed Rule stated that CFPB supervision of larger
participants would promote compliance with applicable requirements of
Federal consumer financial law. A group of State attorneys general,
consumer groups, some nonprofit and individual commenters, a banking
association, and a comment from a payment network and an industry
association generally agreed that the proposal would serve this
purpose, as described below. However, as described further below, some
industry and nonprofit and other commenters disagreed or stated that
the proposal did not provide sufficient support for the claim that it
would serve this purpose.\58\
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\58\ Some commenters also suggested that existing State and
Federal oversight of some market activities, including for
compliance with Federal consumer financial law, was adequate. The
Final Rule separately addresses comments on those general topics
further below.
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Several commenters expressed concern that larger participants may
be violating or inadequately incentivized to comply with one or more of
the Federal consumer financial laws cited in the Proposed Rule. A joint
comment from consumer groups stated that consumers are exposed to
unfair, deceptive and abusive practices in the payments area, and
stated that oversight of this market is needed to ensure market
participants comply with the prohibition against
[[Page 99588]]
unfair, deceptive, and abusive acts and practices.\59\ This comment
assessed the risk of abusive practices as high due to what the comment
described as lack of competition and consumer choice with respect to
the larger participants defined in the Proposed Rule. A comment from a
group of State attorneys general stated that the Proposed Rule, coupled
with existing State consumer protection statutes, would allow the
Federal and State governments to work together to prevent and abate
unfair, deceptive, and abusive acts and practices in the market. A
consumer group and a nonprofit commenter stated that the Proposed Rule
would be especially useful in promoting compliance with the prohibition
against unfair, deceptive, and abusive acts and practices by companies
that provide financial services to incarcerated and recently
incarcerated persons. And a consumer group and nonprofit commenter
stated that it was common sense that unfair, deceptive, and abusive
acts and practices protections be applied to new entrants and
technologies like those described in the Proposed Rule.
---------------------------------------------------------------------------
\59\ See 12 U.S.C. 5531, 5536 (prohibiting unfair, deceptive,
and abusive acts and practices in connection with the offering or
provision of consumer financial products and services).
---------------------------------------------------------------------------
As an example of how supervision of larger participants would
promote compliance, a banking association noted that the CFPB's
publication Supervisory Highlights \60\ communicates CFPB expectations
of compliance to the overall market and encouraged its use in this
market, and stated that the proposal should enable the CFPB to publish
Supervisory Highlights identifying problematic conduct in this market.
A comment from several consumer groups pointed to findings in
Supervisory Highlights related to violations of Regulation E and other
provisions of Federal consumer financial law violations at banks. The
comment stated that the CFPB also should supervise larger nonbank
companies handling consumer payments, including payment apps, because
such violations at nonbanks are just as likely if not more so.
---------------------------------------------------------------------------
\60\ The CFPB periodically publishes Supervisory Highlights to
share key examination findings in order to help industry limit risks
to consumers and comply with Federal consumer financial law. Each
Supervisory Highlights publication shares recent examination
findings, including information about recent enforcement actions
that resulted, at least in part, from the CFPB's supervisory
activities. These reports also communicate operational changes to
the CFPB's supervision program and provide a convenient and easily-
accessible resource for information on the CFPB's recent guidance
documents. Supervisory Highlights does not refer to any specific
institution in order to maintain the confidentiality of supervised
entities. See <a href="https://www.consumerfinance.gov/compliance/supervisory-highlights/">https://www.consumerfinance.gov/compliance/supervisory-highlights/</a> (last visited Nov. 5, 2024).
---------------------------------------------------------------------------
Regarding EFTA and Regulation E, a comment from consumer groups
stated that oversight is needed to ensure payment app and digital
wallet providers comply with the EFTA's consumer protections for
electronic fund transfers, highlighted payment fraud as a significant
risk, and stated that violations of the EFTA related to digital
payments are extremely common, even among banks that are closely
supervised by regulators. The commenter cited to several findings of
EFTA violations from CFPB examinations in this area that the CFPB has
published in Supervisory Highlights. A credit union association
commenter stated that nonbanks that offer consumer payment services
have error resolution responsibilities under Regulation E which the
CFPB cannot effectively assess without exercising supervisory
authority.
Commenters also addressed risks posed to consumers associated with
potential violations of the GLBA and Regulation P.\61\ A comment from a
group of State attorneys general supported the Proposed Rule in part
because it would allow the CFPB to examine digital payment applications
for compliance with the privacy provisions of the GLBA. The comment
stated the Proposed Rule would permit the CFPB to address the critical
data privacy issues posed by digital payment applications by allowing
the CFPB to assess how applications are storing, using, and sharing
their collections of sensitive consumer data as well as changes to
larger participants' privacy policies. A consumer group commenter
stated that its review had identified multiple risks associated with
peer-to-peer payment application companies. The commenter stated that
more than 25,000 consumers had signed a petition urging the CFPB to
take action with respect to various risks posed by payments
applications, including risks associated with fraud and collection and
storage of consumer information.\62\
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\61\ Title V, subtitle A of the GLBA and its implementing
regulation, Regulation P, govern the treatment of nonpublic personal
information about consumers by financial institutions.
\62\ Similarly, other commenters emphasized potential risks with
respect to use of consumer data and risks to consumer privacy that
may be associated with payment application and digital wallet
providers, including the risk of losing money through fraud or
mistakes or having personal data collected and shared.
---------------------------------------------------------------------------
Other commenters such as a company, nonprofits, and an industry
association stated that the Proposed Rule did not adequately assess the
degree of existing compliance or otherwise explain how it would promote
compliance. For example, one commenter criticized the statement in the
proposal that CFPB supervision would incentivize compliance as
circular, given what it viewed as inadequate discussion in the Proposed
Rule of the level of existing non-compliance or risks of non-
compliance.\63\ In addition, several industry comments suggested that
EFTA/Regulation E, GLBA/Regulation P, or both do not apply to certain
market participants, which they viewed as undermining the notion that
the Proposed Rule would promote compliance with Federal consumer
financial law. A company commenter added that the proposal did not
explain how the prohibition against unfair, deceptive, or abusive acts
or practices applied to market participants, or why supervision is the
appropriate mechanism to identify and prevent any anticipated
violations of Federal consumer financial law more broadly. Further, an
industry commenter stated that State supervision by itself is more
effective and better at enforcing the law than CFPB supervision.
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\63\ Further below, the Final Rule summarizes and responds to
comments more broadly addressing the general topic of risks to
consumers in the market.
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Comments on Detecting and Assessing Risks to Consumers and Markets,
Including Emerging Risks
Comments from a group of State attorneys general, a payment
network, a banking association, consumer groups, and nonprofits agreed
that CFPB supervision of larger participants in this market would help
the CFPB to detect and assess risks to consumers and markets, including
emerging risks, in this rapidly growing and evolving market. For
example, an industry association generally described the potential for
CFPB supervision to promote maturity in the market, which it described
as immature and rapidly evolving.\64\ In addition, these comments
pointed to several reasons why the CFPB supervision and examination
process is well suited to this goal. A consumer group stated that
supervisory authority is one of the most basic tools regulators have to
identify new risks in the market as early as possible, before market
failures with wide-ranging implications occur. Several consumer groups
added that CFPB should not rely only on third-party sources of
[[Page 99589]]
information to assess market activity, which would lead to delayed
responses to problems, compared with supervision.\65\ A nonprofit
commenter stated that because supervision occurs outside of the
adversarial legal process, it is an especially effective tool for
rapidly gathering information that can prevent dubious practices before
they develop.
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\64\ In its view, the Proposed Rule may result in development of
a robust, consumer-protected market, given how previous larger
participant rules had helped to ensure consumer protection remains a
prominent concern among participants in those markets.
\65\ These commenters also stated supervision of larger
participants would allow the CFPB to respond more quickly to
emerging problems affecting servicemembers who are especially
vulnerable to identity theft and fraud in the market.
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Several comments also identified various existing and emerging
risks in the market that the commenters believed the CFPB would be able
to effectively detect and assess though supervision, including risks
with respect to consumers' loss of funds and loss and misuse or abuse
of data. The Final Rule summarizes these comments below. In addition, a
group of State attorneys general stated that the rule will allow the
CFPB to detect and assess risks that emerge not only from the existing
products and services, but also as a result of future technological
advancements in the market.
With respect to the potential for consumers to lose funds or access
to funds, a group of State attorneys general noted that research cited
in the proposal indicated that almost a third of digital payment
application users with lower incomes reported one or more problems
related to funds being sent to the wrong person or not receiving funds
that were sent to them.\66\ These commenters stated that a lack of
regulatory oversight has significantly contributed to those problems. A
nonprofit commenter stated that larger participants pose unique risks
to consumers related to what the commenter characterized as the lack of
consumer protections associated with these applications, as well as the
possible systemic risks they may present to the financial markets. The
commenter raised specific concerns about the risk of consumer loss of
funds from uninsured entities and lack of consumer awareness of such
matters. The commenter also stated that CFPB supervision of these
nonbank payment applications would, among other things, help to
identify and mitigate systemic financial risk and enhance consumer
protection. An individual commenter stated that the market had diverse
participants but that there are common areas of risk with payment apps
linked to a stored value product, including a risk of losing access to
funds to pay for food or bills due to a technical glitch. Additional
commenters raised various concerns about what they often described as
fraud in the market and lack of related consumer protections, and a
nonprofit commenter cited complaints submitted to the FTC regarding
peer-to-peer payment fraud. At the same time, several industry
commenters suggested that certain consumer protections such as EFTA/
Regulation E or GLBA/Regulation P do not apply to some market
participants, as described further above, and that consumers often are
adequately protected by other parties to the transaction such as banks
and credit unions, as described in the discussion of general comments
about existing oversight of the market further below.
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\66\ Consumer Reports P2P Survey at 7 (also indicating that of
all respondents who have used a P2P service, 22 percent reported one
or more such problems). See also 88 FR 80197 at 80200 n.25
(proposal's discussion of other data in this report, noted above).
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With regard to uses of consumer payments data, a banking
association, a payment network, a nonprofit commenter, and several
consumer groups stated that the way in which nonbanks can exploit the
convergence of payments and commerce poses risk to consumers with
respect to this market, such as through aggregation and monetization of
consumer financial data. A group of State attorneys general added that
supervision of larger participants would help the CFPB to detect and
assess emerging risks in the use of consumer financial data as
technology continues to evolve. And an individual commenter and several
industry comments stated that consumer payments data is often used for
purposes beyond initiation of the consumer payment transaction.\67\
Several consumer groups described the level and use of consumer data
collected by large technology firms as unreasonable and potentially
dangerous. Several other commenters including individuals noted that
the collection of such data also raises data security risks, including
what a nonprofit commenter described as novel security risks raised by
digital wallets. At the same time, other comments from industry
suggested that data security risks to consumers were particularly low
given the security and anti-fraud enhancements from market
participants' reliance on features such as tokenization.\68\ And a
nonprofit commenter stated that government regulators generally are not
effective at preventing data breaches as some of the largest have
occurred at heavily-regulated institutions.
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\67\ The Final Rule discusses and responds to these comments in
more detail in the section-by-section analysis of the exclusion for
certain marketplace activities described further below.
\68\ In addition, digital assets industry comments described
what they viewed as additional security that digital assets provide.
As discussed in the section-by-section analysis of the larger-
participant test further below, the Final Rule does not count those
transactions toward the larger-participant test.
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Some commenters disagreed that the goal of detecting and assessing
risks including emerging risks warrants the proposed expansion of
CFPB's supervisory authority in this market. For example, two nonprofit
commenters stated that the rationale of detecting and assessing
emerging risks was not supported by evidence, and instead only by the
theoretical possibility of harm in an innovative, successfully-growing
and popular market. Another nonprofit commenter stated that the
proposal did not examine the nature of the emerging risks, whether by
mentioning novel security risks posed by digital wallets or other
harms. Another nonprofit commenter stated its belief that market
participants' responses to the CFPB's previous market-monitoring orders
generated adequate information for the CFPB to determine the level of
risks posed by this emerging market.\69\ Two industry associations
stated that they agreed in principle that regulation needed to evolve
along with new technology, but they stated that the CFPB first must
identify harms it perceives in the market before proposing to supervise
its larger participants. Another industry association agreed, stating
that the Proposed Rule merely described the possibility of ``new
risks'' from ``new product offerings'' and did not state what the ``new
risks'' might be. It pointed to market reports that, in its view,
indicated that nonbanks' multi-sided business models in the digital
economy provide new benefits to consumers and promote competition.\70\
A nonprofit commenter characterized the proposal as referring to
hypothetical risks that may occur in the future, and described this
reference as a mere pretext to support an agenda to target large
technology firms. An industry commenter added that the goal of
detecting and assessing new and emerging risks is inadequate as a
[[Page 99590]]
foundation for a larger participant rule. In its view, the CFPB can
only engage in larger participant rulemakings when it identifies risks
that supervision would mitigate. The commenter also asserted that,
because the CFPB must consider risks to consumers in exercising its
supervisory authority under section 1024(b)(2), the CFPA also requires
that the CFPB establish the existence of specific risks to consumers
that would be mitigated by supervision when issuing a larger
participant rule under section 1024(a)(1)(B) and (2). The industry
commenter also claimed that principles of administrative law likewise
require the rule to target identified risks.\71\
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\69\ However, this commenter also recommended that the CFPB
continue to gather information on the market before expanding its
supervisory authority as proposed.
\70\ Separately, this commenter observed that the financial
technology sector that encompasses the proposed market often uses
advanced technologies including artificial intelligence, block chain
technology, and data mapping to create new financial products and
services that are beneficial in various ways. This commenter did not
state that such products posed any risk or could pose any emerging
or new risks.
\71\ The commenter also stated in a footnote that if the rule
does not need to identify meaningful risks to consumers then the
CFPA would violate the non-delegation doctrine in constitutional
law. The commenter did not explain the basis for that view, and the
CFPB disagrees with that view. Through the CFPA, Congress has
provided guidance to the CFPB on how to exercise its rulemaking
authority under 12 U.S.C. 5514(a)(1)(B) and has imposed limits on
that authority, including rules of construction for defining larger
participants and policy considerations, which the CFPB has addressed
in this Final Rule.
---------------------------------------------------------------------------
More broadly, many of the industry commenters and other commenters
stated that the Proposed Rule did not adequately consider whether
market activity currently poses risks to consumers and if so how and to
what degree. Other commenters similarly stated that the proposal failed
to establish that certain provisions of Federal consumer financial law
apply to market participants; that the proposal failed to identify
potential violations of law or other specific harms that the Proposed
Rule would seek to address, or any relevant market failures; and that
the CFPB should first issue a report articulating the risks it sees in
the proposed market or otherwise identify such risks prior to issuing a
final rule.\72\ Certain commenters also stated that the CFPB should
evaluate risk separately with respect to various subcomponents of the
market described in the Proposed Rule, and argued for the exclusion of
various market participants, as discussed in more detail in the
section-by-section analysis of the corresponding component of the
market definition further below.\73\ Finally, a nonprofit commenter
stated that the CFPB should provide greater clarity to market
participants as to how the CFPB would assess risk in its prioritization
process in this market, including what risks it would consider.
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\72\ A nonprofit commenter stated that the unique data security
risks that digital wallets pose should be addressed through public
education rather than regulation. As noted above, consumer education
is outside the scope of this rule and, for the reasons explained in
the response to general comments, education is not a substitute for
supervision.
\73\ Some commenters suggested that CFPB supervision itself
would increase risk such as by reducing examinees' resources
available for fraud prevention, or exposing the supervised entity's
data to breaches. For the reasons explained in the impacts analysis
in part VII, the CFPB has not determined the Final Rule will reduce
fraud prevention. With regard to the risk of data breaches, the
CFPB's information security system mitigates those risks as further
discussed in part VII.
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Comments on Ensuring Consistent Enforcement of Federal Consumer
Financial Law Between Banks and Nonbanks
Some comments addressed the Proposed Rule's statement that the rule
would further the CFPB's statutory mandate to ensure consistent
enforcement of Federal consumer financial law between nonbanks and
banks and credit unions, in order to promote fair competition. Several
consumer groups, banking and credit union industry associations, a
payment network, some nonprofits, and an industry provider generally
agreed that the Proposed Rule would have that benefit. For example, a
community banking association stated that community banks have long
expressed concerns that financial technology and large technology firms
are offering financial products and services traditionally provided by
banks, without the same level of regulatory oversight. A banking
association stated that consumers are best protected when banks and
nonbanks offering similar financial products and services are subject
to the same oversight, which mitigates the potential for consumer harm
and improves consumer trust and confidence. This commenter and another
banking association added that establishing parity in supervision will
help to ensure that nonbanks provide the same consumer protections when
they provide the same services as banks. A payment network and a
nonprofit commenter agreed that the proposal would help to ensure that
entities engaged in the same functional activities are subject to the
same functional regulation. Some comments described nonbanks as
deriving a competitive advantage due to their lesser supervisory
oversight, and banks and credit unions as disadvantaged. For example,
the credit union industry association commenter stated that the lesser
supervisory oversight of nonbank peer-to-peer payment apps increases
burdens on credit unions responding to consumer disputes of
transactions conducted in those apps due to the app providers'
underinvestment in compliance and customer service and consumer
preferences for contacting the credit union. The community banking
association also stated that this gap in oversight erodes consumer
trust. One of the banking industry associations agreed, noting that its
2022 survey found that an overwhelming majority of consumers were
concerned about a gap in regulatory oversight between fintech firms
(including cryptocurrency firms) and banks, and believed that the CFPB
and Congress should do more to protect consumers from harm and abuse in
these areas.\74\
---------------------------------------------------------------------------
\74\ Consumer Bankers Ass'n, Press Release, NEW POLL: Nearly
Ninety Percent Of Americans Concerned That Fintech & Crypto Firms Do
Not Have Appropriate Level of Federal Regulation (Dec. 12, 2022)
(describing 56 percent of respondents that want greater oversight
compared to 24 percent who are satisfied with existing oversight),
<a href="https://consumerbankers.com/press-release/new-poll-nearly-ninety-percent-of-americans-concerned-that-fintech-crypto-firms-do-not-have-appropriate-level-of-federal-regulations/">https://consumerbankers.com/press-release/new-poll-nearly-ninety-percent-of-americans-concerned-that-fintech-crypto-firms-do-not-have-appropriate-level-of-federal-regulations/</a> (last visited Nov.
18, 2024).
---------------------------------------------------------------------------
At the same time, some industry and nonprofit commenters challenged
the potential for Proposed Rule to promote consistent enforcement of
Federal consumer financial law as between nonbanks and depository
institutions, and thereby promote fair competition, as well as the
appropriateness of that consideration in the rulemaking. For example,
some of these commenters described the proposed objective as an
illegitimate form of ``mission creep . . . outside of [the CFPB's] core
jurisdiction'' or further suggested that the Proposed Rule would place
the CFPB in the role of market gatekeeper for nonbanks, which would
frustrate competition and innovation (which one of these commenters
described as the effect that banking regulation already has on banks).
Some industry commenters also suggested the objective failed to account
for the structure of nonbank market activity vis-[agrave]-vis banks and
credit unions. For example, an industry association stated that many
nonbank market participants either complement banks and credit unions
by making it easier for consumers to use payment methods provided by
those financial institutions, or partner directly with the banks and
credit unions. Some banking associations also expressed concern that
the rule would increase indirect burden on banks and may create
confusion about differences between banks and nonbanks. As another
example, an industry provider stated that banks provide deposit
accounts (and associated funds transfer functionalities), not pass-
through payment wallets allowing consumers to access payment methods
issued by
[[Page 99591]]
third-party financial institutions.\75\ And for that reason, in its
view, increased oversight of those activities would not serve the
CFPB's stated purpose. However, another industry association stated
that banks have been introducing their own digital wallets, both
directly and through affiliates, in an effort to compete with nonbank
incumbents that have embedded their digital wallets into merchant
checkout processes.
---------------------------------------------------------------------------
\75\ As discussed below in the section-by-section analysis of
the definition of ``covered payment functionality,'' the preamble
uses the phrase pass-through payment wallet to describe this type of
functionality discussed by commenters.
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Finally, an industry association also suggested that in some ways
the Final Rule may not promote consistent enforcement of Federal
consumer financial law. It stated that the CFPB should explain why
larger participants in the proposed market should be subject to what it
viewed as significantly more CFPB supervisory authority than exists
over other persons that facilitate consumer payment transactions, such
as banks and credit unions providing physical payment cards and
providers of payment applications that do not have ``general use'' as
defined in the Proposed Rule such as automobile purchase applications
and food delivery applications.\76\
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\76\ The commenter also stated the Proposed Rule excluded from
``general use'' bill-payment applications and applications used to
purchase financial assets including securities. However, the
Proposed Rule specifically acknowledged the existence in the market
of ``a general-use bill-payment function.'' 88 FR 80197 at 80206. In
addition, the Proposed Rule did not list applications for purchase
of securities among the examples of activities that do not have
``general use'' because it already excluded those transaction from
the proposed definition of ``consumer payment transaction'' as
discussed in the section-by-section analysis of that term further
below.
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Comments on Other Regulators' Existing Oversight Authority
Some commenters suggested the rule would help existing regulatory
oversight efforts in the market, while others stated that the Proposed
Rule did not adequately consider whether the CFPB supervisory authority
was needed in light of existing regulatory oversight mechanisms of
other regulators.
A group of State attorneys general stated that the Proposed Rule
would allow Federal and State authorities to coordinate to prevent and
abate unfair, deceptive, and abusive acts and practices in the market.
They indicated that violations of Federal law detected through CFPB's
supervisory examinations could assist State enforcement, including in
States such as California, New Jersey, and New York, where a commercial
practice that violates Federal law is deemed or presumed to violate the
State's consumer protection laws.
On the other hand, some other commenters stated that the Proposed
Rule did not adequately consider the degree to which the market already
is overseen by other regulators, including State oversight of nonbank
market participants that are money transmitters, Federal prudential
regulators' oversight with respect to banks and credit unions that
provide accounts, hold funds, and process payments facilitated by
nonbank market participants, and FTC enforcement of consumer protection
laws including competition laws.\77\ Several industry associations
stated that the rulemaking generally must better account for the
potential for CFPB supervision to duplicate the oversight by those
other regulators, and the unnecessary burdens and diverging regulatory
expectations that such duplicative supervision can create.\78\ One of
these commenters stated that the CFPB should clarify the scope and
requirements of the rule to prevent these outcomes, and stated that
close coordination by the CFPB with other regulators is needed before
the CFPB pursues oversight of larger participants.
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\77\ A few industry comments also mentioned Federal oversight of
money transmitters by FinCEN in the U.S. Treasury. These commenters
did not describe any nexus between that oversight and compliance
with Federal consumer financial law, or otherwise suggest that
supervisory activity by FinCEN and the CFPB would have overlapping
subject matter related to compliance with Federal consumer financial
law.
\78\ Some commenters also discussed Federal prudential
regulators' existing oversight of banks and credit unions as
relevant due to the inclusion in the market of nonbanks that partner
with banks and credit unions, and of pass-through payment wallets
that facilitate the use of accounts provided by banks and credit
unions. The Final Rule summarizes and responds to those comments in
more detail in the section-by-section analysis of ``covered payment
functionality'' below.
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With respect to existing State oversight, an industry association
stated that State financial regulators supervise various aspects of the
market and the CFPA requires the CFPB to account for oversight by State
authority when exercising its supervisory authority. Two other industry
associations indicated that in their view the Proposed Rule did not
consider how the CFPB would address overlap in scope with State
examinations on the same subject matter particularly at money
transmitters. A nonprofit commenter suggested that State oversight is
sufficient because States are better at enforcing the law because they
have a better understanding of local conditions.\79\
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\79\ This commenter also stated that States generally occupy the
field of consumer protection law, that Federal supervisory oversight
by the CFPB would ``preempt'' State law, and that the proposal did
not provide compelling evidence for doing so. The CFPB disagrees
that a larger participant rule, which establishes CFPB supervisory
authority and does not impose substantive consumer protection
obligations, preempts such State consumer protection laws.
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Comments on CFPB Enforcement and Market-Monitoring Authorities
An industry association stated that the Proposed Rule did not
explain how supervisory authority would promote additional compliance
with Federal consumer financial law beyond compliance the CFPB ensures
through its enforcement function and aided by its market-monitoring
function. A nonprofit suggested that CFPB enforcement is sufficient to
address risks to consumers, and that supervision would only impose
unnecessary burden.
Comments Raising ``Major Questions'' Doctrine
Another area of comment related to the ``major questions
doctrine.'' Those commenters who addressed the doctrine generally were
critical of the Proposed Rule and took an expansive view of the
circumstances in which the doctrine applies. First, one nonprofit
commenter stated that the major question doctrine precludes the CFPB
from defining larger participants in a digital wallet market generally.
This commenter stated that, despite the existence of digital wallets at
the time of adoption of the CFPA, Congress did not expressly include
them within the scope of CFPB supervisory authority and therefore chose
to foster innovation free from the CFPB's supervisory oversight.
Further, in its view, the market has vast economic and political
significance given both the aggregate dollar value of transactions on
digital wallets (nearly $1 trillion) and references by the CFPB to
payment systems as ``critical infrastructure'' and to ``Big Tech''
companies.\80\ Second, some commenters stated that the CFPB's
interpretation of the merchant payment processing exclusion in CFPA
section 1002(15)(A)(vii)(I) also is impermissible under the major
questions doctrine.\81\
[[Page 99592]]
Third, some commenters stated that the major questions doctrine voids
the CFPB's interpretation of CFPA section 1024(b) as authorizing
supervision of all consumer financial products and services provided by
a larger participant for compliance with Federal consumer financial law
and related risks.\82\
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\80\ CFPB Press Release (Nov. 7, 2023) (announcing Proposed
Rule), <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-proposes-new-federal-oversight-of-big-tech-companies-and-other-providers-of-digital-wallets-and-payment-apps/">https://www.consumerfinance.gov/about-us/newsroom/cfpb-proposes-new-federal-oversight-of-big-tech-companies-and-other-providers-of-digital-wallets-and-payment-apps/</a> (last visited Nov. 8,
2024).
\81\ In addition, some commenters stated that the inclusion of
certain digital assets transfers in the proposed definition of
consumer payment transactions raised a ``major question.'' As
discussed further below, the CFPB has decided, for purposes of this
Final Rule, not to define larger participants in the general-use
digital consumer payment applications market by reference to
activity involving digital assets. This Final Rule therefore does
not address these major questions comments further.
\82\ As discussed further above in the general comments on how
the rule would enable the CFPB through its supervisory activity to
detect and assess risks to consumers and markets, a nonbank
commenter claimed that the larger participant rule itself must
identify meaningful risk, or it would violate the major questions
doctrine. For the reasons described below in the response to these
general comments above, the CFPB disagrees with both claims. The
CFPB also disagrees that this rule implicates the major questions
doctrine for reasons discussed below.
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Comments on Potential Scope of CFPB Examinations of Larger Participants
Relatedly, the CFPB received several other comments on the
proposal's statement that the CFPB's supervisory authority is not
limited to the products or services that qualified a person for
supervision, but also includes other activities of such a person that
involve other consumer financial products or services or are subject to
Federal consumer financial law.\83\ Four commenters (representing the
banking industry) expressed agreement with the CFPB's description of
its supervisory authority over larger participants. They stated that
the CFPB's position is consistent with how the CFPB supervises large
banks, where every consumer financial activity that the bank engages in
is subject to CFPB jurisdiction. Several other commenters (several
industry trade groups, an individual company, and a law firm) disagreed
with the CFPB's description of its supervisory authority. These
commenters generally interpreted CFPA section 1024 to limit the scope
of nonbank supervisory authority over larger participants to specific
consumer financial products and services included in the market covered
by the corresponding larger participant rule. One of these commenters
asserted that the rule could not be used by the CFPB to scrutinize the
digital assets business lines of entities, including those already
subject to supervision. One commenter also suggested that even if the
CFPA's view of its authority is correct, it would be unreasonable for
the CFPB to actually exercise that authority because the costs of such
supervision would exceed the benefits. Another said the exercise of
such authority would discourage innovation and competition.
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\83\ 88 FR 80197 at 80198 n.7 (quoting 77 FR 42874 at 42880).
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Response to General Comments Received
After first responding to comments on rulemaking process issues,
the Final Rule provides a response below to other general comments. For
the reasons described below, the CFPB continues to believe that
issuance of this larger participant rule is warranted because: (1) the
market has grown dramatically and become increasingly important to the
everyday financial lives of consumers; (2) CFPB supervisory authority
over its larger participants would help the CFPB to promote compliance
with Federal consumer financial law; (3) that authority would help the
CPFB to detect and assess risks to consumers and the market, including
emerging risks; and (4) that authority would help the CFPB to ensure
consistent enforcement of Federal consumer financial law between banks
and nonbanks.
Rulemaking Process
While the CFPB was considering comments on the Proposed Rule, the
Supreme Court issued a decision ruling that the CFPB funding mechanism
is constitutional under the Appropriations Clause.\84\ The CFPB
disagrees with commenters' suggestion that it should have forgone
larger participant rulemaking activity during such a challenge.
---------------------------------------------------------------------------
\84\ CFPB v. Cmty. Fin. Servs. Ass'n of Am., Ltd., 601 U.S. 416
(2024).
---------------------------------------------------------------------------
The CFPB also disagrees with those commenters suggesting that an
extension of the comment period was necessary to allow for meaningful
input on the Proposed Rule. The Proposed Rule would have a narrow
impact, establishing CFPB supervisory authority over a group of nonbank
covered persons who already are subject to CFPB enforcement and market-
monitoring authority, and at least some of whom already are subject to
CFPB supervisory authority on other grounds. Despite this, the CFPB
received timely comments from a wide array of commenters, as described
above, and all but one of the commenters described here filed timely
comments after requesting more time. The CFPB disagrees that an
extension of the comment period is warranted based on the proposal of a
market definition that commenters viewed as complex or a larger-
participant test with more than one criterion. As discussed below,
commenters provided numerous useful comments about the proposed market
definition and the CFPB is making several adjustments to the market
definition in the Final Rule in response including to improve clarity.
With regard to the larger-participant test, the CFPB proposed a test
that was based on two criteria (consumer payment transaction volume and
the entity's size by reference to SBA size standards) that were
explained in the proposal and are not especially complicated. Proposed
rules often include small entity exclusions, and many commenters
provided substantive comments on the proposed exclusion, as discussed
further below.\85\ Further, it was unnecessary to extend the comment
period with an accompanying notice of the risks the CFPB believes
market participants pose to consumers because, as explained in the
Proposed Rule and discussed below, the CFPB is not required to make
findings about relative risks in a market to justify issuing (or
proposing) a larger participant rule. Finally, the CFPB notes that the
Proposed Rule set a January 8, 2024, deadline for filing of comments,
about two months after the rule was issued on November 7, 2023, and 52
calendar days after its November 17, 2023, publication in the Federal
Register. Commenters had well over 30 days to prepare comments even
accounting for the end-of-year holiday season.\86\ Indeed, several of
the requests for an extension cited their own substantive comments on
the Proposed Rule as the reasons for requesting an extension. For these
reasons, the CFPB also disagrees with the industry comment suggesting
that the lack of extension of the comment period supports a conclusion
that the CFPB should withdraw the Proposed Rule.
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\85\ With respect to the proposed coverage of digital assets,
commenters from the digital asset sector provided extensive and
detailed comments, demonstrating that those commenters were able to
provide meaningful input on the Proposed Rule during the comment
period. In any event, as discussed below, the CFPB has decided, for
purposes of this Final Rule, not to define larger participants in
the general-use digital consumer payment applications market by
reference to activity involving digital assets.
\86\ The extensive comments in the rulemaking record demonstrate
that the presence of Federal holidays (Veteran's Day after issuance
of the proposal and Thanksgiving, Christmas, and New Years after
publication in the Federal Register) and a concurrent proposal and
ongoing market monitoring in this market did not preclude commenters
from offering detailed substantive comments. In any event, the CFPB
sent the market-monitoring inquiries to a limited number of firms
and issued the parallel proposal (which, unlike this rulemaking,
proposed substantive consumer protections) almost three weeks
earlier with a 60-day comment period.
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[[Page 99593]]
Establishing CFPB Supervisory Authority Over the Large and Growing
Market
As described above, commenters agreed with the findings in the
Proposed Rule that the market has grown rapidly to achieve a
significant size with high levels of adoption and broad reliance by
consumers on general-use digital consumer payment applications. As the
proposal explained in detail, the market for general-use digital
consumer payment applications has large and increasing significance to
the everyday financial lives of consumers, who are growing increasingly
reliant on such applications to initiate payments.\87\ Further growth
can be anticipated.\88\ For example, as the proposal stated, nonbank
digital payment applications have rapidly grown in the past few years
to become the most popular way to send money to other individuals other
than cash, and are used for a higher number of such transactions than
cash.\89\ The proposal also cited various market research publications
indicating that most merchants in the United States accept general-use
digital consumer payment applications as a means or method of payment.
Given the extent of consumer adoption and reliance, the extent of the
consumer payment transaction volume (approximately 13.5 billion
annually) and value (approximately $1.2 trillion annually), and the
breadth of associated consumer data collected, it is important for the
CFPB to establish Federal supervisory oversight of larger participants.
---------------------------------------------------------------------------
\87\ See 88 FR 80197 at 80200-80201.
\88\ Id.
\89\ Id.
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The CFPB also has considered the industry association commenter's
observation that the market for general-use digital consumer payment
applications as defined in the Proposed Rule may not have reached the
maturity stage in the industry lifecycle. The CFPB acknowledges that,
compared to the markets covered by previous larger participant
rulemakings,\90\ this market has developed more recently, fueled by
technological change. In the years after a large nonbank financial
technology firm developed the first well-known digital payment app in
the late 1990s,\91\ other large fintech firms including BigTech firms
\92\ entered and expanded the market by leveraging new digital consumer
technologies, such as smartphones that support digital applications
(which proliferated starting in the late 2000s) \93\ and smartphone
near-field communication (NFC) technologies that support in-store
payments (which proliferated in the 2010s).\94\ More recently, well-
known market participants have been bundling consumer financial
products and services to help consumers to make payments to friends and
family and payments to merchants together in the same digital
application. Although the market is newer than some other consumer
finance markets, consumer adoption for these types of consumer payment
transactions already has reached very high levels. As described in the
Proposed Rule and explained above, general-use digital consumer payment
applications already play a fundamental role in facilitating the
payments that many consumers in the United States make every day.
Therefore, the CFPB believes it is an appropriate time for it to issue
a rule to establish the authority of the CFPB to supervise larger
participants in this market. The CFPB reaches that conclusion in the
Final Rule not solely due to the size of the market and its growth, but
in conjunction with its goals described below of promoting compliance
with Federal consumer financial law, detecting and assessing risks to
consumers and markets, and ensuring consistent enforcement of Federal
consumer financial law.
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\90\ Following significant growth in the 1980s, by 1990,
personal remittances from the United States had reached over US$10
billion. See World Bank Group, Personal remittances, paid (current
US$)--United States, <a href="https://data.worldbank.org/indicator/BM.TRF.PWKR.CD.DT?locations=US">https://data.worldbank.org/indicator/BM.TRF.PWKR.CD.DT?locations=US</a> (last visited Nov. 5, 2024). Nearly
two decades earlier, consumer reporting agencies and consumer debt
collection markets had already grown to the point that Congress
adopted substantive consumer protection legislation to regulate
them. See Public Law 91-508 (Oct. 26, 1970) (title VI adopting Fair
Credit Reporting Act); Public Law 95-109 (Sept. 20, 1977) (Title
VIII adopting Fair Debt Collection Practices Act). By that time,
following adoption of the Higher Education Act of 1965, Public Law
89-329 (Nov. 8, 1965), student lending and student loan servicing
had already been expanding. And largescale consumer automobile
financing dates back to at least the 1920s. See Buy Now Pay Later: A
History of Personal Credit, Harv. Bus. School Library (section
titled ``Cards on time'' noting that ``[i]n the 1920s, auto
financing took a giant leap forward when the car manufacturers
entered the game''), <a href="https://www.library.hbs.edu/hc/credit/credit4d.html">https://www.library.hbs.edu/hc/credit/credit4d.html</a> (last visited Nov. 5, 2024).
\91\ PayPal Editorial Staff, Alternative and digital payment
methods: Shaping the payment industry and preparing for the future
(Dec. 18, 2023) (stating that ``[t]he first digital solution in the
alternative payment industry was PayPal, developed in 1998 to enable
people to make payments via an email address''), <a href="https://www.paypal.com/us/brc/article/alternative-payment-method-trends">https://www.paypal.com/us/brc/article/alternative-payment-method-trends</a>
(last visited Nov. 5, 2024).
\92\ Consistent with its use by the Financial Stability Board,
the Final Rule uses the term ``BigTech'' to refer to large
technology companies with extensive customer networks. See, e.g.,
Financial Stability Board Report P091219-1, BigTech in finance--
Market developments and potential financial stability implications
(Dec. 9, 2019) at 3 (``BigTech firms are large technology companies
with extensive established customer networks. Some BigTech firms use
their platforms to facilitate provision of financial services. Those
that do so can be seen as a subset of FinTech firms--a broader class
of technology firms (many of which are smaller than BigTech firms)
that offer financial services.''), <a href="https://www.fsb.org/wp-content/uploads/P091219-1.pdf">https://www.fsb.org/wp-content/uploads/P091219-1.pdf</a> (last visited Nov. 5, 2024).
\93\ Apple Press Release, Apple Reinvents the Phone with iPhone
(Jan. 9, 2007), <a href="https://www.apple.com/newsroom/2007/01/09Apple-Reinvents-the-Phone-with-iPhone/">https://www.apple.com/newsroom/2007/01/09Apple-Reinvents-the-Phone-with-iPhone/</a> (last visited Nov. 5, 2024);
Michael DeGusta, Are Smart Phones Spreading Faster than Any
Technology in Human History? MIT Technology Review (May 9, 2012)
(citing data that smart phones, which represented only six percent
of U.S. mobile phone sales as of 2006, had grown to a two-thirds
share as of 2012, with use by nearly 40 percent of the U.S.
population), <a href="https://www.technologyreview.com/2012/05/09/186160/are-smart-phones-spreading-faster-than-any-technology-in-human-history/">https://www.technologyreview.com/2012/05/09/186160/are-smart-phones-spreading-faster-than-any-technology-in-human-history/</a>
(last visited Nov. 5, 2024).
\94\ CFPB Contactless Payments Spotlight, supra.
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Promoting Compliance With Federal Consumer Financial Law
As described in the proposal, supervision of larger participants in
a market for general-use digital consumer payment applications will
help ensure those companies are complying with applicable requirements
of Federal consumer financial law.\95\ One of the primary purposes of
supervision under CFPA section 1024(b)(1) is ``assessing compliance
with the requirements of Federal consumer financial law,'' and the
Final Rule will further the CFPB's ability to assess compliance by
larger participants with the requirements of those laws.\96\
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\95\ 88 FR 80197 at 80201, 80212.
\96\ See 12 U.S.C. 5514(b)(1)(A).
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As identified by several commenters and described further above,
the larger participants defined in the Rule engage in activities that
are subject to applicable Federal consumer financial law such as the
prohibition against unfair, deceptive, and abusive acts and practices
set forth in the CFPA; the EFTA and its implementing Regulation E; and
the data privacy protections of the GLBA and its implementing
Regulation P. The CFPB disagrees with the comments suggesting that
certain larger participants would not be subject to any Federal
consumer financial laws.\97\ The larger participants defined by the
rule are covered persons under the CFPA and would at a minimum be
subject to the CFPA's prohibition against unfair, deceptive, and
abusive acts and practices.\98\ Assessing
[[Page 99594]]
compliance with the prohibition against unfair, deceptive, and abusive
acts and practices is itself important, because such practices can
cause significant harm to consumers.\99\ Many of these commenters also
acknowledged that some of the other Federal consumer financial laws
would apply to at least a subset of the larger participants defined by
the Proposed Rule.\100\
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\97\ As discussed further below, the CFPB disagrees with
industry commenter suggestions that pass-through payment wallets are
excluded from the scope of the CFPA as ``electronic conduit
services.''
\98\ See 12 U.S.C. 5481(5) (defining the term ``covered
person''), 5531 (applying prohibition against unfair, deceptive, and
abusive acts and practices to all ``covered persons'' as well as
other persons), 5536 (same). The CFPB also can supervise larger
participants for other Federal consumer financial laws that apply,
including laws that take effect or for which compliance is mandatory
in the future. For example, the CFPB recently finalized a personal
financial data rights rule under its CFPA authority that is part of
Federal consumer financial law and that generally applies to market
participants. CFPB, Final Rule, Required Rulemaking on Personal
Financial Data Rights, 89 FR 90838 (Nov. 18, 2024) (CFPB Personal
Financial Data Rights Rule). As another example, the CFPB's nonbank
registration regulation imposes requirements on covered nonbanks
related to the registration of covered orders including, for covered
nonbanks that are supervised registered entities, written-statement
requirements. See 12 CFR 1092.201(q), 1092.204.
\99\ For example, under the CFPA, an unfair act or practice must
cause or be likely to cause ``substantial injury'' to consumers. 12
U.S.C. 5531(c)(1); see also, e.g., Supervisory Highlights Issue 18,
Winter 2019 at 13-14 sec. 3.1.2, <a href="https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-18_032019.pdf">https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-18_032019.pdf</a> (last
visited Nov. 13, 2024) (noting that CFPB supervisory activities
resulted in or supported the public enforcement action resolved in
2019 by consent order In re: Enova International, Inc., Admin. Proc.
File No. 2019-BCFP-0003 (Jan. 25, 2019) ]] 9-33 (describing unfair
acts and practices including repeat debiting of consumer accounts
without valid authorization), <a href="https://files.consumerfinance.gov/f/documents/cfpb_enova-international_consent-order_2019-01.pdf">https://files.consumerfinance.gov/f/documents/cfpb_enova-international_consent-order_2019-01.pdf</a> (last
visited Nov. 13, 2024); Supervisory Highlights Issue 21, Winter 2020
at 16 sec. 4.1 (noting that CFPB supervisory activities resulted in
or supported the public enforcement action resolved in 2019 against
Maxitransfers Corporation including deceptive acts and practices in
statements in terms and conditions regarding company's
responsibility for errors by their agents), <a href="https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-21_2020-02.pdf">https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-21_2020-02.pdf</a> (last visited Nov. 13, 2024); Issue
32, Spring 2024, supra, at 14 sec. 4.1 (noting that CFPB supervisory
activities resulted in or supported the public enforcement action
resolved in 2023 against Toyota Motor Credit Corporation finding
several unfair acts and practices).
\100\ For a discussion of comments suggesting that the market
should be confined to entities that receive or hold the funds being
transferred in consumer payment transactions, or that the market
should cover consumer payment transactions that transfer funds from
nonbank accounts but not from bank accounts, see the section-by-
section discussion below of Final Rule Sec. 1090.109(a)(2)
regarding the term ``consumer payment functionality.''
---------------------------------------------------------------------------
The CFPB agrees with the commenters that stated that this rule will
help the CFPB to ensure compliance with Federal consumer financial
laws, and disagrees with those that stated that it would not. The
CFPB's supervisory authority will promote compliance with applicable
legal requirements in multiple ways. As described in the proposal,
under the CFPA, the CFPB shall use its supervisory authority to
``assess[ ] compliance with the requirements'' of Federal consumer
financial laws \101\ and to ``obtain[ ] information about the
activities and compliance systems of procedures'' of market
participants.\102\ The CFPB may review the entity's activities and
compliance systems or procedures and issue supervisory findings or
criticisms as appropriate.\103\
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\101\ See 12 U.S.C. 5514(b)(1)(A).
\102\ See 12 U.S.C. 5514(b)(1)(B).
\103\ See also discussion below regarding 12 U.S.C.
5514(b)(1)(C) in connection with the use of CFPB supervisory
authority for the purpose of ``detecting and assessing risks to
consumers and markets for consumer financial products and
services,'' including the CFPB's use of its authority under the
Final Rule to better understand how the Federal consumer financial
laws apply to larger participants defined by the rule and the
products and services they offer and to review and mitigate risks
related to noncompliance.
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Supervision is one of the CFPB's most important and powerful tools
to protect consumers by promoting compliance with Federal consumer
financial law. As discussed in the proposal and as a nonprofit
commenter emphasized, the prospect of the CFPB exercising supervisory
authority over such firms may cause them to allocate additional
resources and attention to compliance and to take steps to mitigate any
noncompliance.\104\ In addition, based on the CFPB's supervisory
experience in other markets, the CFPB's supervisory activities
authorized under the Final Rule are likely to help entities to identify
issues before they become systemic or cause significant harm. Through
its supervisory activity, the CFPB detects and addresses legal
violations. In some instances, the CFPB uses enforcement actions to
address violations that it originally identified through supervision.
The CFPB also uses supervision to help ensure that supervised entities
develop and maintain systems and procedures to prevent and remedy
violations. CFPB supervisory reviews and related compliance ratings
promote the development of compliance risk management practices
designed to manage consumer compliance risk, support compliance, and
prevent consumer harm.\105\ Through supervision, CFPB examiners may
articulate supervisory expectations to supervised larger participants
in connection with supervisory events.\106\ The CFPB also notes that,
following the issuance of its five prior larger participant rules, it
has successfully used its supervisory authority to detect violations
and promote compliance in each of the markets covered by those rules,
as the CFPB has documented in its periodic publication Supervisory
Highlights.\107\ Thus, the CFPB disagrees with comments criticizing the
proposal's statement that CFPB supervision will help to ensure that
larger participants are complying with applicable requirements of
Federal consumer financial law.\108\ Moreover, by authorizing the CFPB
to supervise larger participants, the Rule will promote strong
compliance risk management practices in this market.\109\ The CFPB also
disagrees with commenters stating that CFPB supervision generally harms
[[Page 99595]]
consumers by reducing the resources available to those companies.
Instead, CFPB supervision as provided under the rule will, as intended
by Congress, promote compliance with Federal consumer financial law and
otherwise facilitate the CFPB's statutory objectives. For the reasons
discussed above, the CFPB concludes that the rule will help the CFPB to
promote compliance with Federal consumer financial law in the market.
That, in turn, will reduce risks of harm to consumers, as also
discussed in the impacts analysis in part VII below.
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\104\ See 88 FR 80197 at 80211-12.
\105\ See, e.g., Federal Financial Institutions Examination
Council, Uniform Interagency Consumer Compliance Rating System, 81
FR 79473, 79474 (Nov. 14, 2016) (discussing assessment by agency
examiners of consumer compliance), <a href="https://www.ffiec.gov/press/pr110716.htm">https://www.ffiec.gov/press/pr110716.htm</a> (last visited Nov. 5, 2024).
\106\ See CFPB, Bulletin 2021-01: Changes to Types of
Supervisory Communications (Mar. 31, 2021), <a href="https://files.consumerfinance.gov/f/documents/cfpb_bulletin_2021-01_changes-to-types-of-supervisory-communications_2021-03.pdf">https://files.consumerfinance.gov/f/documents/cfpb_bulletin_2021-01_changes-to-types-of-supervisory-communications_2021-03.pdf</a> (last visited
Nov. 5, 2024).
\107\ The CFPB publishes Supervisory Highlights on its website
several times each year at <a href="https://www.consumerfinance.gov/compliance/supervisory-highlights/">https://www.consumerfinance.gov/compliance/supervisory-highlights/</a> (last visited Nov. 5, 2024).
Since its first larger participant rules took effect in late 2012
and early 2013, these publications have highlighted findings of
violations of Federal consumer financial law and compliance
management weaknesses from examinations in markets subject to its
larger participant rules. See, e.g., Issue 4, Spring 2014 at 8-10
(consumer reporting market), at 11-14 (consumer debt collection
market); Issue 10, Winter 2016 at 11-14 (international money
transfer market). For the most recent examples, see, e.g., Issue 35,
Fall 2024 (automobile finance market); Issue 34, Summer 2024
(consumer debt collection market); Issue 32, Spring 2024 at 4-7
(consumer reporting market); Issue 31, Fall 2023 at 13-14
(international money transfer market); Issue 30, Summer 2023 at 4-8
(automobile financing market), at 8-9 (consumer reporting market),
at 12-13 (consumer debt collection market), at 29-30 (international
money transfer market); Issue 29, Winter 2023 at 14-15 (student loan
servicing market); Issue 28, Fall 2022 at 4-7 (automobile financing
market), at 7-8 (consumer reporting market), at 16-17 (consumer debt
collection market); Issue 27, Fall 2022 at 14-25 (student loan
servicing market); Issue 26, Spring 2022 at 5-11 (consumer reporting
market), at 14-16 (consumer debt collection market), at 22-25
(international money transfer market), at 25-27 (student loan
servicing market).
\108\ See 88 FR 80197 at 80201. Further, the CFPB disagrees that
it is required to make findings of noncompliance in the market in
order to issue this rule, for generally the same reasons (discussed
below) that it is not required to make findings regarding the level
of risk in the market or market failure.
\109\ For example, as discussed in the impacts analysis further
below in part VII, entities may improve their compliance management
either in response to the possibility of an examination or in
response to an examination finding regarding compliance management
weaknesses. See also CFPB Supervision and Examination Manual, part
II.A (describing how CFPB examinations conduct compliance management
reviews).
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Detecting and Assessing Risks to Consumers and Markets, Including
Emerging Risks
The CFPB concludes that this rule will help the CFPB to detect and
assess risks to consumers and markets from the provision of general-use
digital consumer payment applications. As explained in the Proposed
Rule and for the reasons elaborated further below, the CFPB agrees with
comments suggesting that CFPB supervision of larger participants in
this rapidly-growing and evolving market will be especially useful to
the detection and assessment of emerging risks. As discussed below, the
CFPB disagrees with the commenters that stated that the CFPB must first
make a risk determination before establishing supervisory authority
over larger participants by rule.
The CFPB concludes that establishing its supervisory authority over
larger participants in this market would help it to detect and assess
emerging risks for several reasons.
First, the CFPB shares the view of the group of State attorneys
general and other commenters that this highly-concentrated market will
continue to grow and evolve rapidly as the technology that has fueled
its rapid growth also continues to evolve. As with other markets the
CFPB now supervises, it is important for the CFPB to be able to closely
assess whether pressure to sustain high growth in this market will
drive nonbank firms to develop new and increasingly risky
products.\110\
---------------------------------------------------------------------------
\110\ Cf. Financial Crisis Inquiry Commission Report (Feb. 25,
2011) at 104 (``The refinancing boom was over, but originators still
needed mortgages to sell to the Street. They needed new products
that, as prices kept rising, could make expensive homes more
affordable to still-eager borrowers. The solution was risker, more
aggressive, mortgage products that brought higher yields for
investors but correspondingly greater risks for borrowers.''), at
414 (also noting that ``high-risk, nontraditional mortgage lending
by nonbank lenders flourished in the 2000s and did tremendous damage
in an ineffectively regulated environment, contributing to the
financial crisis''), <a href="https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf">https://www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf</a> (last visited Nov. 6, 2024).
---------------------------------------------------------------------------
In addition, the CFPB agrees with the comments expecting that the
market will continue to grow, including by expanding how general-use
digital consumer payment applications help consumers to make payments
in other ways. As the proposal explained, it is critical for the CFPB
to be able to detect and assess emerging risks as new product offerings
blur the traditional lines of banking and commerce.\111\ This blurring
was noted by several commenters that described a trend toward
``embedded finance'' described above and is illustrated in industry
comments discussed below describing various ways that nonbanks'
general-use digital payment applications serve as intermediaries
between consumers and merchants.\112\ Such applications also can
facilitate payments from many different types of accounts consumers
hold across multiple financial institutions. Supervision can detect and
assess risks that may arise from a single application establishing
connections that can cause payments to be made from many different
consumer accounts.\113\ In addition, as noted in the industry report
cited by a consumer group commenter, consumers also can use payment
functionalities embedded in digital applications, such as text
messages, to make payments, including peer-to-peer payments.\114\
---------------------------------------------------------------------------
\111\ For example, the proposal noted how in its 2022 market-
monitoring report on the convergence of payments and commerce, the
CFPB described the potential for consumer financial data and
behavioral data to be used together in increasingly novel ways. 88
FR 80197 at 80201 and n.43.
\112\ See section-by-section analysis of Sec. 1090.109(a)(1)
and of ``covered payment functionality'' in 1090.109(a)(2). See also
Google LLC Embedded Finance White Paper at 7 (``Embedded finance
also offers a bonus for financial services companies: The data you
collect from each transaction can help enhance customer service
experience and innovate new products and experiences. The
possibilities are endless for these kinds of partnerships, with high
revenue and business growth potential. Before embarking on the
embedded finance journey, however, you'll need to prepare'' by,
among other steps, ``[p]lan[ning] to manage and analyze the vast
trove of data you'll be collecting.''); CFPB Report on Convergence
of Payments and Commerce, supra, at sec. 3.3 (``Embedded
commerce'').
\113\ Today, a general-use digital consumer payment application
can initiate payments from multiple credit cards, prepaid accounts,
and checking accounts. A general-use digital consumer payment
application can facilitate payments from accounts that the provider
offers through depository institution partners, or from linked
accounts issued by other institutions (sometimes referred to as
pass-through payments).
\114\ Google LLC Embedded Finance White Paper at 3; Apple Cash
website (``Send and Receive Money in Messages. With Apple Cash, you
can send and receive money with just a text, in Messages. So it's
easy to tip your dog walker, request funds from your roommate, or
chip in for a coworker's gift.''), <a href="https://www.apple.com/apple-cash/">https://www.apple.com/apple-cash/</a>
(last visited Nov. 6, 2024).
---------------------------------------------------------------------------
The CFPB also agrees with the group of State attorneys general that
new risks may emerge as the relevant technologies in this market
evolve. In this market, by using its supervisory activity as general-
use digital consumer payment applications incorporate new technology,
the CFPB can inform its assessment of risks to consumers and to
markets.\115\
---------------------------------------------------------------------------
\115\ In the CFPB's experience, for some financial institutions,
even the rollout of relatively conventional digital technologies can
pose significant risks to consumers, including in the area of
digital payments. Cf. CFPB, In re: VyStar Credit Union, Admin Proc.
File No. 2024-CFPB-0013 (Oct. 31, 2024), ] 20 (describing how outage
in the establishment of a new online banking platform of large
credit union left consumers unable to engage in certain banking
activities, and that ``[s]ome members' previously scheduled
recurring payments were delayed or even deleted.''), <a href="https://files.consumerfinance.gov/f/documents/cfpb-vystar-credit-union-consent-order_2024-10.pdf">https://files.consumerfinance.gov/f/documents/cfpb-vystar-credit-union-consent-order_2024-10.pdf</a> (last visited Nov. 16, 2024).
---------------------------------------------------------------------------
Supervision can be effective at detecting and assessing such risks.
As a nonprofit commenter noted, supervision allows for rapid exchange
of information outside of the adversarial legal process. The
supervisory process also generally is confidential, which also
facilitates the exchange of information.\116\ For example, when
examiners conduct a compliance management review, they can assess the
strength of larger participants' compliance management as applied to
the development and marketing of new products.\117\ In addition, as
illustrated by its work during the COVID-19 pandemic, examiners who are
familiar with supervised entities can review activities across a market
to identify emerging risks of consumer harm in a time of macroeconomic
stress or
[[Page 99596]]
shock.\118\ As another example, through its supervisory tool, the CFPB
can respond rapidly to reports of any widespread outages at larger
participants by gathering information through an established
supervisory relationship.\119\
---------------------------------------------------------------------------
\116\ The CFPB treats CFPB confidential supervisory information
consistent with applicable regulation; see 12 CFR part 1070. As
noted above, even when Supervision highlights its findings to the
public through Supervisory Highlights, it generally does not
identify individual firms (outside of highlighting any associated
enforcement actions).
\117\ See, e.g., CFPB Supervision and Examination Manual, part
I.A (page 6 of compliance management review section explaining how
examiners' compliance management review includes a review of the
``processes for development and implementation of new consumer
financial products or services and distribution channels or
strategies, to determine degree of compliance function
participation.''); see also id. at 4-5 (describing how examiners
review product development as a component of the review of board and
management oversight of compliance); id. at 9 (review of training of
staff responsible for product development); id. at UDAAP Examination
Procedures at 2 (review of product development documentation in
connection with examiner's assessment of compliance with the
prohibition against unfair, deceptive, and abusive practices).
\118\ See, e.g., CFPB, Prioritized Assessment FAQs (July 20,
2020) at 1 (``The Bureau is adapting its supervision program to meet
the needs of the current national emergency . . . . Through
Prioritized Assessments, the Bureau will expand its supervisory
oversight to cover a greater number of institutions than our typical
examination schedule allows, gain a greater understanding of
industry responses to pandemic-related challenges, and help ensure
that entities are attentive to practices that may result in consumer
harm.''), <a href="https://files.consumerfinance.gov/f/documents/cfpb_prioritized-assessment_frequently-asked-questions.pdf">https://files.consumerfinance.gov/f/documents/cfpb_prioritized-assessment_frequently-asked-questions.pdf</a> (last
visited Nov. 7, 2024); Supervisory Highlights Issue 23, Jan. 2021
(secs. 3.3, 3.5, and 3.6 of COVID-19 special edition describing
supervisory observations in prioritized assessments in student loan
servicing, consumer reporting, and consumer debt collection markets
subject to larger participant rules), <a href="https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-23_2021-01.pdf">https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-23_2021-01.pdf</a> (last visited Nov. 7, 2024).
\119\ See CFPB, What happens if my payment app has an outage and
I can't access my account? (Dec. 21, 2023) (describing consumer
complaints as one way the CFPB collects information about outages at
payment apps), <a href="https://www.consumerfinance.gov/ask-cfpb/what-happens-if-my-payment-app-has-an-outage-and-i-cant-access-my-account-en-2145/">https://www.consumerfinance.gov/ask-cfpb/what-happens-if-my-payment-app-has-an-outage-and-i-cant-access-my-account-en-2145/</a> (last visited Nov. 8, 2024); FEDS Notes, Offline
Payments: Implications for Reliability and Resiliency in Digital
Payment Systems (Aug. 16, 2024) (describing how ``several recent
high-profile outages have highlighted the need for building more
reliability and resiliency in digital payment systems''), <a href="https://www.federalreserve.gov/econres/notes/feds-notes/offline-payments-implications-for-reliability-and-resiliency-in-digital-payment-systems-20240816.html">https://www.federalreserve.gov/econres/notes/feds-notes/offline-payments-implications-for-reliability-and-resiliency-in-digital-payment-systems-20240816.html</a> (last visited Nov. 8, 2024).
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Supervision of larger participants in this market also can identify
new and emerging risks to consumers relating to the applicability of
existing requirements of Federal consumer financial law to new
products. For example, comments from consumer groups and State
attorneys general suggested that non-compliance with EFTA/Regulation E
and GLBA/Regulation P is common in this market, while some industry
commenters stated that neither EFTA/Regulation E nor GLBA/Regulation P
apply to at least some market participants. Other commenters described
how some consumers may be confused about the legal protections afforded
through certain payment apps. The CFPB does not define the application
of those laws in this rulemaking. Through its supervisory activity, the
CFPB can gather information to assess the applicability of those laws
to the specific consumer financial products and services that a larger
participant provides. Where the law applies and is violated, examiners
can address the situation through supervisory action and where
appropriate the CFPB can consider enforcement activity. In addition,
such findings can help to inform what the CFPB communicates to the
broader market, including through its Supervisory Highlights
publication.
The CFPB disagrees with certain comments, summarized further above,
that suggested that in a larger participant rule the CFPB is required
to assess the degree or prevalence of risks to consumers, potential
violations of law, or other specific harms occurring in the described
market. The relevant provisions of the CFPA do not impose such
requirements. While some comments did not identify any legal basis for
this alleged obligation, others asserted that the obligation arises
from section 1024(b)(2), which concerns the CFPB's operation of a
``risk-based supervision program.'' The CFPB believes that these
comments misinterpret the scope and purpose of section 1024(b)(2). As
the CFPB has previously explained,\120\ that provision describes the
manner in which the CFPB must ``exercise its authority under paragraph
[(b)](1)'' \121\ which in turn authorizes the CFPB to supervise
``persons described in subsection (a)(1).'' The Final Rule does not
exercise authority provided by section 1024(b)(1). Rather, it
``describe[s],'' in part, a set of persons falling within section
1024(a)(1), by defining a category of ``larger participant[s].'' The
CFPB only exercises the authority set forth in section 1024(b)(1) when
it actually requires reports or conducts examinations of such persons.
In exercising authority under section 1024(b)(1), the CFPB considers
(and for larger participants under this Final Rule will consider) the
factors set forth in section 1024(b)(2), including risks to consumers,
as further described above in part I's discussion of the CFPB's
prioritization process. However, the CFPA does not mandate
consideration of those factors when issuing a rule that defines a
category of larger participants under paragraph (a)(1).\122\
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\120\ See 77 FR 42874 at 42883; 77 FR 65775 at 65779.
\121\ 12 U.S.C. 5514(b)(2).
\122\ This conclusion is reinforced by the immediately following
subsection of the CFPA, 1024(a)(1)(C), which expressly references
the consideration of risk. Under that provision, the CFPB has the
authority to supervise any nonbank covered person that the CFPB
``has reasonable cause to determine, by order, after notice . . .
and a reasonable opportunity . . . to respond . . . is engaging, or
has engaged, in conduct that poses risks to consumers with regard to
the offering or provision of consumer financial products or
services.'' 12 U.S.C. 5514(a)(1)(C) (emphasis added).
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As noted above, one industry comment further argued that general
principles of administrative law require the CFPB to identify concrete
risks to consumers that will be mitigated by supervision in order to
issue this rule. The commenter suggested that the Proposed Rule should
have specified in detail what kind of compliance improvements the CFPB
envisions, what activities of particular entities are currently non-
compliant, why compliance will prevent particular risks to consumers,
the likelihood of such risks occurring, the resulting harm to
consumers, and how all of these issues compare to related markets.
Elsewhere this Final Rule discusses the CFPB's statutory authority,
reasons, and supporting evidence for issuing this Final Rule and
explains how this Final Rule will help the CFPB to effectuate the
statutory purposes of the CFPA. The CFPB disagrees that it was
additionally required to consider in this rulemaking the kinds of
detailed information about mitigation of concrete risks contemplated by
the commenter. As explained above, there is no indication in the text
of the CFPA that the CFPB is required to consider such information in
issuing a larger participant rule.\123\ Because the CFPB's risk-based
prioritization process considers the type of information about risks
described in part I above, the CFPB's supervision of larger
participants ultimately may assist the CFPB in detecting and assessing
risks to consumers and to markets.\124\ But sections 1024(a)(1)(B) and
(2) do not require the CFPB to reach conclusions regarding such matters
before it can even initiate risk-based prioritization for a category of
larger participants.
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\123\ With respect to cross-market comparisons of risk, as
explained in the Proposed Rule and in its previous larger
participant rulemakings, ``[t]he Bureau need not conclude before
issuing a [larger participant rule] that the market identified in
the rule has a higher rate of non-compliance, poses a greater risk
to consumers, or is in some other sense more important to supervise
than other markets.'' 88 FR 80197 at 80200 n.24; 77 FR 65775 at
65779.
\124\ See 12 U.S.C. 5514(b)(1)(C).
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To the extent the industry commenter suggests the CFPB should
consider such information because it asserts its own type of digital
wallet product is ``low risk'' and should therefore be excluded from
the market and ineligible for CFPB supervision, the CFPB does not
believe that it is required to categorically exempt allegedly ``low-
risk'' products within a market when issuing a rule to define larger
participants of a market.\125\
[[Page 99597]]
The CFPB likewise disagrees with other commenters who suggested that
the CFPB is obligated to undertake a separate risk assessment of
various subcomponents or sectors of the described market, or to include
only the riskiest subcomponents or sectors within the larger
participant definition. CFPA section 1024(a)(1)(B) provides for the
issuance of rules defining ``larger participant[s] of a market'' for
consumer financial products or services, and contains no language
requiring exemptions for allegedly ``low-risk'' subcomponents of a
market. Consistent with CFPA section 1024(b)(2), the CFPB considers
whether products are lower risk, and thus less of a priority for
supervisory attention, when choosing particular entities and consumer
financial products and services for supervisory examinations as part of
its operation of its risk-based supervision program.\126\ The CFPB's
operation of that risk-based supervision program is designed to prevent
CFPB's supervision program from placing undue burdens on larger
participants whose activities are genuinely lower risk. The CFPB also
provides below further justification for the scope of the market
described in this Final Rule, including regarding the inclusion of
pass-through payment wallets in the market.\127\
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\125\ Nor has the CFPB determined in this rulemaking exercising
CFPA section 1024(a)(1)(B) authority that any specific market
participant or larger participant poses any particular type or level
of risk, low or otherwise, to consumers. Thus, although this
commenter made claims regarding its product having low risk
including low risk of violation of the prohibition against unfair,
deceptive, and abusive acts and practices, the CFPB does not
adjudicate such claims in this legislative rulemaking, for the
reasons described above. In any event, the CFPB disagrees that the
commenter was prevented from presenting evidence regarding the risks
posed by its products. It had notice of the CFPB's reasons for the
proposal and commented on them.
\126\ As described above, the CFPB Supervision and Examination
Manual describes the CFPB's established process for conducting risk-
based prioritization of nonbank covered persons subject to its
supervisory authority under CFPA section 1024(a).
\127\ See section-by-section analysis of Sec. 1090.109(a)(2)
(definition of ``wallet functionality'').
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The CFPB disagrees with the industry commenter suggesting that the
CFPB may issue a rule to define larger participants of a market for
consumer products or services only in cases of ``market failure.''
There is no support for this view in the text or legislative history of
the CFPA. Moreover, while concerns about market failure often underlie
laws and regulations imposing substantive consumer protection
requirements,\128\ this Final Rule does not impose substantive
requirements and instead concerns the scope of the CFPB's supervisory
authority, which is an authority designed to accomplish the statutory
purposes established under CFPA section 1024(b)(1)(A)-(C). In that
context, there is little reason to read section 1024(a)(1)(B) to
impliedly bar the issuance of a larger participant rule in the absence
of a demonstrated market failure.
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\128\ See, e.g., 12 U.S.C. 4301(a) (Congressional finding in
Truth in Savings Act that ``competition between depository
institutions would be improved . . . if there was uniformity in the
disclosure of terms and conditions on which interest is paid and
fees are assessed in connection with such accounts.''); 15 U.S.C.
1601(a) (Congressional finding in Truth in Lending Act that
``competition among the various financial institutions and other
firms engaged in the extension of consumer credit would be
strengthened by the informed use of credit.'').
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Although the CFPB disagrees with the comments suggesting that it
must make findings regarding risk to issue this larger participant rule
and it does not do so here, as discussed above other commenters
described various existing and emerging risks to consumers that may be
associated with products and services provided by larger participants.
Those comments raise legitimate concerns regarding potential risks to
consumers in the market and thus provide further support for the CFPB's
conclusion that this rule will help the CFPB to use its supervisory
tool to detect and assess risks to consumers and the market. It is not
necessary for this rule to adjudicate the nature, extent, or source of
such risks, or for the CFPB to publish market-wide findings about such
risks as a predicate for larger participant rulemakings. As discussed
above, the CFPB incorporates information available to it about such
risks (including from its market-monitoring function, among others)
when prioritizing which nonbank covered persons subject to CFPA section
1024(a) it will examine.\129\ In response to the nonprofit calling on
the CFPB to describe in more detail the risks it would consider in
prioritizing larger participants for examination in this market, part I
of the Final Rule above explains in further detail the CFPB's
prioritization process and the factors the CFPB considers as part of
that process, consistent with the CFPA and as described in its
Supervision and Examination Manual. The CFPB also expects that it will
continue to periodically publish Supervisory Highlights to communicate
key examination findings and risks identified over time on a market-by-
market basis.
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\129\ The CFPB also provides additional responses further below
to the comments suggesting it must publish the results of its market
monitoring, or establish why its supervisory tool is superior to its
market-monitoring tool. In any event, the CFPB has used data from
its market-monitoring orders to inform the estimates published in
this Final Rule, as discussed in the section-by-section analysis of
the larger-participant test further below.
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Ensuring Consistent Enforcement of Federal Consumer Financial Law
With regard to comments on whether the Proposed Rule would further
the CFPB's statutory objective of ensuring that Federal consumer
financial law is enforced consistently between nonbanks and depository
institutions in order to promote fair competition,\130\ the CFPB agrees
with commenters who stated that the Proposed Rule would further that
objective by permitting the CFPB to supervise both banks and nonbanks
operating in the general-use digital consumer payment application
market and by reducing the competitive advantage nonbanks may derive
from being subject to less supervisory oversight. The CFPB disagrees
with the commenter that characterized the Proposed Rule as a form of
``mission creep . . . outside [the CFPB's] core jurisdiction.'' The
commenter did not address the CFPA's statutory objective of consistent
enforcement of Federal consumer financial law without regard to an
entity's status as a depository institution. In addition, the CFPB
already has enforcement and rulemaking authority with respect to
participants in the market; thus, those entities already fall within
the CFPB's ``jurisdiction'' in significant ways.\131\ The CFPB also
disagrees with a related comment that described the larger participant
rule as placing the CFPB in a market gatekeeper role. That comment
appeared to misunderstand the function of larger participant rules,
which do not regulate who enters a market but instead identify ``larger
participants'' for purposes of section 1024(a)(1)(B). In addition, the
CFPB disagrees with some commenters' suggestion that the rule should
not be issued because of their concerns about the rule potentially
making nonbanks less competitive and frustrating their innovation. As
discussed below, the Final Rule adopts a significantly higher
threshold, resulting in fewer market participants qualifying as larger
participants. Even
[[Page 99598]]
with respect to larger participants, the CFPB does not have evidence to
indicate that the Final Rule is likely to significantly affect
innovation.
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\130\ 12 U.S.C. 5511(b)(4).
\131\ The CFPB also disagrees with the industry comment
suggesting that the Proposed Rule failed to account for the role of
the FTC in promoting competition. As the Proposed Rule explained, it
is focused on the statutory objective (codified in 12 U.S.C.
5511(b)(4)) of ensuring Federal consumer financial law ``is enforced
consistently, without regard to the status of a person as a
depository institution, in order to promote fair competition[.]'' 88
FR 80197 at 80198 n.5. The CFPB can promote consistent enforcement
of Federal consumer financial law without impeding the FTC's
mission; the two are compatible, and the CFPB coordinates with the
FTC regarding its supervision activities more broadly.
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The CFPB also disagrees with those industry comments stating that
the Proposed Rule would not promote consistent enforcement of Federal
consumer financial law and fair competition because the proposed market
definition included pass-through payment wallets that banks do not
provide. Banks and credit unions can and do provide payment wallet
functionalities. For example, very large depository institutions offer
payment wallet functionalities that facilitate consumers' payments from
accounts at the depository institution to make purchases online and in
stores.\132\ In addition, these comments appear to presuppose that the
CFPB can only further the statutory objective of consistent enforcement
in this rule if banks and nonbanks compete to offer precisely the same
products in precisely the same manner to consumers. But the objective
of consistent enforcement can also be furthered where the CFPB has the
ability to supervise both nonbanks and depository institutions that
play complementary roles in payment transactions. For example, when a
depository institution subject to the CFPB's supervisory authority
makes its accounts accessible to the consumer through a general-use
digital consumer payment application provided by an unaffiliated
nonbank, supervision of both the depository institution and the nonbank
serves the statutory objective described above. Nonbanks may initiate
payments from consumer accounts held at banks and credit unions and
engage in a number of related activities that can implicate Federal
consumer financial law compliance obligations.\133\ In addition, the
CFPB agrees with the credit union association commenter that
unaffiliated payment applications can cause burdens on credit unions
related to error resolution and customer service. Where the CFPB can
supervise both a nonbank pass-through payment wallet and a depository
institution involved in payments transactions, it is better positioned
to consistently enforce applicable legal obligations with respect to
the two entities. Below in the section-by-section analysis of ``wallet
functionality,'' this Final Rule further discusses the reasons why
pass-through payment wallets are appropriately included in the market
definition.
---------------------------------------------------------------------------
\132\ For example, an industry association commenter pointed to
a new digital wallet called Paze and a click-to-pay product offered
by banks. See also, e,g., Early Warning Services, LLC, Press
Release, Paze Hits Major Milestone: 125 million Credit and Debit
Cardholders Can Check out Online (Oct. 1, 2024) (describing ``Paze,
a reimagined digital wallet offered by banks and credit unions,'' as
available for use with 125 million payment card accounts issued by
seven very large banks), <a href="https://www.paze.com/paze-hits-major-milestone-125-million-credit-and-debit-cardholders-can-check-out-online">https://www.paze.com/paze-hits-major-milestone-125-million-credit-and-debit-cardholders-can-check-out-online</a> (last visited Nov. 7, 2024); Click to Pay with American
Express (describing how depository institution offers an ecommerce
payment wallet), <a href="https://network.americanexpress.com/globalnetwork/v4/products/click-to-pay-with-american-express">https://network.americanexpress.com/globalnetwork/v4/products/click-to-pay-with-american-express</a> (last visited Nov. 7,
2024). See also CFPB Contactless Payments Spotlight, supra (n.59
describing how JPMorgan previously provided the Chase Pay app to
facilitate consumer payments for retail purchases).
\133\ See, e.g., Board of Gov. of Fed. Rsv. System, FDIC, OCC,
Joint Statement on Banks' Arrangements with Third Parties to Deliver
Bank Deposit Products and Services (July 25, 2024) at 1 (noting how
under certain bank/fintech arrangements, ``banks rely on one or
multiple third parties to . . . process payments (sometimes with the
ability to directly submit payment instructions to payment
networks); perform regulatory compliance functions; provide end-user
facing technology applications; service accounts; perform customer
service; and perform complaint and dispute resolution functions''),
<a href="https://www.occ.gov/news-issuances/news-releases/2024/nr-ia-2024-85a.pdf">https://www.occ.gov/news-issuances/news-releases/2024/nr-ia-2024-85a.pdf</a> (last visited Nov. 7, 2024). See id. at 1-3 (describing how
deployment of new digital payment technologies create a potential
for insufficient risk management to meet consumer protection
obligations such as requirements under Regulation E to investigate
and resolve certain payment disputes within required timeframes).
---------------------------------------------------------------------------
Finally, the CFPB disagrees with the industry association commenter
to the extent it was suggesting that larger participant rules cannot
promote fair competition between banks and nonbanks unless they apply
antitrust principles to define the market. For the reasons discussed
below in the section-by-section analysis of the market definition in
Sec. 1090.109(a)(1), the purpose of antitrust law is different from
the purpose of larger participant rules and the CFPB does not apply
antitrust law in this rule. Nonetheless, as explained above, banks,
credit unions, and their affiliates can offer and provide covered
payment functionalities with general use through digital applications.
In this rulemaking, the CFPB shares the goals expressed by the banking
association and payment network commenters of applying consistent
functional oversight to similar functional activities in this market.
And as explained below in the section-by-section analysis of the market
definition, the activities encompassed by the market definition are
similar in how they support, digitally, a common set of payment
activities that consumers engage in, such as making everyday payments
to friends and family and for purchases. Relatedly, the CFPB disagrees
with the industry association commenter to the extent it was suggesting
that, by not including physical payment cards in the market, the Final
Rule will not promote consistent enforcement of Federal consumer
financial law. For the reasons discussed in the section-by-section
analysis further below, the CFPB concludes the ``digital application''
component of the market definition is appropriate. The CFPB already has
broad supervisory oversight of the use of physical payment cards issued
by the very large banks and credit unions that it supervises. However,
there is a supervisory gap over the significant role that nonbank
larger participants play in facilitating the use of payment cards
through general-use digital consumer payment applications. As described
above, consumer adoption of general-use digital consumer payment
applications is very high, indicating that consumers often prefer them
to physical cards. Indeed, in some cases, such as at the time of
origination or card replacement, a nonbank's general-use digital
consumer payment application may be the only way for the consumer to
use the payment card.\134\ The Final Rule will fill this gap, which
will promote consistent enforcement of Federal consumer financial
law.\135\
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\134\ PULSE, PULSE Debit Issuer Study (Aug. 8, 2024) at 9-10
(reporting that all surveyed issuers report provisioning debit cards
to digital wallets, that 38 percent of debit cards are loaded into
digital wallets, and that digital issuance of debit cards directly
to such wallets is the top new capability that debit card issuers
plan to introduce with 50 percent of issuers planning to add this
service), <a href="https://content.pulsenetwork.com/2024-debit-issuer-study/2024-pulse-debit-issuer-study">https://content.pulsenetwork.com/2024-debit-issuer-study/2024-pulse-debit-issuer-study</a> (last visited Nov. 7, 2024).
\135\ With respect to what the commenter referred to as food
delivery applications and automobile purchase applications, for the
reasons discussed in the section-by-section analysis of the
exclusion for certain merchant and marketplace payment activities in
paragraph (C) of the definition of ``consumer payment transaction,''
the CFPB believes those are part of a distinct market.
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Other Regulators' Existing Oversight Authority
With regard to comments on existing oversight of market
participants, the CFPB agrees with the comment from the group of State
attorneys general that stated that the rule would help existing
regulatory oversight efforts in the market and would allow for
increased coordination between Federal and State authorities to prevent
unlawful conduct. The Bureau agrees that the existing regulatory
oversight framework governing general-use digital consumer payment
applications is important, but the Bureau believes that establishing
its supervisory authority as part of this framework would better
promote compliance with and consistent enforcement of Federal consumer
[[Page 99599]]
financial law and help it to detect risks to consumers and the market.
The CFPB disagrees with the industry association comment suggesting
that the CFPB must determine whether the market covered by the rule is
inadequately supervised before issuing a larger participant rule; no
such requirement appears in the text of the CFPA.\136\ The CFPB
accounts for existing oversight when evaluating how to exercise its
supervisory authority pursuant to CFPA section 1024(b)(2).
Specifically, the CFPB takes seriously its inter-governmental
coordination obligations, described below, and believes that they will
promote coordination and minimize regulatory burden in connection with
the CFPB's exercise of its supervisory authority over larger
participants in this market and the existing regulatory oversight
structure at the Federal and State levels.
---------------------------------------------------------------------------
\136\ See, e.g., 12 U.S.C. 5514(a)(1)(B), (a)(2).
---------------------------------------------------------------------------
For example, as required by the CFPA and explained in the Proposed
Rule, the CFPB coordinates its examination activity, including at
nonbanks, with State regulators.\137\ One purpose of this coordination
is to prevent duplication and unnecessary regulatory burden. That
coordination will address commenter concerns regarding CFPB oversight
of larger participants that may engage in market activity that is
subject to State money transmitter laws. In addition, industry comments
often recognized that providers of pass-through payment wallets that do
not hold or receive funds generally are not engaged in money
transmission under State laws, and thus are not subject to State-level
supervision.
---------------------------------------------------------------------------
\137\ 88 FR 80197 at 80198 n.12. See also 12 U.S.C.
5514(b)(2)(D) (CFPB shall exercise its supervisory authority under
12 U.S.C. 5514(b)(1) in a manner designed to ensure that such
exercise takes into consideration, among other things, the extent to
which supervised nonbanks are subject to oversight by State
authorities for consumer protection); 12 U.S.C. 5514(b)(3) (CFPB
coordination of supervisory activities with States); Int'l Money
Transfer Larger Participant Rule, 79 FR 56631 at 56632, 56638, 56643
(explaining how the Bureau will coordinate with appropriate State
regulatory authorities and will consider the extent of State
supervisory activity when prioritizing individual examinations.);
2013 CFPB-State Supervisory Coordination Framework (May 7, 2013)
(describing process for CFPB-State coordination under information-
sharing memorandum of understanding), <a href="https://files.consumerfinance.gov/f/201305_cfpb_state-supervisory-coordination-framework.pdf">https://files.consumerfinance.gov/f/201305_cfpb_state-supervisory-coordination-framework.pdf</a> (last visited Nov. 8, 2024).
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The CFPB also disagrees with industry comments suggesting that this
rule establishing CFPB authority to supervise larger participants in
this market will create CFPB supervisory activities that are
unnecessarily duplicative or burdensome vis-[agrave]-vis oversight
activities by the FTC and prudential regulators. Congress has adopted
mechanisms to prevent unnecessarily duplicative or burdensome CFPB
supervisory activities in cases where the FTC may exercise enforcement
authority or prudential regulators may exercise supervisory authority
over larger participants.\138\ Among other things, the CFPB coordinates
across its functions with the FTC, which does not have a supervisory
tool.\139\ In addition, the CFPA provides that the CFPB has exclusive
authority with respect to the prudential regulators to supervise larger
participants for purposes of assuring compliance with Federal consumer
financial law.\140\ Also, consistent with the requirements of CFPA
section 1024(b)(3), the CFPB coordinates with prudential regulators to
minimize the duplication and regulatory burden of supervisory activity
pursuant to memoranda of understanding, including where appropriate at
nonbank larger participants.\141\ Moreover, as discussed above, nonbank
larger participants engage in substantial volumes of market activity
with interconnection across the U.S. financial system. CFPB supervision
of nonbank larger participants can assess compliance with the
requirements of Federal consumer financial law across their various
market activities, which involve interactions with banks and credit
unions overseen by various Federal prudential regulators. Thus, CFPB
oversight of larger participants can ensure consistent enforcement of
Federal consumer financial law and complement the oversight of the
Federal prudential regulators.
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\138\ Such supervisory authority may exist, for example, where
(as noted by the industry commenter) prudential regulators may
examine certain nonbank service providers to banks under authorities
such as the Bank Service Company Act. See generally 12 U.S.C. 1861-
67.
\139\ The CFPB coordinates with the FTC consistent with its
obligations under the CFPA, including 12 U.S.C. 5514(c)(3) and
5581(b)(5). See CFPB-FTC Memorandum of Understanding (Feb. 25, 2019)
(section VII describing how CFPB coordinates its supervision and
examination activities with the FTC), <a href="https://files.consumerfinance.gov/f/documents/cfpb_ftc_memo-of-understanding_2019-02.pdf">https://files.consumerfinance.gov/f/documents/cfpb_ftc_memo-of-understanding_2019-02.pdf</a> (last visited Nov. 8, 2024).
\140\ 12 U.S.C. 5514(c), (d) (describing the extent to which
CFPB supervisory and enforcement authorities are exclusive with
respect to nonbank covered persons described in CFPA section
1024(a)(1)). See also CFPA section 1025(b)(1) (similarly providing
that the CFPB has exclusive authority to supervise very large
depository institutions and their affiliates for the purposes listed
therein, including assessing compliance with the requirements of
Federal consumer financial laws).
\141\ See 12 U.S.C. 5514(b)(3) (``To minimize regulatory burden,
the Bureau shall coordinate its supervisory activities with the
supervisory activities conducted by prudential regulators . . .
including establishing their respective schedules for examining
persons described in subsection (a)(1) [of CFPA section 1024] and
requirements regarding reports to be submitted by such persons.'').
See, e.g., CFPB, Board of Gov. of Fed. Rsv. System, FDIC, NCUA, and
OCC Memorandum of Understanding (MOU) on Supervisory Coordination
(May 16, 2012) at 2 (noting how CFPA sections 1024(b)(3)-(4) and
1025(b)(2) require the CFPB to ``coordinate its supervisory
activities with the supervisory activities conducted by the
Prudential Regulators, including consultation regarding their
respective schedules for examining Covered Institutions and
requirements regarding reports to be submitted by Covered
Institutions.''), <a href="https://files.consumerfinance.gov/f/201206_CFPB_MOU_Supervisory_Coordination.pdf">https://files.consumerfinance.gov/f/201206_CFPB_MOU_Supervisory_Coordination.pdf</a> (last visited Nov. 7,
2024); see also id. (listing objectives of the MOU, including
``[a]void[ing] unnecessary duplication of effort'' and
``[m]inimiz[ing] unnecessary regulatory burden''); id. at 8 (``The
CFPB and Prudential Regulators will coordinate in connection with
examinations that relate to Covered Supervisory Activities of
Covered Institutions' Service providers'').
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CFPB's Existing Enforcement and Market-Monitoring Authorities
The CFPB disagrees with those industry commenters suggesting that
it cannot use its larger participant rulemaking authority to establish
supervisory authority in this market due to the existence of the CFPB's
enforcement and market-monitoring authorities. The CFPA identifies
supervision of nonbank covered persons under CFPA section 1024 as a
primary function of the CFPB.\142\ Sections 1024(a)(1)(B) and (2) of
the CFPA specifically empower the CFPB to prescribe larger participant
rules for the purpose of authorizing CFPB supervision, and those
provisions contain no requirement that a larger participant rule
consider the adequacy of the CFPB's other authorities or
functions.\143\ Given the statutory scheme in the CFPA, any larger
participant rule will generally apply to nonbank covered persons that
also are subject to the CFPB's market-monitoring and enforcement
authorities. These comments thus appear to reflect, in large part, a
policy disagreement with Congress's decision to give the CFPB the
ability to supervise nonbank larger participants of markets for
consumer financial products and services it defines by rule in addition
to its other authorities.
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\142\ See 12 U.S.C. 5511(c)(4) (listing supervision of covered
persons, including nonbank covered persons, as one of the CFPB's
``primary functions'').
\143\ By contrast, in allocating its supervisory resources under
CFPA section 1024(b)(2) the CFPB considers, among other things,
``the extent to which such institutions are subject to oversight by
State authorities for consumer protection.'' 12 U.S.C.
5514(b)(2)(D).
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Further, as the Proposed Rule noted and as also discussed above,
supervision can serve an important function that is distinct from and
complementary to enforcement and
[[Page 99600]]
market monitoring.\144\ For example, supervision can benefit consumers
and providers by detecting compliance problems early, at a point when
correcting the problems would be relatively inexpensive and before many
(or many more) consumers have been harmed.\145\ In addition, the CFPB
conducts its supervisory activities not only for the purposes of
assessing compliance with the requirements of Federal consumer
financial law, but also for purposes of obtaining information about the
person's activities and compliance systems or procedures and detecting
and assessing risks to consumers and markets. These latter two purposes
of its supervisory activities generally are distinct from its
enforcement activities, which focus on addressing violations of Federal
consumer financial law.\146\ In addition to promoting compliance in
their own right, those activities also help to inform CFPB decisions
regarding when to initiate enforcement activity. Similarly, CFPB
supervisory and examination activity at individual firms can inform how
the CFPB conducts market-wide monitoring. The CFPB's market monitoring
function also can support decisions about when to initiate supervisory
activity. For example, under CFPA section 1022(c)(1), the CFPB may use
its market monitoring to support its functions, including to inform its
prioritization of its nonbank supervision examination activities at
larger participants.\147\
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\144\ 88 FR 80197 at 80212-13.
\145\ See also CFPB Supervision Director, What new supervised
institutions need to know about working with the CFPB (Jan. 9, 2023)
(``Supervisory activities may help entities identify issues before
they become systemic or cause significant harm.''), <a href="https://www.consumerfinance.gov/about-us/blog/what-new-supervised-institutions-need-to-know-about-working-with-the-cfpb/">https://www.consumerfinance.gov/about-us/blog/what-new-supervised-institutions-need-to-know-about-working-with-the-cfpb/</a> (last visited
Nov. 7, 2024).
\146\ 12 U.S.C. 5511(c)(4).
\147\ See 12 U.S.C. 5512(c)(1).
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The Final Rule Does Not Implicate the ``Major Questions'' Doctrine
The CFPB disagrees with comments stating that the Rule implicates
the ``major questions'' doctrine, which is reserved for ``extraordinary
cases'' in which the ``history and the breadth of the authority that
the agency has asserted'' and the vast ``economic and political
significance'' of the assertion of authority by the agency ``provide a
reason to hesitate before concluding that Congress meant to confer such
authority.'' \148\ As noted above, the Final Rule does not impose any
new substantive consumer protection requirements on larger
participants. Because general-use digital consumer payment applications
are consumer financial products and services as defined in the
CFPA,\149\ the CFPB already has enforcement authority, market-
monitoring authority, and rulemaking authority with respect to nonbank
covered persons participating in the market for general-use digital
consumer payment applications. Whether or not the CFPB may exercise one
additional form of authority--supervision--over a group of larger
participants in that market is not a question of vast economic and
political significance in the sense recognized by courts.\150\ In this
regard, the CFPB notes that one nonprofit commenter confuses the
overall dollar value of transactions through digital wallets (which the
commentator estimates at almost $1 trillion) with the economic impact
of this larger participant rulemaking, which is of course vastly
smaller.\151\
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\148\ W. Virginia v. EPA, 597 U.S. 697, 721 (2022) (cleaned up).
\149\ See nn.241-42 infra (noting explanation in Proposed Rule,
88 FR 80197 at 80205 nn.64-65).
\150\ Cf., e.g., Biden v. Nebraska, 143 S. Ct. 2355, 2373-74
(2023) (citing an estimate that the agency's action would ``cost
taxpayers between `$469 billion and $519 billion' '' and that it
implicated a ``matter of earnest and profound debate across the
country'').
\151\ Similarly, the CFPB's statements in press materials cited
by the commenter do not suggest that this rulemaking would have a
vast economic impact. The costs and benefits of this rulemaking are
further discussed below. The CFPB also disagrees with the commenter
that section 1024(a)(1)(B) would need to refer specifically to
``digital wallets'' to authorize this rulemaking. By that logic,
there could be no larger participant rulemakings because section
1024(a)(1)(B) refers to markets for ``other consumer financial
products or services'' without expressly identifying particular
consumer financial products and services.
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CFPB Examinations of Larger Participants
With respect to comments on the statement in the Proposed Rule
noting that the CFPB's supervisory authority is not limited to the
consumer financial products or services that qualified a person for
supervision, the CFPB clarifies it is not relying on that position as a
rationale for the Final Rule or as authority for issuing the Final
Rule, and that the CFPB would finalize the market definition, market-
related definitions, and larger-participant test as currently
formulated in this Final Rule irrespective of the existence of that
position.\152\
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\152\ Nonetheless, the CFPB notes that it explained the basis
for this interpretation in its first larger participant rulemaking,
for the consumer reporting market, where it noted that the ``Dodd-
Frank Act authorizes the Bureau to supervise `covered person[s]'
described in 12 U.S.C. 5514(a)(1)(A) through (E)[ ]'' and that
supervision of certain other activities of such persons ``is
consistent with the purposes that the Dodd-Frank Act sets out for
the Bureau's supervisory activities'' set forth in 12 U.S.C.
5514(b)(1). See 77 FR 42874 at 42880; see also 12 U.S.C.
5514(a)(1)(B) (providing that ``this section shall apply to any
covered person'' that is a nonbank ``larger participant of a market
for other consumer financial products or services'' as defined by
rule); 12 U.S.C. 5514(b)(1) (providing that ``[t]he Bureau shall
require reports and conduct examinations on a periodic basis of
persons described in [12 U.S.C. 5514(a)(1)] for'' certain listed
purposes). The CFPB disagrees with certain commenters' suggestion
that the reference to ``relevant product markets and geographic
markets'' in the provision describing the operation of the CFPB's
risk-based supervision program (12 U.S.C. 5514(b)(2)) was intended
to impliedly limit the scope of the CFPB's supervisory authority
under 12 U.S.C. 5514(a)(1) and (b)(1) to only the consumer financial
products and services described in the larger participant rule. The
CFPB also disagrees that this interpretation implicates the major
questions doctrine for reasons discussed above in the CFPB's
response to other comments about that doctrine.
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109(a)(1) Market Definition--Providing a General-Use Digital Consumer
Payment Application
Proposed Rule
Proposed Sec. 1090.109(a)(1) would have described the market for
consumer financial products or services covered by the Proposed Rule as
encompassing ``providing a general-use digital consumer payment
application.'' The term would have been defined as providing a covered
payment functionality through a digital application for consumers'
general use in making consumer payment transaction(s). This term
incorporated other terms defined in proposed Sec. 1090.109(a)(2):
``consumer payment transaction(s),'' ``covered payment functionality,''
``digital application,'' and ``general use.'' The term ``covered
payment functionality'' would have included a ``funds transfer
functionality'' and a ``wallet functionality,'' terms which proposed
Sec. 1090.109(a)(2) also would have defined.\153\ The Proposed Rule
sought comment on all aspects of the proposed market definition,
including whether the market definition in proposed Sec.
1090.109(a)(1) or the market-related definitions in proposed Sec.
1090.109(a)(2), discussed in the section-by-section analysis below,
should be expanded, narrowed, or otherwise modified.
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\153\ The term ``consumer payment transaction(s)'' also would
have incorporated another term--``State,'' which proposed Sec.
1090.109(a)(2) would have defined.
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Comments Received
Several commenters addressed the proposed market definition
overall. The Final Rule summarizes those comments in this section-by-
section analysis of the market definition in Sec. 1090.109(a)(1). In
addition, some comments addressed certain specific defined terms used
in the market definition or called for
[[Page 99601]]
certain exclusions or additions to the market by modifying those
defined terms. The Final Rule summarizes and responds to those comments
in the section-by-section analysis of the market-related definitions in
Sec. 1090.109(a)(2) below.
As discussed above, some commenters expressed support for the
Proposed Rule to establish supervisory authority over the market that
includes funds transfer apps and wallet functionalities with general
use that nonbank covered persons provide to consumers through digital
applications. For example, as described above, a group of State
attorneys general stated that the CFPB's supervisory oversight of
larger participants in this market would help to promote compliance
with Federal consumer financial law and to detect and assess risks
posed by this emerging financial market and market participants.
Banking and credit union associations, as well as a payment network and
nonprofit, also supported CFPB supervisory oversight of larger
participants in the proposed market, as described in the summary of
general comments above. As also described above, consumer group
comments also were supportive of the scope of the market activities
defined in the Proposed Rule, while calling for certain scope
expansions, as discussed further below. In addition, an industry
association expressed general support for the proposal to define a
market that allows the CFPB to oversee entities with varied business
models.
Other commenters disagreed with the approach to market definition
in the Proposed Rule. For example, some industry commenters stated that
larger participant rules must apply antitrust law market definition
principles because, in their view, the statutory provision in CFPA
section 1024(a)(1)(B) authorizing CFPB rules to define larger
participants of ``a market'' incorporates those principles. Some of
these commenters did not provide a legal basis for this view. Others,
such as three industry trade associations, cited Congress' use of the
phrase ``relevant product markets'' in an adjacent provision, CFPA
section 1024(b)(2), and suggested that the term ``market'' in section
1024(a)(1)(B) is implicitly limited by the phrase ``relevant product
market.'' \154\ They further suggested that the terms ``market'' and
``relevant product market'' should be understood to incorporate
antitrust case law discussing the boundaries of a market for purposes
of evaluating the viability of an antitrust claim, including cases
holding that a group of products are in the same market under antitrust
law if they are reasonably interchangeable by consumers for the same
purposes.\155\ Two of these industry associations also stated that
Congress included the requirement in CFPA section 1024(a)(2) that the
CFPB consult with the FTC prior to issuing a larger participant rule
because of the FTC's role in enforcing Federal antitrust laws.\156\
These commenters therefore concluded that a larger participant rule
must define ``a market'' that qualifies as a ``relevant product
market'' within the meaning of antitrust law.\157\
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\154\ Section 1024(b)(2) calls for the CFPB to exercise its
authority in CFPA section 1024(b)(1) to require reports and
examinations of nonbank covered persons described in CFPA section
1024(a)(1) ``in a manner designed to ensure that such exercise . . .
is based on the assessment by the Bureau of the risks posed to
consumers in the relevant product markets and geographic markets,''
and taking into consideration certain factors further specified in
CFPA section 1024(b)(2).
\155\ See, e.g., United States v. E.I. du Pont de Nemours & Co.,
351 U.S. 377, 395 (1956). One commenter also cited a European
regulation in support of its position.
\156\ The summary and response to comments regarding the FTC
consultation process is included in part IV above.
\157\ Two of the industry associations also indicated that the
Proposed Rule did not do so because antitrust law market definition
requires examining the factors that influence consumer choices, and
the Proposed Rule did not discuss those factors.
---------------------------------------------------------------------------
Those commenters and several other comments from industry,
nonprofits, and Members of Congress also disagreed with the proposed
market on the grounds that it was overbroad, conflating several markets
into one. For example, a comment from Members of Congress stated that
in their view, the proposal sought to cover different markets such as
peer-to-peer services, stored value accounts, neobanking, merchant
payment processing, and payment credential management.\158\ In
addition, some industry associations stated that the proposed market
would not qualify as a valid market because it groups together four
different types of activities that, in their view, are not economic
substitutes. They stated that these activities function in different
ways and meet different needs and use cases. They described four of
these activities as follows: (1) drawing from a stored balance held by
the company; (2) routing funds held in a third-party bank account for
transmission to a recipient; (3) charging or offering a payment method
for consumer purchases in a manner that is excluded from State money
transmitter regulations; \159\ and (4) storing and transmitting payment
credentials without participating in the flow of funds from the
consumer to the recipient. They also stated that digital applications
for person-to-person transfers and digital applications for processing
payments for merchants are different and present different risks of
consumer harm. Because these activities in their view constitute
separate markets, they stated that the Proposed Rule deviated without
justification from previous larger participant rules that did not
encompass multiple markets.\160\
---------------------------------------------------------------------------
\158\ However, as discussed above, the market is not based on
providing a stored value account. And as discussed below under
``covered payment functionality,'' the market definition generally
does not apply to merchant payment processors.
\159\ They added that State money transmitter regulation
excludes this activity because, in their view, the activity poses
low risks.
\160\ As an example, they cited the international money transfer
larger participant rule in which the CFPB declined to include the
domestic money transfer market.
---------------------------------------------------------------------------
More broadly, an industry association also stated that the market
includes ``P2P'' and digital wallet functionalities that, in their
view, are not reasonably interchangeable because they provide
``similar'' but ``differentiated'' services to consumers. Another
industry association stated that consumers rely on funds transfer
functionalities and wallet functionalities in different ways, and that
these functionalities sometimes, but not always, may be interrelated.
They stated that the CFPB should do a ``piecewise analysis'' of these
functionalities, separately analyzing how consumers rely upon them.
They stated that wallet functionalities initiate funds transfers but
are subject to Regulation E only when they store funds. They suggested
that the Proposed Rule did not establish a purpose for including wallet
functionalities in the market when they do not store funds. An industry
firm and two nonprofits suggested that wallet functionalities that do
not store funds instead facilitate consumers' payments for purchases
from merchants by storing and transmitting payment credentials for
accounts held at third-party financial institutions the CFPB already
supervises. They described that activity as part of a separate market
from the other payment functionalities included in the proposed market.
They stated that the CFPB's proposal to include such wallet
functionalities in the proposed market does not reflect the sensitivity
the CFPB has shown to differences among other consumer financial
products and services, such as consumer reporting, consumer debt
collection, and student loan servicing, by covering them in separate
larger
[[Page 99602]]
participant rulemakings defining separate markets.\161\
---------------------------------------------------------------------------
\161\ This commenter and another industry association suggested
this approach was inconsistent with how a previous larger
participant rule engaged in ``tailor[ing]'' of the rule. 78 FR 73383
at 73397. However, the quoted portion of the previous rule addressed
the tailoring of the larger-participant test to the market at hand,
which was not the subject of the comments described here.
---------------------------------------------------------------------------
A nonprofit commenter described the proposed market as being
composed of multiple sectors, including the first three groups of
activities listed by the industry association comments described above,
as well as what they described as fully online fintech firms such as
``neobanks'' and money transmitters. In its view, consumers interact
with these products differently and rely on them for different
purposes, and each presents different consumer harms.
Response to Comments Received
As an initial matter, the CFPB disagrees with some industry
commenters' novel suggestion that larger participant rules must define
a market that would qualify as a market under antitrust law. In the
CFPB's international money transfer larger participant rulemaking,
large providers of international money transfers urged the CFPB to take
the opposite position--i.e., to state that larger participant rules do
not define ``markets'' for purposes of antitrust law. In response, the
CFPB so clarified.\162\
---------------------------------------------------------------------------
\162\ See Comment on proposed international money transfer
larger participant rule by Dolex Dollar Express, Inc., MoneyGram
Payment Systems, Inc., RIA Financial Services, Sigue Corporation,
and Western Union Financial Services, Inc. (April 1, 2014) (2014
Industry Comment Letter) at 5 (``[T]he term `market' for purposes of
defining a larger participant should not be used in the absence of
cautionary language to make clear that the term is not reflective of
a Bureau determination of `market' for antitrust purposes.''),
<a href="https://www.regulations.gov/comment/CFPB-2014-0003-0014">https://www.regulations.gov/comment/CFPB-2014-0003-0014</a> (last
visited Nov. 7, 2024); CFPB, Final International Money Transfer
Larger Participant Rule, 79 FR 56631 at 56635 n.43 (stating in
response to comment that in its larger participant rulemakings
``[t]he Bureau neither defines markets for purposes of antitrust
law, nor intends the market definition in this Final Rule to be used
for any purpose other than determining larger-participant status'').
---------------------------------------------------------------------------
Having carefully considered commenters' arguments, the Final Rule
maintains the position announced in the international money transfer
larger participant rule for several reasons. As explained below, the
market definition in the Final Rule fits within a more general
understanding of the term ``market'' reflected in CFPA section 1024(a),
which does not require application of antitrust law. First, commenters
have not identified any language in CFPA section 1024, or any
legislative history, that expressly refers to antitrust statutes,
antitrust caselaw, or antitrust concepts of a market such as
substitutability and reasonable interchangeability. Instead, the
commenters' argument depends on an attenuated and unpersuasive argument
that (1) reads the term ``market'' in section 1024(a)(1)(B) as being
implicitly limited by the phrase ``relevant product market'' in a
separate provision, section 1024(b)(2); and then (2) further suggests
that the phrase ``relevant product market'' in section 1024(b)(2) was
meant to implicitly import antitrust concepts of substitutability and
reasonable interchangeability into the CFPB's larger participant
rulemakings under section 1024(a)(1)(B). Second, section 1024(a)(1)(B)
gives authority to the CFPB to define by rule a larger participant of
``a market for other consumer financial products or services[.]'' \163\
That phrasing is meaningful because CFPA section 1024(a) enumerates, in
paragraphs (A), (D), and (E) three categories of consumer financial
products and services over which the CFPB has supervisory authority.
Legislative history suggests that Congress understood each to be a
separate ``market'' in a general sense.\164\ The first category
encompasses an array of different services that broadly relate to
mortgage loans (the ``origination, brokerage, or servicing of
[mortgage] loans'' and also ``loan modification and foreclosures relief
services in connection with such loans'').\165\ Another category is
``private education loans,'' which are generally understood to be part
of a broader market for educational financing that also includes
Federal student loans.\166\ The third category is ``payday loans,''
which are understood to compete with other types of higher-cost credit
such as title loans and installment loans.\167\ These categories thus
do not describe consumer financial products and services that
correspond to the strict antitrust conception of a market, which
undercuts the suggestion that the term ``market'' in section
1024(a)(1)(B) should be understood to implicitly incorporate antitrust
concepts.\168\ Third, the purpose of defining a ``relevant product
market'' under antitrust law is to determine whether a firm can exert
monopoly power in a market and thereby profit from supra-competitive
pricing.\169\ Market power and the analysis of it generally is the
domain of antitrust law, not the Federal consumer financial law over
which the CFPB has authority. Commenters have not presented any
persuasive reason why Congress would have wanted the terms
[[Page 99603]]
``market'' and ``relevant product market'' in section 1024 to be
limited by reference to antitrust laws that the CFPB does not enforce
and that do not concern the CFPB's supervisory function.
---------------------------------------------------------------------------
\163\ 12 U.S.C. 5514(a)(1)(B).
\164\ The Senate Report to the CFPA describes the ``mortgage
market'' that is the subject of CFPA section 1024(a)(1)(A) as
``consist[ing] of more than 25,000 lenders, servicers, brokers, and
loan modification firms that would be subject to Bureau supervision
and enforcement.'' S. Rep. 111-176 (Apr. 30, 2010) at 163.
\165\ 12 U.S.C. 5514(a)(1)(A); see, e.g., CPFB, Final Rule,
Mortgage Servicing Rules Under the Real Estate Settlement Procedures
Act (Regulation X), 78 FR 10696, 10699 (Feb. 14, 2013) (providing an
overview of the ``mortgage servicing market'' within the context of
the ``mortgage market'' that is ``broader'').
\166\ 12 U.S.C. 5514(a)(1)(D); see, e.g., CFPB, Final Rule,
Defining Larger Participants of the Student Loan Servicing Market,
78 FR 73383, 73385 (Dec. 6, 2013) (``[t]he student loan servicing
market is comprised of entities that service Federal and private
student loans that have been disbursed to pay for post-secondary
education expenses''); Kelly D. Edmiston, Lara Brooks, and Steven
Shepelwich, Fed. Rsv. Bk. of Kansas City Research Working Paper 12-
05, ``Student Loans: Overview and Issues (Update)'' (Aug. 2012 rv.
Apr. 2013) at 4 (``The student loan market is made up of federal and
`private' student loans. Federal student loans are those that are
listed under Title IV of the Higher Education Act. Private student
loans are those made by depository and non-depository financial
institutions (banks) and non-profit lenders (states).''), <a href="https://www.kansascityfed.org/documents/5428/rwp12-05edmistonbrooksshepelwich.pdf">https://www.kansascityfed.org/documents/5428/rwp12-05edmistonbrooksshepelwich.pdf</a> (last visited Nov. 7, 2024).
\167\ 12 U.S.C. 5514(a)(1)(E); see, e.g., CFPB, Final Rule,
Payday, Vehicle Title, and Certain High-Cost Installment Loans, 82
FR 54472, 54475 (Nov. 17, 2017) (referring to payday loans as part
of a ``broader set of liquidity loan products that also includes
certain higher-cost longer-term installment loans'' that are
sometimes referred to as ``payday installment loans''); NCUA, Final
Rule, Payday Alternative Loans, 84 FR 51942 (Oct. 1, 2019)
(authorizing credit unions to originate certain higher-cost
installment loans with a term of up to 12 months to compete with
payday loans).
\168\ Similarly, larger participant rulemakings only apply to
nonbank covered persons, and not to insured depository institutions,
insured credit unions, and certain of their affiliates that may
compete with nonbanks (and that may be subject to CFPB supervision
under section 1025 or certain CFPB supervisory activities described
under section 1026). See 12 U.S.C. 5514(a)(3)(A). If Congress had
intended larger participant rulemakings to define a market for
antitrust purposes, it presumably would have expressly accounted for
how insured depository institutions, insured credit unions, and
certain of their affiliates participate in such markets too.
\169\ See, e.g., Thomas G. Krattenmaker, Robert H. Lande, Steven
C. Salop, Monopoly Power and Market Power in Antitrust Law, 76 Geo.
L.J. 241, 255 (1987) (noting that ``antitrust law now requires proof
of actual or likely market power or monopoly power to establish most
types of antitrust violations'' and ``market power and market
definition are closely rel
[…truncated; see source link]Indexed from Federal Register on December 10, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.