InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
FTC seeks permanent injunction against auto warranties operation
On February 9, the FTC announced it was charging a Florida-based group of operators (defendants) with violations of the FTC Act and the Telemarketing Sales Rule for allegedly engaging in deceptive practices when marketing and selling automobile warranties. The complaint alleged the defendants, among other things, (i) misrepresented that they are affiliated with consumers’ car dealers or manufacturers; (ii) misrepresented that their warranties provide “bumper-to-bumper” coverage; (iii) falsely promised that consumers can obtain a full refund if they cancel within 30 days; (iv) used remotely created checks which are illegal in telemarketing transactions; and (v) called numbers on the do not call registry. According to the FTC, the defendants allegedly collected more than $6 million from consumers since 2018. The FTC seeks a permanent injunction against the defendants to prevent future violations, as well as redress for injured consumers through “rescission or reformation of contracts, the refund of money, the return of property, or other relief necessary to redress.”
Chopra highlights consumer protection topics
On February 10, CFPB Director Rohit Chopra answered questions during a Washington Post Live session on several consumer protection topics. Citing auto lending as a top concern for the Bureau, Chopra noted that it is important for consumers to be able to shop around, refinance loans, and navigate a competitive market. He also discussed recent Bureau initiatives related to junk fees and overdraft/insufficient funds fees, and said the Bureau intends to sharpen its supervisory scrutiny in these spaces. Chopra stated that, as part of a fair and competitive market consumers want to know when they are being charged these fees, noting that financial institutions have started to transition away from dependency on these types of fees and instead implement programs that will allow a bank to determine what shortfall they will allow on an individual consumer basis. He added that the Bureau may eventually see if rulemaking will increase competition and upfront pricing.
Chopra also discussed the role agencies play in the future regulation of cryptocurrency. He noted that while most of the cryptocurrency market is currently related to speculative trading, this could change if one of the big tech payment platforms decides to expand its services to cryptocurrency. Chopra highlighted several concerns, including how payment data from these systems will be used, how money will be transacted, and how consumers will report fraud. He stated that the Bureau is closely monitoring this space and any regulation will be an interagency effort. While Chopra also discussed the need for transparency with respect to how big tech companies are tracking, monetizing, and harvesting consumer data, he stated it is too early to tell whether there is a need for rulemaking in this area. Chopra also discussed topics related to the buy-now-pay-later industry and student lending, and stated that the Bureau is monitoring both areas carefully.
FDIC appoints three corporate officers
On February 9, the FDIC announced three new corporate officers: Kymberly Copa as Deputy to the Acting Chairman and Chief of Staff; Daniel Bendler as Deputy to the Acting Chairman and Chief Operating Officer; and Harrel Pettway to the position of General Counsel. Since 2019, Ms. Copa has served as the Acting Deputy to the FDIC Director and provided analysis and advice on matters pending before the FDIC Board of Directors. Prior to that, she served as Senior Special Counsel in the FDIC’s Legal Division. Mr. Bendler will retain his role as the Director of the Division of Administration, which provides all administrative services for the FDIC. In 2019, he was named the Special Advisor to the Deputy to the Chairman and Chief Operating Officer. In 2019, Mr. Pettway was named Senior Deputy General Counsel in the FDIC’s Legal Division. He also previously served as Deputy General Counsel. According to Acting Chairman Martin J. Gruenberg, all three “bring deep knowledge and experience to their new roles,” and the Acting Chairman looks forward to collaborating with them in implementing the FDIC’s priorities.
Agencies defeat states’ valid-when-made challenge
On February 8, the U.S. District Court for the Northern District of California granted cross-motions for summary judgment in favor of the OCC and FDIC (see here and here), upholding their respective rules which clarify that interest charges that are permissible when a loan is originated “shall not be affected by the sale, assignment, or other transfer of the loan.” The judgments resolve lawsuits brought by several state attorneys general in 2020, challenging both the OCC’s final rule on “Permissible Interest on Loans that are Sold, Assigned, or Otherwise Transferred” (known also as the valid-when-made rule) and the FDIC’s final rule which clarified that under the Federal Deposit Insurance Act (FDIA), whether interest on a loan is permissible is determined at the time the loan is made and is not affected by the sale, assignment, or other transfer of the loan.
In the OCC matter, the states’ argued that the agency’s valid-when-made rule (which effectively reversed the U.S. Court of Appeals for the Second Circuit’s 2015 Madden v. Midland Funding decision, and was covered by InfoBytes here) impermissibly preempts state law, is contrary to the plain language of section 85 (and section 1463(g)(1)), and contravenes the judgment of Congress, which declined to extend preemption to nonbanks. Moreover, the states contended that the OCC failed to give meaningful consideration to the commentary received regarding the rule, essentially enabling “‘rent-a-bank’ schemes.” The OCC countered that its rule does not preempt state law but rather “merely interprets” banks’ authority to charge interest. (Covered by InfoBytes here.) The court agreed with the OCC, holding that the OCC was interpreting the scope of 12 U.S.C. § 85, not determining whether to preempt state laws, and therefore was not required to follow the procedures set forth in 12 U.S.C. § 25b as the states alleged, including consulting with the CFPB. Applying the Chevron framework, the court upheld the OCC’s interpretations of the National Bank Act and Home Owners’ Loan Act. Acting Comptroller of the Currency Michael J. Hsu issued a statement following the decision, in which he emphasized that while the court’s order “affirmed the validity of the OCC’s rule,” the “legal certainty should be used to the benefit of consumers and not be abused.” He added that the agency “is committed to strong supervision that expands financial inclusion and ensures banks are not used as a vehicle for ‘rent-a-charter’ arrangements.”
In the FDIC matter, the states argued, among other things, that the FDIC did not have the power to issue the final rule under 12 U.S.C. § 1831d, and asserted that while the FDIC may issue “regulations to carry out” the provisions of the FDIA, it cannot issue regulations that would apply to nonbanks. The states also claimed that the rule’s extension of state law preemption would facilitate evasion of state law by enabling “rent-a-bank” schemes. The FDIC countered that the states’ arguments misconstrue the rule, which does not regulate nonbanks, does not interpret state law, and does not preempt state law. Rather, the FDIC argued that the rule clarifies the FDIA by “reasonably” filling in “two statutory gaps” surrounding banks’ interest rate authority. (Covered by InfoBytes here.) The court rejected the states’ argument that the FDIC exceeded its authority, and held that under Chevron, the agency’s interpretation of 12 U.S.C. § 1831d is not unreasonable. In upholding the FDIC’s interpretation, the court stated that the final rule “does not purport to regulate either the transferee’s conduct or any changes to the interest rate once a transaction is consummated.”
Fed releases synthetic identity fraud mitigation toolkit
Recently, the Federal Reserve released a synthetic identity fraud mitigation toolkit to help financial institutions, businesses, and consumers improve awareness, detection, measurement, and mitigation of identity fraud. The Fed emphasized that synthetic identity fraud (in which fictitious people are created to penetrate the financial system) is a challenge facing the payments industry and other businesses and continues to grow in frequency and impact. Synthetic fraud accounted for an estimated $20 billion in losses to U.S. financial institutions in 2020, the Fed stated, stressing the need for synthetic identity fraud awareness and continued discussions about detection and mitigation strategies. The toolkit contains several modules, including resources on the basics of synthetic identity fraud, how fraudsters use synthetic identities, what to do when synthetic identities become a reality, and how to detect synthetic identities. Additional resources will be added in the future, including more on synthetic identity fraud detection and mitigation.
Fannie Mae to pay $53 million to settle fair housing violations
On February 7, the Fair Housing Advocates of Northern California, along with the National Fair Housing Alliance and 19 local fair housing organizations from across the country announced a $53 million settlement with Fannie Mae to resolve allegations that Fannie Mae allowed foreclosed homes in predominantly White neighborhoods to be better maintained and marketed than similar homes in communities of color, a claim corroborated by a four year-long investigation of over 2,300 Fannie Mae real estate owned (REO) properties in 39 metropolitan areas. The plaintiffs alleged that they attempted to get Fannie Mae to voluntarily comply with the Fair Housing Act and change its discriminatory policies and practices, but claimed that Fannie Mae “continued to maintain its REO properties differently based on the predominant race and national origin of neighborhoods” and caused “particularized and concrete injury to those homeowners and residents.”
Under the terms of the settlement, Fannie Mae is required to pay $53 million to cover claims for damages, attorneys’ fees, and cost. Nearly $35.4 million of the settlement amount will be used to address community needs, including “addressing home ownership, neighborhood and/or community stabilization, access to credit, property rehabilitation, residential development in African American and Latino communities, fair housing education and outreach, counseling, and other fair housing activities” in the allegedly harmed areas.
The announcement further noted that the plaintiffs—who will manage and disburse the settlement funds—intend to provide grants that will go towards down-payment assistance for first-generation homebuyers and renovations for homes that languished in foreclosure, as well as innovative programs and partnerships to promote fair housing. The announcement also noted that Fannie Mae has implemented several measures to avoid similar occurrences in the future, such as increasing its oversight of maintenance of its REO properties, prioritizing owner-occupants instead of investors as purchasers of REOs, ensuring compliance with fair housing laws, and providing fair housing training to its employees and vendors. According to the announcement, this case marks the first time a federal court confirmed that the Fair Housing Act has covered the maintenance and marketing of REO properties.
Following the announcement, HUD released a statement applauding the settlement. “It is our hope that settlement of these cases will bring about much needed positive outcomes for these undeserved communities,” Principal Deputy Assistant Secretary for HUD’s Office of Fair Housing and Equal Opportunity Demetria L. McCain said. “We also hope mortgage lenders across the country will take steps to avoid fair housing violations in their own REO portfolios.”
OCC to host risk management workshops
On February 7, the OCC released its lineup of free, virtual workshops for boards of directors of community national banks and federal savings associations. Included as part of the workshops to be held this spring is a risk management series focusing on credit risk, operational risk, compliance risk, and risk governance. Another workshop will present guidance for directors and senior managers on building blocks for success. A schedule of the upcoming workshops and registration information is available here.
McWilliams discusses her tenure at FDIC
On February 3, outgoing-FDIC Chairman Jelena McWilliams spoke at the Bipartisan Policy Center on both her tenure and technology’s role in facilitating a more inclusive financial system. In reflecting upon her time as Chairman, McWilliams opined that the “story of how financial regulators, central banks, and the global financial system responded to the pandemic is one of great success. Only three banks failed since the start of the pandemic, and none due to the pandemic itself.” She also pointed out that during the Covid-19 pandemic, the FDIC prioritized “improving supervision and resolution planning” and “the importance of strong capital levels,” particularly for large banks. McWilliams listed some of her accomplishments as Chairman, including “implement[ing] a recordkeeping rule,” “simplify[ng] the deposit insurance rules for trust accounts,” and “enhancing the FDIC’s readiness if it is ever called upon to resolve non-bank firms, such as central counterparties.” Central counterparties, McWilliams explained, play a critical role in the financial system as their clearing services are central to U.S. financial markets. McWilliams discussed the ways in which the FDIC enhanced competition, fostered innovation, and “supported third-party partnerships,” extolling these virtues as “the guiding principles of my chairmanship that helped forge the most vibrant financial market in the world.”
McWilliams also stated that a “key aspect of our pro-competition agenda” was to “moderniz[e] a broad range of our rules while maintaining our core safety and soundness focus.” In connection with “crypto assets,” McWilliams opined that her personal “view is that generally bank-issued stablecoins closely resemble digital representations of deposits.” She urged the FDIC to “to build off the work we have done and provide clarity to the public as soon as practicable, which could include promulgating amendments to the deposit insurance rules.” McWilliams said that she hopes regulators will be more welcoming of the “endless possibilities” that digital assets and blockchain technology have in enhancing the efficiency of payments.
Treasury stresses importance of regulating stablecoins
On February 8, Under Secretary for Domestic Finance Nellie Liang testified before the House Financial Services Committee that more must be done to clearly and consistently regulate stablecoins. Stablecoins’ “exponential growth” heightens “the urgency of ensuring that an appropriate regulatory framework is in place,” Liang stressed, adding that the value of stablecoins has grown over the last two years from roughly $5 billion in 2020 to approximately $175 billion today.
Liang encouraged lawmakers to consider two additional issues as they create policy: (i) regulations for “intermediaries” in the digital asset markets, including traditional financial actors such as banks and investment companies, as well as stablecoin issuers, custodial wallet providers, and digital asset exchanges; and (ii) potential systemic risk that may result from the build-up of leverage against digital assets, which “can play a key role in catalyzing and accelerating financial instability.” Liang compared the second issue to the 2007-2008 financial crisis. To address this risk, Liang stated that the Biden Administration is examining the role that leverage plays in the digital asset market, as well as the implications that leverage may have on the rest of the financial system. She also reiterated concerns raised in the President’s Working Group (PWG) on Financial Markets’ report on stablecoins (covered by InfoBytes here), which emphasized that stablecoins may be more widely used in the future as a means of payment and could increase “risks to users and the broader system.” Liang stressed that “[w]hile Treasury and the PWG fully support efforts by state and federal agencies to use existing authorities in support of their statutory mandates, we do not believe existing authorities provide a sufficient basis for comprehensive and consistent oversight of stablecoins.”
CFPB publishes 2022 reportable HMDA data reference chart
On January 27, the CFPB published the Reportable HMDA Data: A Regulatory and Reporting Overview Reference Chart for HMDA Data Collected in 2022. The chart serves as a reference tool for data points that are required to be collected, recorded, and reported under Regulation C, as amended by HMDA rules, which were most recently issued in April 2020 (covered by InfoBytes here). The chart also provides relevant regulation and commentary sections and guidance for when to report “not applicable or exempt.” The Bureau notes that the “chart does not provide data fields or enumerations used in preparing the HMDA loan/application register (LAR).” For additional information on preparing the HMDA LAR, financial institutions should consult FFIEC guidance here.