Thread by @regulatorynerd

Ohad asks a good question. I'm on hold with Wells Fargo checking refinancing options. So let's do a quick thread.

https://twitter.com/ohadsamet/status/1344360906902351872

2/ First some background. Synchrony Financial, who issues the Venmo credit card, was issued an approval order for a novel credit card product.

3/ (My former colleagues should pay attention, as some frequently mis-use the term "secured credit")

Synchrony wants to offer cards that start as secured credit. Cardholders can then graduate to an unsecured credit card account after 12 months of good payment history/use.

4/ Secured credit cards function like this.

I think you're credit-worthy-ish, but there's warts. Maybe a past bankruptcy. Maybe your credit score is in the toilet due to bad repayment history. Etc . . .

5/ (wells just picked up - will be back at this in a little bit)

6/ I say "hey - you give me $500, I'll give you a credit card with a limit for $150." The $500 protects me if you don't pay. But -- importantly -- the $500 isn't applied to the principal. It's a break glass in emergency thing. The person still needs to make monthly payments.

7/ Secured credit cards are hard. First, you have to deal with the credit risk issues. Second, you need to make sure you're not creating legal risks. Only a few banks offer them at scale, and they can be highly profitable if done well.

8/ So back to Synchrony. They're looking at the market and saying "why are interest rates so high on secured credit cards if the lender is holding enough cash to cover potential defaults." They want to offer a lower-rate secured card, that graduates to higher rate unsecured.

9/ Could you do this without the CFPB approval order? I think so, but it's complicated and requires your business team, lawyers and compliance folks getting comfortable with a bunch of grey areas in Regulation Z.

10/ So this is a good time to do a quick primer on Reg Z. It's the regulation that implements the CARD Act (which is part of the Truth in Lending Act). It sets conduct requirements for credit card issuers, so they don't screw consumers w/r/t marketing and repayment practices.

11/ Reg Z requires a few things before you open accounts. First, you can generally only open accounts and give cards if you get a written application. Second, you need to give the applicant a bunch of disclosures, including a table with all the potential fees and costs.

12/ Reg Z also requires issuers to perform an analysis of whether the applicant has the ability repay the full credit line. This needs to be performed anytime they also hike your credit limit.

13/ Those of you who work on FinTech and bank onboarding funnels know it's a pain to get folks to come back and agree to a whole bunch of other disclosures. So Synchrony's proposal to the CFPB helps streamline that a little.

14/ Synchrony does this by presenting disclosures for the secured + unsecured card at onboarding. Asking the CFPB to bless upfront means some examiner can't stick their wet finger in the air and say the wind is blowing in the direction of a UDAAP violation 3 mos into the program.

15/ For context, the CFPB's first big series of enforcement actions was against the credit card industry for what they called "add on" products. The CFPB took issue with these products despite the fact there was no law against them, and no clear notice of expectations.

16/ Some issuers were definitely doing bad things with add ons. They were sold in an inconsistent manner, and sales weren't monitored well, introducing the incentive for bad apples to oversell/mis-explain them.

17/ But the CFPB sued EVERYONE with a credit card portfolio. Even the FDIC got in on the action, popping tiny store-brand issuers like Fry's. That they did this without notice and without warning makes some issuers spooked today. So you ask for blessing in advance to be safe.

18/ Getting the CFPB's blessing upfront also helps Synchrony navigate some of the other parts of Reg Z.

19/ One of the ones that makes seamlessly graduating folks tricky is the advance notice requirement for material changes to the account. There's a grey area about whether graduating someone to an unsecured line with a higher APR is a material change.

20/ If it is, then Synchrony would need to give 45 days' advance notice of the change.* The CFPB is saying Synchrony's structure doesn't trigger this requirement, so they can upgrade folks to unsecured lines instantly.

*going from memory, consult Reg Z for official numbers

21/ Let's go deeper on this. Imagine if when you wanted to add Bitcoin trading to your PayPal wallet, that PayPal thanked you for opting in and then told you the feature would be turned on 46 days from now. That's what Z does if the account change is in any way detrimental.

22/ One of the ways Synchrony gets around this advance notice requirement is by dressing the upgrade up as a new account opening. IMO, I think the CFPB should have waived this and should also considering updating Z to make this easier.

23/ The big reason is that Synchrony needs to issue a new plastic card when the person upgrades. Maybe I'm just overly swayed by @brunoswerneck 's call for us all to do small things to help the planet, but why not allow cardholders to use their existing cards?

24/ And now some closing thoughts about why go get the order vs. get the legal advice and run with the product offering.

25/ When developing new products, it helps to consult counsel and get a memo detailing the legal risks and requirements involved. Folks like @eigoldberg are great at this if you need outside counsel.

26/ When you hit grey areas, sometimes you'll have outside counsel place a "no names" call to the regulator to ask how they'd view a certain set of facts. But regulators generally won't confirm this in writing and usually give a bunch of caveats.

27/ Sometimes the attorney at the regulator will think your idea is a good one, so they encourage you to get an advisory opinion or take advantage of some other program to drive clarity on your question.

28/ The revamped CFPB approval order process is one of these avenues. It's expensive. Some lawyers over steer (I think they do it to drive billable hours for their own pockets). But sometimes they're good and make sense.

29/ I think Synchrony's request is a solid use of the CFPB's process. In addition to getting clear rules of the road, they now have something (approval) no one else in the market has and they can use this to sell to their co-brand customers like PayPal.

30/ In fact, given Dan Schulman's push for improving customer financial health, maybe we'll start seeing this offering in our PayPal accounts in the near future. Chime has credit builder - wouldn't it be cool to see other large players get in the game with similar products?

31/ Oh, and BofA's fees are lower than Wells on a refinance. Am going to stick with Brian Moynihan for my mortgage needs and wants.