Consumer Safety Should Be Top Issue for Payment System, Cordray Says

WASHINGTON — Payment operators should prioritize consumer protection as bad actors access networks like the automated clearing house and the industry tries to increase transaction speeds, a key regulator said Thursday.

In remarks to the New York conference for The Clearing House, Consumer Financial Protection Bureau Director Richard Cordray said existing laws and rules issued by the Nacha network are not sufficient on their own to shield consumers from harm.

"Even if these rules were all that they should be, merely having rules and safeguards is not enough — they need to be policed and enforced aggressively if they are to have their intended effect of actually protecting consumers," Cordray said in his prepared remarks. "As we see it, banks and administrators have important roles to play, and they need to be vigorous and proactive both to preserve consumer trust in the payment system and to protect their customer relationships."

Cordray highlighted concerns about "unscrupulous people or businesses" exploiting weakness in the ACH system to make unauthorized debits on customer accounts. In one example, he discussed a woman who had taken out a short-term loan from one lender through an online lead generator. But she then complained that a separate online payday lender, Hydra Group, had also deposited money into her account and debited repayments without her consent. (Hydra, which had operated through the ACH, was sued by the CFPB in September.)

To be sure, leaning on banks to be the gatekeepers of the payment system is not new ground, and many in the industry have called out officials for applying too much pressure on banks to act like police. Bankers have also specifically complained about the Department of Justice's controversial Operation Choke Point, which targets banks that process payments for high risk merchants.

But Cordray said banks need to be wary of the potential for their customers to be abused.

"Surely, the financial institutions that accept these unscrupulous lenders and their payment processors as clients need to do a better job of ensuring that they are honoring the protections afforded consumers under the Electronic Fund Transfer Act. But more fundamentally, consumers expect their own bank or credit union to be on their side," Cordray said. "They trust them to hold on to their money, and banks and credit unions need to be better about doing just that.

"Unfortunately, all too often the institutions are not living up to consumers' expectations by failing to honor consumers' stop payment and revocation orders or even refusing to allow consumers to close their accounts to halt the abuse."

Cordray also called for more transparency about the ACH system as a whole to provide consumers with greater certainty about issues such as how long it takes transactions to clear.

"For some consumers, these uncertainties are of little consequence because they are able to maintain a healthy cushion of funds in their checking accounts," he said. "But many other consumers struggle to keep up with their expenses and have no such cushion. Not knowing when a payment will be credited or a debit posted can cause them significant harm."

Additionally, Cordray weighed in on industry efforts to build a faster, or "real-time", payment system. The Clearing House and Nacha have both been developing frameworks for enabling quicker transactions. The CFPB director said while the creation of a faster system should be "an urgent priority," how such improvement will affect consumers should be high on the agenda.

Cordray specifically said an improved system should provide quicker access to money a customer deposits, include real-time information on how fees affect account status, offer protections for consumers from unauthorized debits and not be accessible only to the wealthy.

"With these guiding principles in mind, a faster payment system can be made to work for consumers as well as for financial institutions and their commercial clients," he said. "It can bring greater transparency and less need for people to go outside that system to obtain access to their funds and pay their bills. These would indeed be important advances for consumers."