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On July 17, the CFPB announced a new Compliance Assistance Statement of Terms Template (CAST Template) under its Compliance Assistance Sandbox (CAS) Policy issued to a company’s program designed to help employees build emergency savings. Specifically, under the approved template, known as “Autosave,” interested employers could help employees build emergency savings by directing a portion of the employee’s pay to an employee-designated account at a financial institution; or if an employee does not designate an account, directing the funds to an “Autosave” account at an employer-designated institution. The Bureau notes that a CAST Template is necessary for this program due to the legal uncertainty around the application of the “compulsory use” prohibition in the Electronic Fund Transfer Act (EFTA), and Regulation E. However, the applicants assert the Autosave program embodies a “reasonable default enrollment method,” which, according to the Bureau, can be consistent with the consumer choice requirements of the EFTA and Regulation E.
On July 7, the CFPB released a blog post discussing the use of artificial intelligence (AI) and machine learning (ML), addressing the regulatory uncertainty that accompanies their use, and encouraging stakeholders to use the Bureau’s innovation programs to address these issues. The blog post notes that “AI has the potential to expand credit access by enabling lenders to evaluate the creditworthiness of some of the millions of consumers who are unscorable using traditional underwriting techniques,” but using AI may create or amplify risks, including unlawful discrimination, lack of transparency, privacy concerns, and inaccurate predictions.
The blog post discusses how using AI/ML models in credit underwriting may raise compliance concerns with ECOA and FCRA provisions that require creditors to issue adverse action notices detailing the main reasons for the denial, particularly because AI/ML decisions can be “based on complex interrelationships.” Recognizing this, the Bureau explains that there is flexibility in the current regulatory framework “that can be compatible with AI algorithms.” As an example, citing to the Official Interpretation to Regulation B, the blog post notes that “a creditor may disclose a reason for a denial even if the relationship of that disclosed factor to predicting creditworthiness may be unclear to the applicant,” which would allow for a creditor to use AI/ML models where the variables and key reasons are known, but the relationship between them is not intuitive. Additionally, neither ECOA nor Regulation B require the use of a specific list of reasons, allowing creditors flexibility when providing reasons that reflect alternative data sources.
In order to address the continued regulatory uncertainty, the blog post encourages stakeholders to use the Trial Disclosure, No-Action Letter, and Compliance Assistance Sandbox programs offered by the Bureau (covered by InfoBytes here) to take advantage of AI/ML’s potential benefits. The blog post mentions three specific areas in which the Bureau is particularly interested in exploring: (i) “the methodologies for determining the principal reasons for an adverse action”; (iii) “the accuracy of explainability methods, particularly as applied to deep learning and other complex ensemble models”; and (iii) the conveyance of principal reasons “in a manner that accurately reflects the factors used in the model and is understandable to consumers.”
On June 3, NYDFS and France’s Autorité de Contrôle Prudentiel et de Résolution (ACPR) signed a Memorandum of Understanding (MOU) to help ease fintech innovators’ entry into the New York and French markets. This is the first fintech cooperation agreement signed by the ACPR with a U.S. regulator. Under the terms of the MOU, the two regulators will (i) refer companies to one another for potential market entry; (ii) “exchange information about regulatory and policy issues”; (iii) ensure innovators in both jurisdictions receive equal levels of support; and (iv) “share regulatory and supervisory expertise and best practices.” According to NYDFS, the regulators aim to encourage and support financial innovation, enhance consumer protections, and encourage “healthy market competition in their respective markets.”
On February 19, the Conference of State Bank Supervisors announced the launch of a technology platform called the State Examination System (SES) to increase transparency and collaboration with regulated entities. State regulators, who are the primary regulators of non-bank and fintech firms, can use the system for investigations, enforcement actions and complaints. According to the press release, “state regulators will be able to enhance supervisory oversight of nonbanks while making the process more efficient for regulators and companies alike.” Among other things, SES is designed to: (i) “[s]upport networked supervision among state regulators”; (ii) “[s]tandardize workflow, business rules and technology across states”; (iii) [f]acilitate secure collaboration between licensees and their regulators”; (iv) allow examiners to “focus…on higher risk cases”; and (v) promote efficiency by “[m]ov[ing] state supervision towards more multistate exams and fewer single-state efforts.” SES will be managed by the State Regulatory Registry, which also manages the Nationwide Multistate Licensing System.
On February 7, NYDFS announced it will hold its first “Symposium on Financial Innovation and Inclusion” on April 2 during New York Fintech Week. The symposium seeks to connect stakeholders—including policymakers, regulators, innovators, established financial institutions, investors, and consumer representatives—to explore innovation and inclusion, while also exploring opportunities to benefit consumers and mitigate potential risks.
On February 10, Federal Reserve (Fed) Governor Michelle W. Bowman spoke before the Conference for Community Bankers on the interaction between innovation and regulation for community banks. In discussing her “vision for creating pathways to responsible community bank innovation,” Bowman identified particular challenges facing smaller banks when identifying and integrating new technologies and offered suggestions for ways the Fed can assist these banks in managing relationships with third-party service providers. Acknowledging that responsible innovation requires community banks to identify goals and pinpoint products and services to implement their strategies, Bowman recognized that compliance costs can create an outsized and undue burden on smaller banks and stated that federal regulations should be tailored to bank size, risk, and complexity. Among other things, Bowman stated that the Fed could align its third-party service provider guidance with the OCC and other banking agencies to provide uniform standards to banks. “It is incredibly inefficient to have banks and their potential fintech partners and other vendors try to navigate unnecessary differences and inconsistencies in guidance across agencies,” Bowman noted. Regulators and supervisors have a role in easing the burden for community banks, she added, noting that third-party guidance should allow banks to conduct shared due diligence on potential partners and pool resources to avoid duplicating work. In addition, Bowman commented that the Fed could help banks make this choice by publishing a list of service providers subject to regulatory supervision and increasing transparency around “who and what” the Fed evaluates. Bowman further stated that any guidance should also explain what due diligence looks like for potential fintech partners, since standards applied to other third parties may not be universally applicable. Giving community banks a better vision of what success in due diligence looks like, Bowman stated, will require releasing more information on its necessary elements.
Bowman also highlighted the Fed’s upcoming fintech innovation office hours, as well as the Fed’s recently launched fintech website section, (both covered by InfoBytes here), which are designed to help provide access to Fed staff, highlight supervisory observations regarding fintech, provide a hub of information for interested stakeholders on innovation-related matters, and deliver practical tips for banks and other companies interested in engaging in fintech activity.
On January 7, the Conference of State Bank Supervisors (CSBS) released a report by its Fintech Industry Advisory Panel outlining progress made on several initiatives to streamline state licensing and supervision of financial technology companies. As previously covered by InfoBytes, the panel was convened in 2017 as part of Vision 2020—a state regulator initiative to modernize the regulation of fintech companies and other non-banks by creating an integrated, 50-state system of licensing and supervision. The Accountability Report charts progress on initiatives identified by the panel, which, according to the announcement, fit into four focus areas: (i) the use of CSBS regtech for licensing and exams, including expanding the use of NMLS among states across all license types for nonbank financial services, developing “state licensing requirements for multi-state consistency,” and launching a new state examination system; (ii) improved consistency among states, including 26 states signing on to the Multistate Money Service Business (MSB) Licensing Agreement, which is intended to streamline the MSB licensing process; (iii) the creation of uniform definitions and practices and the development of a 50-state MSB model law and state accreditation programs for MSBs, which will encourage greater consistency among states; and (iv) increased regulatory transparency, including online resources for state guidance and exemptions, as well as information sessions with regulators and industry to discuss fintech developments.
On December 17, the Federal Reserve Board (Fed) released a new issue of the Consumer Compliance Supervision Bulletin focusing on supervisory insights into consumer compliance issues related to fintech to assist financial institutions with assessing and managing risk associated with technological innovation. Among the topics covered in the bulletin, are (i) managing risk with fintech collaborations—the Fed stresses the importance of creating strong policies and procedures, as well as board and senior management oversight, comprehensive and tailored training, and risk monitoring; (ii) managing UDAP risks with online and mobile banking platforms—the Fed recommends a focus on ensuring consistency and accuracy in disclosures on the platforms and the regular monitoring of complaints; and (iii) managing possible fair lending risks resulting from targeted online marketing—the Fed suggests careful monitoring over marketing activities and vendors, as well as close review of filters used with internet advertising to prevent excluding populations with legally protected characteristics. The bulletin will be featured on the agency’s new fintech page previously covered by InfoBytes here.
On October 24, the Commodity Futures Trading Commission (CFTC) announced that LabCFTC will operate as an independent operating office of the agency, reporting directly to the chair of the CFTC. As previously covered by InfoBytes, LabCFTC was established in 2017 as an initiative to engage innovators in the financial technology industry and promote responsible fintech innovation. According to the CFTC, the change reflects the importance the agency places on examining the value of innovation within the financial marketplace and making the agency accessible to fintech innovators. The CFTC also released the Artificial Intelligence in Financial Markets primer to provide an “overview of how AI is applied in financial markets” as well as resources for market participants, consumers, and the public. The primer is part of a LabCFTC series on fintech innovation. (Previous InfoBytes coverage here.)
On October 11, the SEC, Commodity Futures Trading Commission (CFTC), and Financial Crimes Enforcement Network (FinCEN) issued a joint statement to remind persons who engage in digital asset activities or handle cryptocurrency transactions of their anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA). According to the agencies, AML/CFT obligations apply to entities defined as “financial institutions” under the Bank Secrecy Act, which include “futures commission merchants and introducing brokers obligated to register with the CFTC, money services businesses (MSB) as defined by FinCEN, and broker-dealers and mutual funds obligated to register with the SEC.” The obligations include, among other things, (i) establishing and implementing an effective AML program; and (ii) complying with recordkeeping and reporting requirements such as suspicious activity reporting (SARs).
The agencies note that persons who engage in digital asset-related activities may have AML/CFT obligations regardless of the “label or terminology used to describe a digital asset or a person engaging in or providing financial activities or services involving a digital asset.” According to the agencies, the facts and circumstances underlying the asset or service, “including its economic reality and use,” is what determines how the asset is categorized, the applicable regulatory treatment, and whether the persons involved are financial institution under the BSA.
Additionally, FinCEN reminded financial institutions of its supervisory and enforcement authority to “ensure the effectiveness of the AML/CFT regime,” emphasizing that persons who provide money transmission services are MSBs subject to FinCEN regulation. FinCEN also referred to its May 2019 interpretive guidance, which consolidated and clarified current FinCEN regulations, guidance, and administrative rulings related to money transmissions involving virtual currency. (Previous InfoBytes coverage here.)
- Jonice Gray Tucker to discuss “Be Your Compliance Best in 2022” at the California Mortgage Bankers Association webinar
- Lauren R. Randell to discuss “Significant legal developments in the Northeast” at the 37th Annual National Institute on White Collar Crime
- Jonice Gray Tucker to discuss “Small business & regulation: How fair lending has evolved & where it is heading?” at the Consumer Bankers Association Live program
- Jonice Gray Tucker to discuss “Regulators always ring twice: Responding to a government request” at ALM Legalweek
- Jonice Gray Tucker and Kari Hall to discuss “Equity, equality, regulation and enforcement – The evolving regulatory landscape of fair lending, redlining, and UDAAP” at the ABA Business Law Committee Hybrid Spring Meeting