A federal oversight agency has fined a California-based online financial firm $2.7 million and accused it of breaking the law with an algorithm that caused overdrafts and penalties to thousands of customers and did not offer them reparation.
The Consumer Financial Protection Bureau (CFPB) said Wednesday it has taken action against Hello Digit, LLC, in San Francisco, a fintech company alleging that its flawed algorithm is causing overdrafts and overdraft penalties for thousands of its customers.
The $2.7 million is to be paid to the CFPB to settle the charges and will be placed in the agency’s Victims Fund. Under the agreement, Hello Digit must pay overdraft claims it previously declined and “cease all illegal activity.”
Additionally, the company that advertised itself as a way to save money used an algorithm to make direct debits from a customer’s bank. But Hello Digit falsely guaranteed that it would not result in any overdrafts; and broke his promise to make amends, according to the CFPB. The watchdog group also alleges that Hello Digit violated federal consumer financial protection law.
As part of the process, customers gave Hello Digit access to their checking accounts, then the company used an algorithm to analyze their accounts and determine how much money and how often it should deduct money. from a customer’s bank account.
An algorithm is a complex formula used to make certain decisions.
“Hello Digit has positioned itself as a savings tool for consumers who find it difficult to save on their own. But instead, consumers ended up paying unnecessary overdraft fees,” said CFPB director Rohit Chopra. “Companies have long been held accountable when they engage in faulty advertising, and regulators must do the same when it comes to faulty algorithms.”
The CFPB charged Hello Digit with violating federal law by: Failing to falsely guarantee no overdraft, but instead requiring consumers to incur overdraft fees from their banks; broke promises to make amends by often denying customers their money back and pocketing interest that should have accrued to consumers.
In December 2021, Hello Digit was acquired by Oportun Financial Corp., a California-based loan and credit company. Hello Digit uses a personal finance app that promotes automated savings.
A spokesperson for Oportun released this statement: “Digit received a Civil Investigation Request (CID) (subpoena) from the CFPB in June 2020. The CID was discussed with Oportun during the acquisition process. The stated purpose of the CID was to determine whether Digit, in connection with the offering of its products or services, misrepresented the terms, conditions or costs of the products or services in an unfair, deceptive or abusive manner. During the investigation, it was found that with a success rate of over 99.99%, Digit is not “perfect”, meaning that a Digit Save transaction resulted in overdraft fees for one of our members less than 0.008% of the time. As a result, Digit owes 1,947 members approximately $35 each, for a total of $68,145. Additionally, Digit will pay a civil penalty of $2.7 million. While we disagree with the CFPB on this issue, we are glad it has been resolved.
Last week, CFPB Director Chopra said in an interview with the Philadelphia Tribune that federal regulators need to be vigilant about how fintech companies use algorithms to discriminate against or violate federal laws. The government can use existing laws to guard against this, he said.
“When Big Tech companies use sophisticated behavioral targeting techniques to market financial products, they must comply with federal financial consumer protection laws,” Chopra said. “Federal and state law enforcement can and should hold these companies accountable if they break the law.”