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CFPB bans medical debt in credit reporting decisions
On June 11, the CFPB released a proposed rule to ban obtaining or using medical information for credit eligibility determinations. Specifically, the proposed rule would amend the FCRA to remove the medical financial information exception and limit credit reporting of medical debt.
In 2003, Congress amended the FCRA to restrict creditors’ use of medical information for purposes of making credit eligibility determinations, and it authorized the banking agencies to issue exemptions from the restriction through rulemaking. In 2005, the banking agencies issued a regulatory exception to permit creditors to obtain and use consumers’ medical financial information when making credit eligibility determinations if certain conditions were met. The CFPB’s proposed rule would roll back the 2005 exception, in addition to other changes. First, the proposed rule would remove the financial information exception that permits creditors to obtain and use medical and financial information (including regarding medical debt) in connection with credit eligibility decisions (with certain limited exceptions). Second, the proposed rule would limit consumer reporting agencies’ ability to furnish medical debt information to creditors.
CFPB Director Rohit Chopra noted in prepared remarks that the proposed rule would eliminate the “loophole” that allowed lenders to access and use medical debt information, which he argued would align regulations with congressional intent. A fact sheet from the White House, published on behalf of Vice President Kamala Harris and Director Chopra, stated that this action builds on prior efforts by the Biden-Harris administration to reduce the burden of medical debt.
As previously covered by InfoBytes, the Bureau announced this initiative in September 2023. The CFPB signaled its interest in proposing this rule when it threw its support behind Connecticut SB 395, which bans the inclusion of medical debt in consumer reports (covered by InfoBytes here). The proposed rule would go into effect 60 days following publication in the Federal Register.
FINRA imposes censure and $250,000 fine on “influencer” company for misconduct and privacy notice violations
On June 10, FINRA agreed to a Letter of Acceptance, Waiver, and Consent (AWC) from a company, addressing various regulatory infractions for improper use of social media influencers in promotional activities. From 2020 to 2022, the firm was found to have compensated influencers for social media content that was not fair and balanced and contained exaggerated claims, violating FINRA Rules 2210(d)(1) and 2010. The firm also failed to review influencer-produced videos prior to their distribution and lacked adequate supervisory procedures to monitor its influencers’ communications, contravening the Securities Exchange Act Section 17(a), Exchange Act Rule 17a-4(b)(4), and additional FINRA rules. Furthermore, the company issued misleading privacy notices to its customers, violating Regulation S-P and FINRA Rule 2010. Specifically, the company stated in its privacy notice that it disclosed nonpublic personal information “only when it is both permitted by law and required for the ordinary course of business,” when in fact it shared such nonpublic personal information with non-affiliated third parties for marketing purposes. To resolve these claims, FINRA imposed a censure and a $250,000 fine. The company concurred.
California’s DFPI orders two crypto-asset companies to stop operations
On June 5, the California DFPI issued two desist and refrain orders against securities firms for allegedly offering unqualified securities under California’s Corporate Securities Law (CSL). The first order was against a company incorporated in the U.K., whereby the DFPI alleged the firm offered and sold unpermitted securities to Californians through its website. Since 2023, these alleged securities were interest-bearing accounts where the firm promised to pay interest on deposited assets that would be deployed into decentralized finance liquidity pools. According to the order, these securities were packaged as investment contracts “that were neither qualified nor exempt from the qualification requirement” of the state’s CSL. The second order was against another crypto-asset firm whereby the firm offered crypto asset interest-bearing accounts beginning in 2023 that were neither qualified nor exempt from the qualification requirement under the CSL, and the DFPI had not permitted the firm to sell securities in California. Both orders required the firms to desist and refrain from selling securities in California until the CSL’s requirements have been met.
New York Attorney General sues crypto companies, alleging billion-dollar pyramid scheme targeting immigrant communities
On June 6, New York Attorney General Letitia James announced legal actions against two companies (with the same founders) for allegedly participating in illegal pyramid schemes. The complaint alleged these schemes defrauded hundreds of thousands of investors, including more than 11,000 New Yorkers, out of more than a billion dollars in crypto-assets. The AG alleged that the companies’ activities specifically preyed upon immigrant communities, notably New Yorkers of Haitian descent, using prayer groups and digital communication channels like social media to make false promises of high returns.
According to the complaint, one of the companies offered fraudulent returns from mining cryptocurrency, but never delivered on the promised profits and bonuses, eventually collapsing in 2019. The complaint then alleged the promoters of the collapsed company founded a new company that also promised high returns and bonuses. According to the complaint, from 2019 to 2023, investors deposited more than $1 billion worth of cryptocurrency into the new company, yet a minuscule fraction (less than $26 million) was actually used for trading on the company’s platform before its collapse in May 2023.
The Attorney General’s legal action will seek a permanent ban on the company and the associated individuals from conducting any securities or commodities business within New York and disgorgement and damages for the victims.
Treasury requests information on AI in financial services sector
On June 6, the Department of the Treasury released a request for information (RFI) to collect from financial institutions, consumers, advocates, academics, and other stakeholders’ data on the uses, opportunities and risks presented by artificial intelligence (AI). The Treasury’s release stated that the Department will be interested in gaining greater insight into how AI would be used in risk management, capital markets, internal operations, customer service, regulatory compliance, and marketing. The RFI posed 19 questions related to general topics such as types of models, AI use, and barriers to entry, as well as questions focused on potential opportunities and risks associated with AI.
The Secretary of the Treasury, Janet Yellen, discussed the RFI in her remarks at the Financial Stability Oversight Council (FSOC) Conference on AI and Financial Stability. Yellen noted that the Treasury would be convening a roundtable on AI and insurance and would support FSOC’s monitoring and analysis of AI’s impact on financial stability.
Colorado tightens regulations related to debt settlement and collection practices
On June 6, the Governor of Colorado signed into law HB 1380 (the “Act”) which revised the state’s consumer protection laws related to debt collection, credit services organizations, and debt management service providers. Key provisions of the law included:
- Debt collectors must now include their name and the original creditor’s name in legal actions against consumers and possess full authority to settle the debt.
- Credit services organizations will be required to provide the state administrator with essential business information (including name and address) and pay an annual notification fee.
- The state administrator can issue cease-and-desist orders and impose penalties of up to $1,500 per violation of the Code.
- Debt-management service providers cannot provide their services to consumers unless they have prepared a debt management plan for the individual that, among other things, lists all the creditors that the service provider expects to participate, and not to participate, in the plan, as well as those that it expects to participate but will not grant concessions to the consumer.
- Providing the state administrator the ability to adopt rules regarding debt settlement service fees by March 1, 2025, provided the rules do not “unduly limit consumer access to debt management services programs based on available state and national data.”
The Act’s amendments will go into effect 91 days following final adjournment of the General Assembly, subject to approval by Colorado voters if a referendum would be filed.
Acting Comptroller Hsu addresses AI integration risks and advocates for consumer financial health measures
On June 6, Acting Comptroller of the Currency, Michael J. Hsu, delivered two statements addressing distinct concerns regarding both artificial intelligence (AI) and consumer financial health.
In the first statement at the 2024 Conference on Artificial Intelligence and Financial Stability, Hsu said that AI was capable of being a tool for innovation or a weapon that could undermine the financial system. Hsu detailed potential risks arising from AI’s deployment, such as rapid adoption without adequate controls. He advocated taking a cautious approach, with “risk management control gates” at different stages of AI integration to ensure innovations are beneficial rather than harmful. Hsu stressed the need for a shared responsibility model for AI, where accountability would be defined clearly across different stakeholders, particularly in cases of AI-enabled fraud and cyberattacks.
In the second statement, made at the Financial Health Network Emerge Conference, Hsu discussed the OCC’s engagement in enhancing consumer financial health as part of its broader goal to foster a fair and inclusive economy. Comptroller Hsu described three possible results given “clear and objective measures of consumers’ financial health”: (i) product offerings could better align with consumer needs; (ii) banks that support their customers’ efforts to improve their financial health would have better customer relationships and build trust; and (iii) improvements in mental well-being for individuals and communities.
Hsu presented the concept of Financial Health Vital Signs (FHVS) as a set of metrics—positive cash flow, liquidity buffers, and on-time payments—that could indicate consumer financial health. The OCC’s report, “Community Development Insights: How Banks Can Measure and Support Customer Financial Health Outcomes,” was introduced as a resource for banks to understand and improve their customers’ financial well-being. Hsu encouraged banks to pilot these metrics, which could lead to better product alignment with customer needs, improved financial decision-making, and reduced financial stress among consumers.
Fed seeks to renew TILA, Regulation Z information collection
On June 4, the Fed published a request for comment on a proposal to extend the “Recordkeeping and Disclosure Requirements Associated with CFPB’s Regulation Z” for three years without revision. According to the notice, the Fed’s request would support the CFPB’s Regulation Z by ensuring consumers receive detailed information about credit terms and costs, particularly in the context of residential real estate transactions, to promote informed credit use. As part of this request, the Fed will invite public comments to address the efficacy of the information collection requirements and seek ways to enhance the quality of collected information, among other things. Comments must be received by August 6.
GAO urges Fed to address outstanding recommendations
On June 3, GAO released a letter addressed to Fed Chair, Jerome Powell, to provide an update on the Fed's implementation of past GAO recommendations. As of May, GAO noted 13 open recommendations under the Fed. The Fed recently implemented two of the GAO’s four 2023 priority recommendations: one on stress test capital ratio estimates, and the other pertaining to risk tolerance articulation. GAO did not add any new priority recommendations for the Fed, but instead emphasized the importance of addressing the remaining two items: one related to blockchain technology and the other on financial technology.
Regarding the blockchain recommendation, GAO urged the Fed to work with other regulators to create a formal mechanism for identifying risks associated with this technology. GAO observed that the Fed had stated in April that it would participate in the Digital Asset Working Group to work with other agencies to address blockchain risks, but GAO recommended that the working group must include a “planning process for identifying and addressing” blockchain risks. Regarding the fintech partnerships recommendation, and in coordination with other federal financial regulators, GAO recommended clear communication on the appropriate use of alternative data in the underwriting process since fintech lenders “may analyze large amounts of alternative data on borrower characteristics … when determining borrowers’ creditworthiness.”
GAO’s letter also emphasized the importance of Congressional oversight to implement recommendations, suggesting strategies such as legislative incorporation and oversight hearings.
FHFA enhances Fannie and Freddie flex modification policies
Recently, the FHFA announced that Fannie Mae and Freddie Mac will update their Flex Modification policies to help struggling borrowers reduce their mortgage payments. Flex Modification would be for eligible borrowers experiencing a permanent hardship and cannot make regular monthly mortgage payments. According to the FHFA, the enhanced policies will aim to decrease a borrower’s monthly payments by up to 20 percent through three incremental steps: (i) interest rate reduction; (ii) extending the loan term; and (iii) principal forbearance for those with loan-to-value ratios above 50 percent. These updates were built on the Servicing Alignment Initiative started in 2011 and have been aimed at better resolving mortgage payment delinquencies. The new Flex Modification policies will take effect on December 1.