The Consumer Financial Protection Bureau (CFPB) headquarters in Washington, D.C., U.S., on Saturday, April 16, 2022. The Credit-reporting company TransUnion is an "out-of-control" repeat offender engaging in deceptive marketing practices the CFPB alleged this week after filing a lawsuit.
Photo: Samuel Corum/Bloomberg via Getty Images

The CFPB thinks outside the fintech sandbox

Protocol Fintech

Good morning, and welcome to Protocol Fintech. This Wednesday: the CFPB’s post-sandbox approach, the SEC is inquiring about crypto exchanges’ insider trading safeguards and Block’s plans for Lightning infrastructure.

Emptying the sandbox

The mutual split between AI-driven lender Upstart and the Consumer Financial Protection Bureau offers a look inside the agency's fast-evolving approach to fintech.

Last week, the CFPB revoked a no-action letter granting limited regulatory immunity to Upstart, a publicly traded fintech company whose AI-driven underwriting in 2021 helped originate nearly $12 billion in loans through lending partners. CFPB Director Rohit Chopra recently declared no-action letters and the agency’s related fintech sandbox program “ineffective.”

Upstart requested the letter’s termination in response to “changing priorities” at the agency, as well as the “need to keep our risk models accurate and up-to-date during a period of significant economic change,” Nat Hoopes, Upstart’s vice president and head of public policy and regulatory affairs, wrote in a company blog post.

The CFPB previously had hoped to help new products to market through no-action letters and regulatory sandbox programs. But Chopra, appointed by President Biden, announced a reorganization of the agency's innovation office last month and encouraged companies to instead apply for formal rulemaking petitions when seeking greater clarity on particular regulations.

  • Upstart was granted the agency’s first-ever no-action letter in 2017 and had it extended for three years in 2020. The letter provided assurance that the CFPB would not pursue fair-lending action against the company during that time.
  • In April, Upstart gave CFPB notice that it planned to add new variables to its underwriting and pricing model, as required by the no-action letter. The CFPB responded with a notice of termination. In the notice, Chopra wrote that "in light of the risk that the [no-action letter] is misconstrued as an endorsement, the CFPB would need to perform more rigorous monitoring and assessment of Upstart’s model and any changes to the model."
  • Upstart "correctly identified" that the review would prevent it from making quick business decisions, according to the CFPB’s notice. As a result, the firm requested the expiration of the no-action letter be moved from Nov. 30, 2023 to the end of May.

The CFPB hasn’t ended the sandbox and no-action program. Despite the recent shift, the agency said it’s still taking applications for both. But it seems unlikely either will get much use, given the agency has now declared them ineffective and stated its preference for rulemaking petitions.

  • Upstart said it will “continue to rigorously test" its loan applications for fairness and hopes to work closely with the CFPB’s new Office of Competition and Innovation.
  • "Effective cooperation between the government and financial technology innovators remains critical to improving financial access for the millions of borrowers left behind by America’s current credit system,” wrote Upstart's Hoopes.

The CFPB is taking a tougher stance toward fintech. In addition to the reorganization of the innovation office, Chopra’s CFPB has pushed to expand its oversight authority over non-bank institutions, including technology providers for the financial industry. The agency has announced probes of employer-driven debt and “buy now, pay later” companies while warning about the risks of bias from algorithms used by financial institutions. With that on its plate, the agency no longer seems interested in playing in the sandbox.

— Ryan Deffenbaugh (email | twitter)


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On the money

The SEC reportedly launched a sweeping inquiry into crypto exchanges. The inquiry is centered around whether crypto exchanges have proper safeguards against insider trading. While a letter was reportedly sent to one major exchange, the inquiry is believed to cover others.

South Korea is planning crypto regulation for consumer protection. The country’s People Power Party chief policymaker, Rep. Sung Il-Jong, said that his party wants to introduce legislation for blockchain-based platforms, reportedly focused on investor and consumer protection.

The 2023 Rugby World Cup and the 2024 Paris Olympics may have NFT tickets. After a rise in fraudulent tickets at the UEFA Champions League final game, the French government is looking into a ticketing system built on the blockchain to issue non-transferable digital tickets.

Block’s TBD unit plans to build on Lightning infrastructure. Block’s newest business unit, TBD, is reportedly planning to build more tools and infrastructure for the Lightning Network.

Iowa regulators ordered BlockFi to pay $943,000. The state’s insurance division said that BlockFi offered and sold securities in Iowa without permission, and without being a registered broker-dealer or agent.


While Coinbase’s layoffs didn’t really come as a surprise to anyone amid the slew of layoffs across the tech sector, the way the company handled it was definitely … something else. According to CEO Brian Armstrong, news of layoffs went to affected employees through their personal emails as their work accounts were immediately cut off, which Armstrong deemed“a practical choice” due to sensitive information.

SEC Chair Gary Gensler is once again issuing a warning to consumers about crypto, but this time about major lenders like the Celsius Network and their operating practices. "I caution the public. If it seems too good to be true, it just may well be too good to be true,” he said at an event.

New York City Mayor Eric Adams isn’t down for the two-year bitcoin mining moratorium bill recently passed by the state legislature, and is reportedly asking Gov. Kathy Hochul to veto it, saying that it would “get in the way of cryptocurrency upstate.” His solution instead? “Give deadlines … not bans.”

Just one question for …
Laura Merling, chief transformation and operations officer, Arvest Bank

Before joining Arvest Bank, Merling served as chief transformation officer at Google Cloud and in executive positions at AT&T and Ford.

What fintech trend is most troubling for you?

We saw fintech funding drop 18% in the first quarter of 2022 compared to the previous quarter, and the trend I find most troubling is the potential for fintechs to lose more funding as the economy changes. Fintechs are the competition: They have really pushed the envelope for financial services and challenged us all to do better as banks, from community banks to national banks. We need things to continue at the pace they’ve challenged us to set. We don’t want them to slow down! They made us think about the great unbundling but even more so about focus and customer experience. If fintech funding dries up, traditional financial services may think the competitive threat is gone, but fintechs have challenged us in a good way, and we can’t take our eyes off the ball.


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