Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Last month, the Government Accountability Office delivered a report at the request of Senators Elizabeth Warren (D-MA) and Sherrod Brown (D-OH) on the CFPB’s oversight and enforcement of fair lending laws after the agency’s 2018 reorganization which moved the Office of Fair Lending and Equal Opportunity from the Supervision, Enforcement, and Fair Lending Division to the Office of the Director and shifted certain responsibilities. GAO’s investigation focused on how the Bureau (i) “managed the reorganization of its fair lending activities”; (ii) “monitored and reported on its fair lending performance”; and (iii) used new HMDA data reported by some lenders since 2018 in its fair lending activities. The investigation team examined documents related to the Bureau’s fair lending activities, including strategic and performance reports and policies and procedures, and interviewed Bureau staff. GAO concluded that the Bureau “did not substantially incorporate key practices for agency reform efforts GAO identified in prior work” during the reorganization, and identified challenges related to the reorganization such as “loss of fair lending expertise and specialized data analysts,” which “may have contributed to a decline in enforcement activity in 2018.” The report also pointed out that the Bureau’s decision to stop reporting fair lending supervision and enforcement performance goals and measures has reduced transparency. However, the report noted that the Bureau has incorporated loan-level HMDA data to support its fair lending activities and that the new data points have improved the agency’s ability to compare how different institutions price loans, helping staff identify potentially discriminatory lending practices.
GAO’s report recommended that the Bureau: (i) collect and analyze information on the outcomes of its fair lending reorganization and use that assessment to address any related challenges or unintended consequences; and (ii) “develop and implement performance goals and measures specific to its efforts to supervise and enforce fair lending laws.” The Bureau agreed with both recommendations and affirmed its commitment to implementing them.
On June 2, the Financial Stability Board released an updated version of the Global Transition Roadmap for LIBOR, which is intended to advise those with exposure to LIBOR benchmarks of some of the steps they should take now and over the remaining period to LIBOR cessation dates to successfully mitigate risks. As previously covered by InfoBytes, the Financial Stability Board released the roadmap last October to outline the steps financial firms and their clients should take “in order to ensure a smooth LIBOR transition” from now through 2021. According to the recent announcement, “transition away from LIBOR requires significant commitment and sustained effort from both financial and non-financial institutions across many LIBOR and non-LIBOR jurisdictions.” In addition to identifying actions that should already be complete, the roadmap details the following steps:
- ISDA Fallback Protocol Effective Date. Firms should adhere to the International Swaps and Derivatives Association’s (ISDA) IBOR Fallback Protocol and IBOR Fallback Supplement, which were launched last October and took effect in January 2021 (covered by InfoBytes here).
- By mid-2021. Firms should have identified which contracts can be amended and contact other parties to prepare for the use of alternative rates. Firms should also execute formalized plans to covert legacy LIBOR contracts to alternative rates.
- By the end of 2021. All new business should be conducted in, or capable of switching immediately to, alternative rates.
- By June 2023. Firms should “be prepared for all remaining USD LIBOR settings to cease.”
On June 2, CFPB acting Director Dave Uejio published a blog post highlighting Bureau efforts to address issues regarding racial injustice and the long-term economic effects of the Covid-19 pandemic on consumers. In January, as previously covered by InfoBytes, Uejio released a statement announcing his immediate priorities for the Bureau as: (i) relief for consumers facing hardship due to the Covid-19 pandemic and the related economic crisis; and (ii) racial equity. In the recent blog post, Uejio acknowledged that the “pandemic has created economic and financial insecurity for millions of Americans,” and has disproportionally impacted communities of color in terms of health and the related financial crises. Uejio also pointed out that, as acting director, his top priority is to “take bold and swift action to address issues of pervasive racial injustice and the long-term economic impacts of the COVID-19 pandemic on consumers” and noted that it is his “intent that the CFPB use all of [its] tools and authorities to protect and fight for fairness and equity.”
On June 2, the Federal Reserve Board announced plans to wind down the portfolio of the Secondary Market Corporate Credit Facility (SMCCF), a temporary emergency lending facility that was established and provided by the Treasury Department under the CARES Act, which closed in December 2020. The SMCCF (covered by InfoBytes here) played a role in restoring market functioning, supported the availability of credit for certain employers, and assisted employment numbers during the Covid-19 pandemic. According to the announcement, sales from the SMCCF portfolio will be “gradual and orderly,” aiming to decrease the likelihood of “any adverse impact on market functioning by taking into account daily liquidity and trading conditions for exchange traded funds and corporate bonds.” The announcement also indicates that the Federal Reserve Bank of New York, which manages the operations of the SMCCF, will release more details before sales begin.
FTC alleges subscription service failed to provide access to paid-for services or secure personal data
On June 7, the FTC announced a complaint and proposed consent order against the operators of a movie subscription service to settle allegations that the respondents denied subscribers access to paid-for services and failed to secure subscribers’ personal information. The FTC alleges in its complaint that the respondents violated the FTC Act by employing multiple tactics to prevent subscribers from using the advertised services, including by (i) invalidating subscribers’ passwords while deceptively claiming to have “detected suspicious activity or potential fraud” on the subscribers’ accounts; (ii) imposing a deceptive ticket verification program, which required subscribers to submit photos of physical movie ticket stubs within a certain timeframe in order to view future movies or risk having their subscriptions cancelled; and (iii) using undisclosed financial thresholds known as “trip wires” to block certain subscribers after they reached certain viewing thresholds based on their monthly cost to the company. The FTC also alleged the respondents violated the Restore Online Shoppers’ Confidence Act, by failing to (i) disclose all material terms before obtaining consumers’ billing information; or (ii) obtain consumers’ express informed consent before charging them. Furthermore, the respondents allegedly failed to take reasonable measures to protect subscribers’ personal information, including storing personal data such as financial information and email addresses in unencrypted form and failing to restrict who could access the data, which lead to a data breach in 2019.
An analysis of the FTC’s proposed consent order notes that the respondents are prohibited from misrepresenting their services and must establish a comprehensive information security program that requires them—and any businesses controlled by the respondents —to implement and annually test and monitor safeguards and take steps to address security risks. The respondents must also obtain biennial third-party assessments of its information security program, notify the FTC of any future data breaches, and annually certify that it is complying with the order’s data security requirements. The FTC noted that because certain respondents have filed for bankruptcy, the order does not include monetary relief.
On June 7, Freddie Mac announced a new cap, or limit, on the purchase of certain single-family mortgages secured by investment properties and second homes to 7 percent of total single-family mortgage acquisitions. For July, Freddie Mac updated the requirements for investment property and second home mortgages to state that if a seller sells more than five mortgages secured by second homes and/or investment properties, the seller’s delivery of such mortgages may not, by the measure of the aggregate unpaid principal balance (UPB) of a mortgage, exceed 6.5 percent “of the total UPB for all [m]ortgages sold during that month.” After July, the cap will be set at 6 percent. The announcement also noted that the cap “is intended to be temporary” and may be revised as needed.
On June 3, President Biden issued a memo designating the “fight against corruption” as a top priority in preserving national security in the United States. The memo notes, among other things, that corruption not only corrodes public trust and development efforts, it also decreases global gross domestic product by an estimated two to five percent. In establishing “countering corruption as a core United States national security interest,” the memo highlights that the Biden administration will “lead efforts to promote good governance; bring transparency to the United States and global financial systems; prevent and combat corruption at home and abroad; and make it increasingly difficult for corrupt actors to shield their activities.” This includes efforts that will significantly bolster the ability of the U.S. government to, among other things: (i) boost the ability of key executive departments and agencies to encourage fair governance; (ii) counter illicit finance in the U.S. and foreign financial systems; (iii) hold corrupt individuals accountable; (iv) “strengthen the capacity of civil society, media, and other oversight and accountability actors to conduct research and analysis on corruption trends”; (v) coordinate with international partners to counteract strategic corruption; and (vi) encourage partnerships with the private sector and civil society. The memo further points out that an interagency review must take place within 200 days of the date of the memo, and a report and recommendations will be submitted to the president for further direction and action.
On June 1, the FTC announced that it submitted its 2020 Annual Financial Acts Enforcement Report to the CFPB. The report covers the FTC’s enforcement activities regarding the Truth in Lending Act (TILA), the Consumer Leasing Act (CLA), and the Electronic Fund Transfer Act (EFTA). Highlights of the enforcement matters covered in the report include:
- TILA and CLA. FTC enforcement actions concerning TILA/Regulation Z and CLA/Regulation M include: (i) efforts to combat deceptive automobile dealer practices; (ii) a payday lending action involving deceptive charges and tactics used to overcharge customers on loan repayments; and (iii) credit repair and debt relief schemes, including a student loan debt relief scheme involving illegal fees and false claims loan payments.
- EFTA. The FTC reported eight new or ongoing cases related to EFTA/Regulation E. These include: (i) negative option plans involving, among other things, companies applying recurring charges to consumers’ debit or credit card numbers for goods or services without obtaining proper written authorization; and (ii) use of robocalls for marketing deceptive products.
Additionally, the report addresses the FTC’s research and policy efforts related to truth in lending and leasing, and electronic fund transfer issues, including (i) collaboration with Department of Defense’s interagency group on preauthorized electronic fund transfer issues; (ii) a small business financing forum that provided “an overview of small business lending and the emergence of new online options available to businesses seeking finance”; and (iii) the FTC’s Military Task Force’s work on military consumer protection issues. The report also outlines the FTC’s consumer and business education efforts, which include several blog posts warning of new scams and practices.
On June 1, the FDIC issued FIL-38-2021 to provide regulatory relief to financial institutions and help facilitate recovery in areas of West Virginia affected by severe storms. The FDIC acknowledged the unusual circumstances faced by institutions affected by the storms and suggested that institutions work with impacted borrowers to, among other things, (i) extend repayment terms; (ii) restructure existing loans; or (iii) ease terms for new loans to those affected by the severe weather, provided the measures are done “in a manner consistent with sound banking practices.” Additionally, the FDIC noted that institutions “may receive favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery.” The FDIC will also consider regulatory relief from certain filing and publishing requirements.
On May 24, the FTC announced that it will be releasing closing letters—letters from FTC staff telling a company or individual that the FTC is closing its investigation into their conduct—which “may supplement law enforcement with other methods, including consumer education, business guidance, warning letters, national workshops, reports.” However, the text in the letters make it clear that the “FTC reserves the right to take further action as the public interest may require.” The FTC also notes that although the closing letters “serve a narrow purpose,” they often include a guide that can help other companies with their own compliance efforts.