CFPB’s remittance rule exception needs a reboot
The Consumer Financial Protection Bureau's first major rulemaking put in place new consumer protections for consumer remittances, including many consumer wire transfers sent through the correspondent banking system by banks, credit unions and broker-dealers. The CFPB recently concluded its five-year assessment of the rule and made a number of findings about its impact on the remittance marketplace. Most focus has been on the impacts on pricing and availability of remittance services. One impact has not received much attention — the pending expiration of an exception that allows banks to offer certain remittance services. (Editor’s note: Until September, the author worked on remittance issues at the CFPB, including those discussed in this article.)
When Congress included protections for consumers who send remittance transfers in the Dodd-Frank Act, it was concerned that complexities of the money transfer system could make compliance difficult. To address these concerns Congress created several exemptions in the law, including a temporary exemption that the bureau could extend for up to 10 years. Congress was aware the correspondent banking system often might be unable to provide banks and credit unions with the exact information about fees and exchange rates that the new rule would require they disclose. The exception allows, under certain conditions, depository institutions to estimate fees and exchange rates rather than providing exact amounts. Initially, the bureau set the exception to expire in July 2015. The bureau later extended the temporary exception to July 2020, the latest date allowed under Dodd-Frank.
The bureau's recent assessment shows that banks rely on the exception for a limited but persistent portion of their remittances. The assessment found that 11.8% of banks used the exception in 2017. Compared to overall bank remittance volume, banks relied on the exemption for only 6.4% of their transfers, which is about 890,000 remittances. The data demonstrates that for most transfers most banks are able to provide the information required by the law to their customers. However, it also shows that ending reliance on the temporary exception — in a market where banks exert little control over the foreign counterparts on whom they rely for information — could affect a nontrivial portion of the remittance market.
Exactly what will happen upon expiration in July 2020 is unclear. The report shows reliance on the temporary exemption has decreased since 2014. If the trend continues, expiration might cause little disruption, but if these numbers stagnate — while lower than 2014 the rate of decrease is not much different than it was in 2015 — it is unclear what would happen to customers who send these transfers. They could lose access if their banks cannot comply and curtail their remittance offerings. Evidence from earlier rulemakings and the assessment suggests banks use the exception for transfers in which access to information is challenging due to the paucity of partners in certain countries that can provide the necessary information. Central bank or other legal restrictions also come into play. In some cases, banks may be able to invest in workarounds, but the cost of workarounds for transfers to areas with a low volume may be uneconomical. For transfers to those areas, consumers may have limited options because nonbank providers may not offer similar services because of de-risking, which occurs when banks terminate banking relationships with nonbank remittance providers.
Congress hoped that technological improvements would eliminate the need for banks to estimate fees and exchange rates. Consumer groups have noted that the exception frustrates a primary goal of the rule — that consumers receive exact information about their remittances. When consumers receive estimates, their ability to comparison shop and have certainty about their transfers is limited. Consumer groups have also argued that the exception is a crutch for banks that dulls the need for them to transition to new technologies or sending methods that allow for easier compliance with the rule.
While these are valid concerns, failing to act could render some consumers unable to make certain bank transfers. Congress should act soon to extend the exception beyond July 2020. An additional five-year extension would recognize that for a small portion of transfers, additional disclosure flexibility remains necessary. The relatively low rate of reliance on the exception provides no evidence that banks overuse the exception. Instead, banks’ continued reliance on it supports the theory that banks only use the exception for those transfers where they are otherwise unable to provide compliant disclosures.
However, Congress should not make an extension permanent. Instead, Congress should pair an extension with a requirement that the bureau study depository institutions' use of the exception. Congress should also task the bureau with studying whether industry can rely on new technologies, such as blockchain as a replacement for traditional correspondent banking systems, to provide certainty to depository institutions about fees and exchange rates. Such a study could also identify whether Congress should enact a more narrowly tailored exception to address specific concerns in certain countries or regarding certain types of transfers. Congress could then decide on the necessity of further extensions.
In the event Congress does not take action, the bureau's options may be limited. The bureau has previously used its authority to create exemptions to this rule to prevent service disruptions. Whether the bureau could use that authority to extend the expiration beyond July 2020 seems unlikely given Congress’ clear intent. The bureau can, however, evaluate whether it can make other adjustments to the rule that might limit service disruptions after the temporary exception expires. The bureau has previously used adjustment and related authorities to revise other provisions of the remittance rule to prevent disruptions (regarding disclosure of foreign taxes and certain fees). It could potentially expand the criteria for two other exceptions — the rule’s safe harbor for transfers to countries where the laws do not permit determination of exact amounts, which is now limited to five countries, or its methods exception, which now only applies to transfers sent via international ACH. These fixes might make it easier for providers to send at least some portion of their transfers after expiration that now are sent pursuant to the temporary exception. If the bureau determines it cannot or will not fix this problem, it should say so soon and encourage Congress to act swiftly.