Wh FINTECH AND CONSUMER PROTECTION: A Snapshot March 2019 By Lauren Saunders National Consumer Law Center Copyright 2019, National Consumer Law Center, Inc. All rights reserved. ABOUT THE AUTHOR Lauren Saunders is Associate Director at the National Consumer Law Center (NCLC) and manages the Washington, DC office, where she directs NCLCs federal legislative and regulatory work. Lauren is a recognized expert in various areas, including small dollar loans, fintech, prepaid cards, credit cards, bank accounts, and consumer protection regulation. She is the lead author of Consumer Banking and Payments Law, contributes to other NCLC treatises, and has authored several reports and white papers. She previously directed the Federal Rights Project of the National Senior Citizens Law Center; was Deputy Director of Litigation at Bet Tzedek Legal Services; and was an associate at Hall consumer law and energy publications; litigation; expert witness services, and training and advice for advocates. NCLC works with nonprofit and legal services organizations, private attorneys, policymakers, and federal and state government and courts across the nation to stop exploitive practices, to help financially stressed families build and retain wealth, and advance economic fairness. nclc TABLE OF CONTENTS EXECUTIVE SUMMARY . 2 FINTECH ISSUES IMPACTING MULTIPLE PRODUCTS AND SERVICES . 5 1. Alternative Data and Models: Big Data, New Algorithms, Machine Learning . 5 2. Data Aggregators . 6 3. Fintech “Sandboxes” . 7 CREDIT, CREDIT-RELATED, AND CREDIT-LIKE PRODUCTS . 9 4. Credit Reporting and Cash Flow Underwriting. 9 5. Online Lending . 10 6. Early Wage Access . 11 7. Student Loans . 12 8. Auto Loans . 13 9. Real Estate Lending . 14 10. Alternative Home Finance Products . 15 11. Loan Servicing, Debt Collection, and Debt Settlement . 16 DEPOSITS, PAYMENTS, AND FINANCIAL MANAGEMENT . 17 12. Personal Financial Management and Overdraft Protection . 17 13. Mobile Deposit Accounts and “Neo-Banks” . 17 14. Faster Electronic Payments and P2P Services . 19 15. Virtual Currencies, Blockchain, and “Smart Contracts” . 20 CONCLUSION . 21 ENDNOTES . 22 2019, National Consumer Law Center 2 Fintech and Consumer Protection EXECUTIVE SUMMARY The use of technology in financial products and services (fintech) is resulting in a wide array of new approaches to financial products and services. The internet, mobile devices, big data, computer algorithms, and other technologies are impacting the way we borrow, make payments, and manage our money. These technologies are also changing the way that entities from credit reporting agencies to debt collectors affect and interact with us. Fintech products and services have the potential to provide important benefits to consumers. They promise to lower costs, promote financial inclusion, help people avoid fees and comparison shop, improve personal financial management, and build assets and wealth. But innovation and fintech approaches are not invariably positive. New products may have hidden or unintended negative consequences, or risks that are not obvious at first. The dangerous pick-a- payment and exploding adjustable rate mortgages that fueled the foreclosure crisis leading to the Great Recession of 2008 were innovations. New technology enabled banks to encourage overdraft fees on debit cards that can turn a $5 cup of coffee into a $40 one. The fintech label also does not necessarily mean that much is different. Products and services are constantly evolving, but sometimes the more things change the more they stay the same. Old problems can arise in a new package, and promised benefits of fintech products may not actually materialize. The allure of shiny fintech products must not lead us into waiving consumer protection rules or oversight of untested products. Just because a product uses new technology does not mean that older protections do not or should not apply or that regulators do not know how to approach a product. It is crucial to look at fintech products carefully and critically, to understand the risks, and not to accept unproven hype about benefits to consumers. The array of approaches that fall under the fintech rubric is vast. This report provides a snapshot of some of the developments, potential promise, and potential concerns in several areas: Fintech issues impacting multiple products: 1. Alternative Data and Models: Big Data, New Algorithms, Machine Learning 2. Data Aggregators 3. Fintech “Sandboxes” Credit, Credit-Related, and Credit-Like products: 4. Credit Reporting and Cash flow Underwriting 5. Online Lending 6. Early Wage Access 7. Student Loans 8. Auto Loans 9. Real Estate Lending The dangerous pick-a-payment and exploding adjustable rate mortgages that fueled the foreclosure crisis leading to the Great Recession of 2008 were innovations. New technology enabled banks to encourage overdraft fees on debit cards that can turn a $5 cup of coffee into a $40 one. Fintech and Consumer Protection 3 2019, National Consumer Law Center 10. Shared Appreciation Home Finance Products 11. Loan Servicing, Debt Collection, and Debt Settlement Deposits, Payments, and Financial Management 12. Personal Financial Management and Overdraft Protection 13. Mobile Deposit Accounts and “Neo-banks” 14. Faster Electronic Payments and P2P Services 15. Virtual Currencies, Blockchain and “Smart Contracts” The listing of potential benefits and concerns in this report does not mean that those benefits or concerns will actually materialize. Potential benefits are listed if they are touted by companies, but these benefits have not always been proven. Similarly, while some concerns are already evident, others are merely things to watch out for. Some benefits or concerns may apply to some companies but not others. While the issues raised by fintech products are as myriad as the products themselves, some common themes, issues, and risks span many fintech products. Common Potential Benefits Better, faster, cheaper. Automation and new technologies promise to reduce both costs and prices, speed up delivery, increase convenience, and improve the customer experience. Fixing old problems as a market opportunity. From overdraft fees to high-cost loans to credit invisibility to loan servicing, new entrants to the financial services market promise to use the problems and failures of existing markets as a blueprint to redesign products and services they hope will do better by consumers. Personalization. Use of personalized data, real time information and feedback, and automated customer interaction tools promise to help providers design products and services around the individual consumer. Access for underserved consumers. Re-tooled underwriting tools, the widespread use of smartphones even in low income communities, and other developments promise to increase financial inclusion and bring mainstream pricing to underserved communities. Common Concerns and Potential Problems Old wine in new bottles; same old problems in a new form. Many fintech products are just variations on older financial products and services. A loan is still a loan. A deposit account is a deposit account. An electronic payment is a payment. It wasnt so long ago that just having a website and offering a product on the internet or by sending emails was considered innovative. Lack of transparency about the costs and business model. Fintech products often appear free or very low cost but may not be. It should always be a red flag if it isnt clear what a product or service costs, or how it is paid for and by whom. Sometimes the costs are hidden or are not revealed until after a consumer begins the sign-up process, and sometimes the cost is not in dollars but in the use, sharing or selling of the consumers personal information. It should always be a red flag if it isnt clear what a product or service costs, or how it is paid for and by whom. Sometimes the costs are hidden or are not revealed until after a consumer begins the sign-up process, and sometimes the cost is not in dollars but in the use, sharing or selling of the consumers personal information. 2019, National Consumer Law Center 4 Fintech and Consumer Protection Disparate impacts and the perils of big data, privacy, and security. Fintechs rely heavily on consumer data. How that data is used, whether it results in unequal treatment of different groups, to whom the data is disclosed and sold, and whether sensitive information is held in a secure fashion are challenges for any company, and especially for start-ups that do not have robust compliance regimes or deep experience. Privacy policies are so opaque as to be useless and consumers cannot know if a company has strong data security. Many fintech products rely on access to consumers bank accounts or other transaction accounts, increasing these concerns. Avoidance of consumer protection laws. Some fintech products are designed to avoid consumer protection laws while others claim that existing rules do not apply to them. Nonbank lenders often partner with banks to avoid state interest rate limits. Products that claim not to be a loan may be designed to avoid credit laws. Companies that collect and distribute information about consumers may not follow the Fair Credit Reporting Act. Some regulators are rushing to exempt new products from consumer protection laws through regulatory “sandboxes.” Fast and easy can cause problems. Fast and easy credit can be fast and easy debt. Faster account applications or faster payments can mean faster fraud or identity theft. Slick mobile apps can gloss over how a product actually works. No humans, no records, and lack of customer service when things go wrong. Fintech products invariably rely on mobile and internet interfaces and electronic communications. But if something goes wrong or you need a person to explain something, customer service may be difficult or impossible to reach. Interactions that take place entirely on a mobile device have no paper record of the agreement or paper statements to call attention to fees and charges. This may leave consumers with little information on what they have agreed to or what they end up paying. Forced arbitration weakens accountability for wrongdoers. Forced arbitration clauses, buried in the fine print of contracts, take away consumers day in court and their ability to band together with other injured consumers when companies violate the law. Forced arbitration clauses are a problem in products old and new, but they are especially widespread in fintech products. 1 Highlighting these problems and others is not intended to take away from the real promise of many fintech products. But it is essential that policymakers, regulators, and consumers keep their eyes wide open and expend the effort to dig deep to understand fintech products and services. A desire to promote innovation must not blind us to the potential risks and the need for consumer protection rules and oversight that are especially needed for untested new products and services. Fintech and Consumer Protection 5 2019, National Consumer Law Center FINTECH ISSUES IMPACTING MULTIPLE PRODUCTS AND SERVICES 1. Alternative Data and Models: Big Data, New Algorithms, Machine Learning Whats happening? Consumer financial products and services are impacted by the use of more and new sources of data about consumers, massive increases in computing power, and new methods to analyze huge amounts of data, such as machine learning and new algorithms. The use of data impacts the marketing, pricing, delivery, and implementation of almost every product. The promise: Streamlined applications and improved underwriting. New uses of data could eliminate the need for cumbersome paper- and records-based loan applications, improve the evaluation of borrowers ability to repay loans, and enhance access for underserved consumers. Better fraud detection and identity verification. Better use of data can help keep fraud out of financial systems and limit identity theft in online services. Faster, more personalized service. Companies use data to target and personalize communications, products and services. Concerns: Disparate impacts on disadvantaged communities. Many data elements, alone or in combination with each other, correlate with race, ethnicity, and other protected class characteristics, potentially leading to discrimination and disparate impacts. 2 Use of such data in lending decisions will implicate the Equal Credit Opportunity Act (ECOA). Same problems in a new package. A recent study found that digital mortgages resulted in higher prices to equally qualified borrowers of color in the same manner as human underwriting does. 3 The poor pay more. Data can be used to analyze price sensitivity and propensity to comparison shop, leading to higher prices for less sophisticated consumers, those with more limited internet access, and those with fewer options. Lack of transparency. It is impossible for consumers and increasingly, even the designers of artificial intelligence or machine learning systems to know what is in the “black box” of data and computer algorithms that shape how decisions about people on issues ranging from credit applications to pricing are being made. 4 Errors, inaccuracies, and inability to correct them. Data could be attributed to the wrong consumer or be otherwise erroneous. The conclusions of computer algorithms could be off base. One National Consumer Law Center (NCLC) study found that assessments such as income and education level predictions from several big data companies were often grossly inaccurate. 5 Fair Credit Reporting Act (FCRA) and other consumer laws. The FCRA limits the uses to which information bearing on a consumer may be used; gives consumers important rights to know what information is being used and when it impacts them adversely; and provides rights, duties and procedures to correct errors. In some circumstances, the protections of the FCRA apply to uses of big data, but many big data companies do not appear to comply. The definitions in the FCRA are very broad, and cover many types of data if used for decisions about credit, employment, insurance, and Many data elements, alone or in combination with each other, correlate with race, ethnicity, and other protected class characteristics, potentially leading to discrimination and disparate impacts. 2019, National Consumer Law Center 6 Fintech and Consumer Protection many other uses. Whether or not the FCRA itself applies, the rights and duties it confers are important for many uses of data. Privacy. Consumers often have no control over use of their data, especially if the database company believes it is not subject to existing laws such as the FCRA or the Gramm-Leach Bliley Act. Even when consumers do need to provide permission, the data may be collected for one purpose but then used or sold for other purposes or in ways that the consumer never understood or would have