Innovation and technology are not magic wands that will help low-income Americans out of debt; they are often tools used to prey on the neediest, Seth Frotman, CFPB general counsel told the Poverty Law Forum earlier this month.
“We hear a lot about ‘innovation’ and ‘financial technology’ in the consumer finance market,” Frotman said, adding that it’s common for such businesses to boast about serving people in need.
He added: “I’ll be completely honest, based on what I’ve seen, there’s reason to be skeptical about how many of these new products and services are doing much of what they’re doing. new or consumer goods.
Frotman’s speech appears to be at odds with the CFPB’s Office of Competition and Innovation whose mission, which is to “promote competition and innovation that benefits consumers in the financial products and services market,” is promoting the of the CFPB as defined in the Consumer Financial Protection Act. , namely, “facilitating access and innovation” in the markets for consumer financial products and services.
Frotman said that a new generation of entrepreneurs has invented ways to “squeeze” out of people who can’t afford it. Regarding technology, he added “it’s a shiny veneer on top of an old practice.” He singled out several programs for criticism—reciting the CFPB’s findings on each:
- Buy Now, Pay Later programs, he said, leave people overextended and trapped in problematic loans such as overdrafts and late payments.
- Rewards access programs. Frotman said these programs are similar to payday loans and have very high interest rates.
- Medical debt loans, credit cards and installment plans, which Frotman says may defer interest components that could leave consumers paying unexpected, recurring interest rates. Frotman said that CFPB officials are concerned that the promotion of these programs would cut off financial assistance that nonprofit hospitals should receive under the Affordable Care Act.
- Chartered finance companies. These companies, Frotman said, lease home appliances to people with money, with the promise that they will eventually own them, after making expensive payments.
- Public benefit programs, which Frotman said can have high fees and other barriers to people trying to access and use their benefits. He said that under the Electronic Funds Transfer Act, people will not have to create an account with a specific financial institution in order to receive government grants. The CFPB is working with the Department of Labor to ensure that people have the option to receive benefits, such as unemployment benefits, according to Frotman. He added that the Equal Credit Opportunity Act prohibits lenders from discriminating against borrowers because they receive public assistance.
Frotman’s words highlight the concerns of many Fintech and other companies that the CFPB is biased against companies that have used new technologies to develop new products and services for consumer finance. Instead of giving a balanced presentation that would have discussed how innovative some of these products are and how popular they are with consumers, instead he only talks about things that the CFPB which does not like them.
He compares payday access products and payday loans, even when used correctly by consumers, are not affordable while payday loans often involve consumers paying triple-digit APRs. He says that buy-now, pay-later products can include late fees without saying that customers who pay on time don’t pay any interest or other fees. And, we could go on and on. The CFPB’s negative attitude toward technology innovation is stifling the Fintech industry. Instead of painting with a broad brush such as saying that the Fintech industry is “cheating” on low-income consumers, the CFPB should encourage innovation by responsible Fintech companies that understand that they are must comply with all applicable laws.
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