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CFPB compares banks’ overdraft practices
On February 10, the CFPB published a blog post providing research on banks’ overdraft fees, which highlighted the Bureau’s “ongoing and growing concern about the impact of bank overdraft fees on families.” The Bureau noted that in 2019, overdraft and non-sufficient fund fees (NSF) fees cost Americans approximately $15.5 billion, and though these fees decreased during the Covid-19 pandemic, “they’ve still cost people billions during this crisis—and were climbing through the third quarter of 2021.” According to the blog post, banks have been announcing changes to their overdraft programs, which include, among other things: (i) eliminating NSF fees charged when transactions bounce; (ii) decreasing overdraft fees; (iii) reducing the daily number of overdraft/NSF fees the bank can charge; (iv) providing or increasing the amount that an account can go negative prior to charging an overdraft fee; and (v) providing a grace period for bringing an account back to positive prior to charging an overdraft fee. The Bureau noted in an earlier blog post that “these changes represent an encouraging step by some banks in the right direction.” Additionally, the Bureau released a table giving a “snapshot” of large banks’ overdraft and NSF practices. The Bureau’s work on overdraft/NSF fees is part of a CFPB initiative, in which the Bureau says it “will strive to strengthen competition in consumer finance by using its authorities to reduce these kinds of junk fees.” The Bureau has issued a request for comment from the public on fees that are associated with consumers’ bank accounts, prepaid or credit card accounts, mortgages, loans, payment transfers, and other financial products, which the Bureau has characterized as being “exploitative” and not being subject to competitive processes that ensure fair pricing. Bureau research found that certain fees often hide a product’s true cost and can undermine a competitive market. (Covered by InfoBytes here). The comment period opened February 4 and closes on March 31.
Courts order VoIP providers to give information to FTC
On February 14, the FTC announced that two federal courts in California ordered two Voice-over-Internet Protocol (VoIP) service providers to produce information that the agency is seeking as part of a continuing investigation into possible illegal robocalls. According to the first order, the VoIP service provider is required to comply with a CID as part of an FTC investigation. According to the FTC, “[a]lthough the CID directed [the respondent] to produce selected information and documents by the end of February 2021, the company produced only a small fraction of the required information, even after receiving an extension of the response deadline from Commission staff.” The FTC filed a petition in federal court seeking to compel compliance with the CID when further efforts to cooperate with the respondent were “unsuccessful.” The assigned magistrate judge issued a report and recommendation in December 2021, finding “that the FTC is entitled to enforcement of the remainder of the CID,” and recommending that the district judge enter an order requiring the respondent to comply. The court accepted that recommendation, and issued an order compelling the respondent’s compliance with the CID. The second VoIP service provider was likewise ordered to turn over information required under an FTC CID, issued to in January 2021. After failing to respond to the CID, the FTC filed suit to enforce compliance and claimed that “neither the company nor its principals had responded to the CID, which ‘materially impeded the FTC’s investigation.’” According to the FTC, the court granted the FTC’s petition, and in response, the respondent turned over the required information.
CFPB releases EFTA bulletin
On February 15, the CFPB released a bulletin reiterating that the EFTA and its implementing regulation, Regulation E, apply to government benefit accounts with the exception of certain state and local electronic benefit transfer programs. The EFTA establishes, among other things, that “no person may require a consumer to establish an account for receipt of electronic fund transfers with a particular financial institution as a condition of employment or receipt of government benefits.” According to the Bulletin, this “compulsory use prohibition ensures that consumers receiving the government benefits” are provided “a choice with respect to how they receive their funds.” The bulletin also summarized the regulation’s disclosure requirements for government benefit accounts, which includes disclosing that the consumer: (i) “has several options to receive benefit payments, followed by a list of the options available to the consumer, and a statement directing the consumer to tell the agency which option the consumer chooses”; or (ii) “does not have to accept the government benefit account and directing the consumer to ask about other ways to receive government benefit payments.”
OCC launches financial inclusion initiative in Detroit
On February 15, the OCC announced the launch of Detroit REACh, marking the agency’s third expansion of Project REACh (Roundtable for Economic Access and Change). As previously covered by InfoBytes, the OCC launched the initiative in 2020 to promote greater financial inclusion of underserved populations and bring together leaders from the banking industry, national civil rights organizations, and various businesses and technology organizations to identify and reduce barriers to accessing capital and credit. The OCC further noted that “Detroit REACh will organize and initiate formal efforts to promote greater access to affordable homeownership, enhance small business financing, and expand access to credit for economically disadvantaged and underserved communities in Detroit.”
Fed announces enforcement action against Illinois bank
On February 10, the Federal Reserve Board announced an enforcement action against an Illinois-based bank. According to the consent order, the bank allegedly violated the National Flood Insurance Act (NFIA) and Regulation H. The order assesses a $253,500 penalty against the bank for an alleged pattern or practice of violations of Regulation H but does not specify the number or the precise nature of the alleged violations. The maximum civil money penalty under the NFIA for a pattern or practice of violations is $2,000 per violation.
Agencies release stress-test scenarios
Recently, the FDIC, Fed, and OCC released the hypothetical economic scenarios for use in the upcoming stress tests for covered institutions. The FDIC released supervisory scenarios, which include baseline and severely adverse scenarios. According to the FDIC, “[t]he baseline scenario is in line with a survey of private sector economic forecasters” while the “severely adverse scenario” is a “hypothetical scenario designed to assess the strength and resilience of financial institutions.” Likewise, the Fed released the results of its supervisory Dodd-Frank bank stress tests conducted on 34 large banks, which collectively hold 70 percent of bank assets in the U.S. The two scenarios, baseline and severely adverse, include 28 variables, such as GDP, unemployment rate, stock market prices, and mortgage rate. In the 2022 stress test scenario, the U.S. unemployment rate rises nearly 6 points to a peak of 10 percent over two years. The large increase in the unemployment rate is accompanied by a 40 percent decrease in commercial real estate prices, broadening corporate bond spreads, and a collapse in asset prices, including increased market volatility. The OCC also released the agency’s scenarios for banks and savings associations currently subject to Dodd-Frank stress tests.
FinCEN releases fact sheet on RRP
On February 14, FinCEN issued a fact sheet regarding its Rapid Response Program (RRP), which is “a collaborative partnership that leverages FinCEN’s relationships with law enforcement, U.S. financial institutions, and foreign financial intelligence units to help victims and their financial institutions recover funds stolen as the result of certain cyber-enabled financial crimes schemes, including business e-mail compromise.” According to FinCEN, in addition to providing information about the program, the fact sheet emphasizes that victims of cyber-enabled crimes, or victims’ financial institutions, need to file a complaint with law enforcement to start the RRP process. The fact sheet also provides guidance on, among things: (i) activating the RRP; (ii) suspicious activity reporting; and (iii) information for financial institutions sharing information. FinCEN noted that it assisted in the recovery of over $1.1 billion since the program started in 2015.
CBA urges CFPB to supervise nonbank small business lenders
On February 9, the Consumer Bankers Association (CBA) sent CFPB Director Rohit Chopra a letter regarding the supervision of nonbank small business lenders. The letter noted that the landscape for business lending has recently altered “substantially,” specifically with the alternative banking options offered by financial technology companies having “significant market share.” The letter considered small businesses to be “vulnerable” because the activities of fintechs engaged in small business lending are not supervised by the Bureau. The letter urged the Bureau to “evaluate all possible avenues for supervising these nonbank small business lenders, including adding nonbank small business lending to the larger participant rule.” The letter also pointed out that the “lack of supervisory authority over nonbank small business lenders” undermines the CFPB’s other regulatory efforts, such as identifying and addressing fair lending concerns through a final rule covering small business lending data collection pursuant to Section 1071 of Dodd-Frank. The CBA argued that the absence of authority over nonbank lenders “will negatively impact the accuracy and utility of any data the Bureau receives under a Section 1071 final rule.” The CBA also advised the Bureau to utilize its ability under 12 U.S.C. Section 5514 to increase its authority over larger participants in the small business lending market.
Senators urge CFPB to investigate student lenders’ bankruptcy compliance
On February 10, several U.S. senators sent a letter to CFPB Director Rohit Chopra claiming private student loan companies and servicers have “intentionally misrepresented to borrowers” their ability to discharge certain private student loans in bankruptcy. Citing a report from the Student Borrower Protection Center, the senators claimed that these private lenders “have intentionally perpetuated the false narrative that all student loans, including all private student loans, are nondischargeable in bankruptcy except in cases where borrowers meet a standard of ‘undue hardship.’” The letter stated, however, that rules related to the dischargeability of private student loans apply only to qualified education loans whereas private lenders and servicers “have long peddled a variety of private student loans that do not meet the definition of qualified education loans.” Citing a figure that estimated approximately $50 billion in private student loan debt held by some 2.6 million borrowers fell into this category, the senators stated that lenders included misleading language in their promissory notes while misrepresenting that students could not discharge their loans in bankruptcy, and collected debts that could have been legally discharged, including through the use of abusive measures such as pursuing legal action and making negative reports to credit bureaus. The senators urged the Bureau to investigate the report’s findings and take action to ensure private lenders and servicers comply with bankruptcy law.
FHFA releases AI/ML risk management guidance for GSEs
On February 10, FHFA released Advisory Bulletin (AB) 2022-02 to Fannie Mae and Freddie Mac (GSEs) on managing risks related to the use of artificial intelligence and machine learning (AI/ML). Recognizing that while the use of AI/ML has rapidly grown among financial institutions to support a wide range of functions, including customer engagement, risk analysis, credit decision-making, fraud detection, and information security, FHFA warned that AI/ML may also expose a financial institution to heightened compliance, financial, operational, and model risk. In releasing AB 2022-02 (the first publicly released guidance by a U.S. financial regulator that specifically focuses on AI/ML risk management), FHFA advised that the GSEs should adopt a risk-based, flexible approach to AI/ML risk management that should also be able “to accommodate changes in the adoption, development, implementation, and use of AI/ML.” Diversity and inclusion (D&I) should also factor into the GSEs’ AI/ML processes, stated a letter released the same day from FHFA’s Office of Minority and Women Inclusion, which outlined its expectations for the GSEs “to embed D&I considerations throughout all uses of AI/ML” and “address explicit and implicit biases to ensure equity in AI/ML recommendations.” The letter also emphasized the distinction between D&I and fairness and equity, explaining that D&I “requires additional deliberation because it goes beyond the equity considerations of the impact of the use of AI/ML and requires an assessment of the tools, mechanisms, and applications that may be used in the development of the systems and processes that incorporate AI/ML.”
Additionally, AB 2022-02 outlined four areas of heightened risk in the use of AI/ML: (i) model risk related to bias that may lead to discriminatory or unfair outcomes (includes “black box risk” where a “lack of interpretability, explainability, and transparency” may exist); (ii) data risk, including concerns related to the accuracy and quality of datasets, bias in data selection, security of data from manipulation, and unfamiliar data sources; (iii) operational risks related to information security and IT infrastructure, among other things; and (iv) regulatory and compliance risks concerning compliance with consumer protection, fair lending, and privacy laws. FHFA provided several key control considerations and encouraged the GSEs to strengthen their existing risk management frameworks where heightened risks are present due to the use of AI/ML.