Fed Rate Cut; CFPB Finalizes $5 Overdraft Rule; USAA Enforcement Action

Fed cut rates by 25bps. Nov retail sales jumped. CFPB finalizes $5 overdraft rule, releases post on credit card cash advance use and sports betting. OCC hits USAA with enforcement action. Affirm lands $4Bn forward flow deal. Sezzle shares drop on short seller report. Blue Ridge exits last fintech partner.

In case you missed it: 1) In a recent American Banker op-ed, Cross River Founder & CEO Gilles Gade argues for modernizing regulatory frameworks to support responsible financial innovation in the fintech sector. 2) Cross River IQ released our Q3 Consumer Lending Review last week. Get up-to-date with the latest in origination, credit quality, and capital markets activity here. ‍

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Rate Hikes Likely to Slow

The Fed rounded out the year with another rate cut. At the FOMC’s meeting last week, the central bank voted to cut rates by 25bps, now targeting a range of 4.25% to 4.5%. However, Fed Chair Powell tempered expectations for more cuts next year, with the current consensus forecasting two quarter-point cuts in 2025. The Fed may be trying to give itself some wiggle room to assess incoming President-elect Trump’s policy positions and their impact on the economy and inflation, particularly if Trump follows through on promises of raising tariffs substantially. Cleveland Fed President Hammack, for the second rate-setting meeting in a row, voted against the rate cut. Stocks sold off sharply in response to the news, with the Dow down more than 1,100 in trading following the announcement.

In other economic news, U.S. retail sales jumped +0.7% month over month in November (not adjusted for inflation). Auto purchases and holiday spending drove the jump, while other spending categories showed more mixed performance.

CFPB Roundup

The coming change in administration hasn’t slowed down the CFPB. Although Congressional Republicans have pushed for regulatory agencies to pause some activities, including progressing rulemaking, until the start of the new administration, CFPB Director Chopra has pushed ahead on a number of the bureau’s initiatives in recent weeks. The bureau has sought to bring some non-bank payment apps under its supervision, by defining them as “larger participants” in the market for such services and to expand the scope of the Fair Credit Reporting Act by defining certain kinds of data brokers as “consumer reporting agencies.”

Last week, the CFPB introduced a long-anticipated final rule that would see overdraft fees capped at as low as $5. Banks are permitted to charge more, but if consumers are charged more than the actual cost, banks would need to provide certain disclosures. Multiple industry trade groups teamed up to file a lawsuit challenging the bureau’s rule, arguing that the CFPB lacks the authority to impose substantive credit restrictions. The next Congress, which will be sworn in on January 3rd, could also move to strike down the rule by way of the Congressional Review Act, which would have the added effect of prohibiting the CFPB from promulgating a substantially similar rule, absent legislative authorization to do so.

The CFPB released a report analyzing the impacts of legalized online sports betting last week. The report compared credit card cash advance usage in Kansas, which legalized sports gambling, and Missouri, which did not. The bureau found that during the 2022 NFL season, shortly after sports betting had been legalized in Kansas, usage of expensive credit card cash advances surged, while in neighboring Missouri, it increased by a far smaller proportion. Cash advance fees declined, which the report speculates could be in response to realizing their card issuers charge cash advance fees if they choose to fund a sports betting app this way.

Finally, the bureau also warned credit card issuers about devaluing rewards points in a circular issued last week. Director Chopra, who is widely expected to step down or be terminated once Trump takes office next year, said of the news, “Large credit card issuers too often play a shell game to lure people into high-cost cards, boosting their own profits while denying consumers the rewards they’ve earned. When credit card issuers promise cashback bonuses or free round-trip airfares, they should actually deliver them. The CFPB is taking aim at bait-and-switch tactics and promoting more competition in credit card markets to protect consumers and give people more choice.”

OCC Hits USAA with Cease & Desist (Again)

USAA is in trouble again. The OCC, the bank’s primary federal regulator, issued a “comprehensive” cease-and-desist order, which requires the bank to address a number of serious deficiencies. The order incorporates and replaces prior cease-and-desist orders issued against the bank in 2019 and 2022. The latest action stems from unsafe or unsound practices relating to management, earnings, information technology, consumer compliance, and internal audit and suspicious activity reporting violations.

Affirm Inks $4Bn Forward Flow Deal with Sixth Street

BNPL lender Affirm has inked a “long-term capital partnership” deal with investment management firm Sixth Street. The firm has agreed to invest “up to” $4Bn in Affirm-originated loans via a three-year forward flow agreement. Per a joint statement, Affirm said the deal would enable it to originate more than $20Bn in loans over the next three years. The BNPL lender has aggressively grown its funding capacity, which has increased by more than 50% over the last two years.

Sezzle Shares Drop on Short Seller Report

Sezzle, another buy now pay later lender, is the latest target of short seller group Hindenburg Research. Hindenburg has previously authored short seller reports critical of Block’s Cash App unit and core banking provider Temenos, among others. Hindenburg’s report is critical of Sezzle’s credit risk management and cites declining merchant and customer numbers. According to Hindenburg, “Filings show Sezzle borrows at a 12.65% interest rate to lend to extremely high-risk consumers whose credit is so bad that they are unable to access traditional credit cards.” Sezzle described the allegations as “misleading and out of context” and said it “remained confident” in the outlook it has provided. Shares of Sezzle, which had been up more than +1,000% year to date, fell nearly (30)% on the news.

Blue Ridge Winds Down Last Fintech Partner

Blue Ridge, once a major player in banking-as-a-service, terminated its last fintech partner program last week. At one point, the bank boasted about 70 such partnerships, including “direct” relationships and through intermediary platform provider Unit. Blue Ridge, however, ran into regulatory trouble, particularly around BSA/AML compliance in its partner programs, resulting in enforcement actions in late 2022 and early 2024. The tumult led to a management shakeup, with veteran community banker Billy Beale taking the CEO role and charting Blue Ridge’s exit from the fintech partnership space. Compliance costs have decreased as Blue Ridge has wound down its partnerships. The bank is hopeful its mid-January 2025 regulatory exam will move it closer to resolving its OCC consent order.