The CFPB adopted a final rule providing for increased oversight of certain companies offering consumer payment products like mobile apps and digital wallets. Continuing to lean into its plans to expand its authority to supervise and examine non-bank providers of payments products, the rule subjects a handful of “larger participants” to CFPB oversight.
The rule is the latest “larger participant” rule issued by the CFPB and the first in almost a decade. Prior rules defined larger participants (and, thus, subjects of CFPB examination authority under Section 1024 of the CFPA) for student loan servicing, consumer reporting, automobile financing, debt collection and remittance markets. Specifically, the rule applies to entities that:
- Together with affiliates, provide “general-use digital consumer payment applications with an annual volume of at least 50 million consumer payment transactions denominated in U.S. dollars”; and
- Do not qualify as a small business concern based on the applicable Small Business Administration (SBA) size standard.
This is consistent with the proposed rule published a year ago, with two important changes: (1) an annual covered consumer payment transaction volume of 50 million, instead of the initially proposed 5 million, and (2) the exclusion of digital asset transactions from coverage under the rule.
The CFPB estimates the rule would affect 7 companies, down from an estimated 17 in the proposed rule. The Bureau has declined to identify the seven companies, but a footnote in the rule lists several “well-known digital payment applications.”
In More Detail: Key Terms
A “larger participant” is covered by the rule if they provide a (i) general-use (ii) digital [consumer] payment application with (iii) annual covered consumer payment transaction volume of at least 50 million consumer payment transactions (iv) denominated in U.S. dollars that (v) does not qualify as an SBA small business concern.
General use: The rule affects large companies that provide “general use” digital payment apps to facilitate a consumer’s transfer of funds to multiple, unaffiliated persons. The rule excludes certain debt repayment as well as prepaid accounts in a health savings, flexible spending or similar account in addition to some disaster relief payments, closed-loop government accounts and needs-tested benefits.
Digital payment application: This refers to a software program accessed through a personal computing device, such as a mobile phone, smart watch or computer. Operating a web browser is not a digital payment application.
Annual covered consumer payment transaction volume: A consumer payment transaction is the transfer of funds by or on behalf of a consumer to another person primarily for personal, family or household purposes. It excludes international money orders, foreign exchange, and transactions excluded from the definition of “electronic fund transfer” under Regulation E as well as some transactions for the sale or lease of goods or services and some extensions of consumer credit by the lender’s affiliates.
Small business concern: The rule does not apply to a company that federal law or regulations classify as a SBA “small business concern.”
Some people and organizations have urged the CFPB to consider criteria other than the volume of consumer payment transactions for a small business exclusion. The CFPB expressed concern that this would not address the risk of inflation impacting the rule’s coverage. Further, it did not want to increase administrative complexity, and noted that additional criteria would not be necessary to “ensure the rule only identifies bona fide larger participants.” The Bureau also stated that were a specific entity a “small business concern participating in this market in a manner that posed risks to consumers, the CFPB has authority to pursue risk-based supervision of such an entity.”
CFPB Requirements Imposed by the Rule
The rule may require companies to submit materials to the CFPB so it can assess whether the company qualifies as a designated “larger participant.” The CFPB said it would provide notice and allow an opportunity to contest a determination that the rule subjects a proposed “larger participant” to CFPB oversight.
The Bureau said it hopes regulating major nonbanks that provide payment products will assist in uncovering “compliance deficiencies indicating harm or risks of harm to consumers.” This, the CFPB holds, is generally beneficial to consumers because it can lead to increased compliance with Federal consumer financial law and encourage specific corrective actions to mitigate consumer risks before they become systemic or cause significant harm.
When Does the Rule Take Effect?
The rule will take effect on January 9, 2025, 30 days after its publication in the Federal Register.
