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FSB reports on nonbank resilience efforts
On November 1, the Financial Stability Board (FSB) released a report providing an update on its efforts to enhance the resilience of nonbank financial intermediation. According to FSB’s report, Enhancing the Resilience of Non-Bank Financial Intermediation, the non-bank financial intermediation (NBFI) sector has become more diverse and grown significantly to nearly half of global financial assets, compared to 42 percent in 2008. The report, among other things, provided an overview of the NBFI ecosystem and a framework for analyzing the availability of liquidity and the effective intermediation under stressed market conditions. The report noted that FSB’s “main focus of work to date” is intended “to assess and address vulnerabilities in specific areas that may have contributed to the build-up of liquidity imbalances and their amplification,” which includes, among other things: (i) enhancing money market fund resilience through policy work; (ii) assessing liquidity risk and its management in open-ended funds; (iii) examining the structure and drivers of liquidity during stress in government and corporate bond markets; (iv) examining “the frameworks and dynamics of margin calls in centrally cleared and non-centrally cleared derivatives and securities markets, and the liquidity management preparedness of market participants to meet margin calls”; and (v) assessing the fragilities in USD cross-border funding and their vulnerabilities in emerging market economies interactions. Based on these findings, the report noted that FSB’s future work will pursue a systemic approach to NBFI, which involves expanding the understanding of systemic risks in NBFI and ensuring that the current policy toolkit is adequate and effective from a system-wide perspective.
Biden Administration releases stablecoin recommendations
On November 1, the U.S. Treasury Department announced that the President’s Working Group on Financial Markets (PWG), with the FDIC and the OCC (collectively, “agencies”), released a report on stablecoins, which are a kind of digital asset intended to maintain a stable value relative to the U.S. dollar. The report noted that stablecoins may be more widely used in the future as a means of payment, which Secretary of the Treasury Janet L. Yellen said could increase “risks to users and the broader system.” Additionally, Secretary Yellen considers current stablecoin oversight to be “inconsistent and fragmented.” Among other things, the report discussed gaps in regulatory authority to reduce these risks. The report recommended that Congress promptly enact legislation to address the risks of payment stablecoins and ensure that payment stablecoins and payment stablecoin arrangements are subject to consistent and comprehensive federal oversight and to “increase transparency into key aspects of stablecoin arrangements and to ensure that stablecoins function in both normal times and in stressed market conditions.” According to the announcement, “[s]uch legislation would complement existing authorities with respect to market integrity, investor protection, and illicit finance, and would address key concerns,” including: (i) risks to stablecoin users and stablecoin runs; (ii) payment system risk; and (iii) systemic risk and concentration of economic power.
While Congress examines legislation on stablecoin, the report recommended that the Financial Stability Oversight Council consider steps for addressing risks, such as “the designation of certain activities conducted within stablecoin arrangements as, or as likely to become, systemically important payment, clearing, and settlement (PCS) activities,” which would be subject to an examination and enforcement framework. The report also recommended that stablecoin issuers “comply with activities restrictions that limit affiliation with commercial entities,” to maintain the separation of banking and commerce. Additionally, the report discussed that, in addition to existing AML/CFT regulations, stablecoin arrangements and activities may implicate the jurisdiction of the SEC and/or CFTC. Therefore, to prevent misuse of stablecoins and other digital assets, the announcement noted that Treasury “will continue leading efforts at the Financial Action Task Force (FATF) to encourage countries to implement international AML/CFT standards and pursue more resources to support supervision of domestic AML/CFT regulations.”
The same day, Treasury released a fact sheet on the PWG report, which clarified, among other things, the purpose of the report, risks posed by stablecoins, and the agencies’ recommendations. In a statement released by OCC acting Comptroller of the Currency Michael J. Hsu, he emphasized his support for the recommendations highlighted in the report pointing out that, “[s]tablecoins need federal prudential supervision to grow and evolve safely.” In a statement released by CFPB Director Rohit Chopra, he noted that though the CFPB was not a member of the PWG, the Bureau “will be taking several steps related to this market,” such as the CFPB’s orders to six large U.S. technology companies seeking information and data on their payment system business practices (covered by InfoBytes here), among other things.
FDIC releases September enforcement actions
On October 29, the FDIC released a list of administrative enforcement actions taken against banks and individuals in September. During the month, the FDIC made public six orders consisting of “one Consent Order, two terminations of Consent Orders, one Order to Pay Civil Money Penalty, one Order Terminating Decision and Order to Cease and Desist, and one Order of Termination of Insurance.” Among the orders is an order to pay a civil money penalty imposed against a Nebraska-based bank related to alleged violations of the Flood Disaster Protection Act. Among other things, the FDIC claimed that the bank “[m]ade, increased, extended, or renewed loans secured by a building or mobile home located or to be located in a special flood hazard area without requiring that the collateral be covered by flood insurance,” and also allegedly “[f]ailed to comply with proper procedures for force-placing flood insurance in instances where the collateral was not covered by flood insurance at some time during the term of the loan.” The order requires the payment of a $24,000 civil money penalty.
The FDIC also issued a consent order to a Utah-based bank, which requires the bank to take measures to correct current alleged violations (and prevent future violations) of TILA, RESPA, E-Sign Act, ECOA, CRA, and TISA, as well as the statutes’ implementing regulations. The bank neither admitted nor denied the alleged violations but agreed to, among other things, develop a sound risk-based compliance program and implement an effective training program to ensure compliance.
FTC issues warning regarding false money-making claims
On October 26, the FTC announced that it is putting businesses on notice that pitch money-making ventures that deceive or mislead consumers regarding potential earnings. According to the announcement, the FTC utilized its Penalty Offense Authority to remind businesses of the law and deter them from breaking it by sending a Notice of Penalty Offenses to over 1,100 companies. The notice puts these businesses on notice that they may incur significant civil penalties if they or their representatives make claims regarding money-making opportunities that run counter to FTC administrative cases. The Notice of Penalty Offenses permits the FTC to seek civil penalties against a company that engages in conduct it knows is unlawful and has been determined to be unlawful in an FTC administrative order, other than a consent order. The FTC added that the Notice highlighted a number of practices that the FTC determined to be unfair or deceptive in prior administrative actions. In general, the cases determined that it was unlawful to make false, misleading, or deceptive representations regarding the profits or earnings that may be anticipated by a participant in a money-making opportunity, including representations that participants will make a profit. The Notice also outlined other practices that the FTC has decided to be unfair or deceptive, such as falsely telling consumers they do not need experience to earn income or that they must act immediately to participate. Companies receiving the Notice also received a copy of the recently issued Notice of Penalty Offenses concerning endorsements and testimonials, as companies frequently use testimonials to advertise money-making opportunities. The FTC also pointed out that “[a] recipient’s presence on this list does not in any way suggest that it has engaged in deceptive or unfair conduct.”
FTC increases dark patterns enforcement
On October 28, the FTC announced a new enforcement policy statement warning companies against using illegal dark patterns that could “trick or trap consumers into subscription services” which are sometimes used by sellers in automatic renewal subscriptions, continuity plans, free-to-pay or free-to-pay conversions, and pre-notification plans. According to the FTC, the agency is enhancing its enforcement due to increasing complaints about the financial harms caused by deceptive sign-up tactics, including unauthorized charges or continuous billing that is impossible to cancel. The policy statement, among other things, “puts companies on notice that they will face legal action if their sign-up process fails to provide clear, up-front information, obtain consumers’ informed consent, and make cancellation easy.” According to the enforcement policy statement, businesses are required to follow three requirements, or be subject to law enforcement action: (i) disclose clearly and conspicuously all material terms of the product or service; (ii) receive the consumer’s express informed consent prior to charging them for a product or service; and (iii) provide easy and simple cancellation to the consumer.
CFPB releases report on consumer credit disputes
On November 2, the CFPB released a report on credit report disputes that outlined the demographic characteristics of disputers and the outcomes for accounts with dispute flags. The report highlighted that consumers in majority Black and Hispanic neighborhoods, as well as younger consumers and those with low credit scores, are far more likely to have disputes on their credit reports. The post—part of a series documenting trends in consumer credit outcomes during the Covid-19 pandemic (the first covered by InfoBytes here)—used data on auto loan, student loan, and credit card accounts opened between 2012 and 2019. Among other things, the report found that majority Black and Hispanic neighborhoods continue to face significant challenges with credit records; for example, in almost every credit category outlined in the report, consumers residing in majority Black areas were more than twice as likely to have disputes on their credit reports compared to consumers residing in majority white areas. For auto loans, consumers in majority Black areas were more than three times as likely to have disputes appear on their credit reports compared to majority white areas. The report also noted that approximately 40 percent of student loans with dispute flags are deleted within four years of the dispute, although this represents less than 0.2 percent of all student loans opened between 2012 and 2019.
According to Director Rohit Chopra, “[e]rror-ridden credit reports are far too prevalent and may be undermining an equitable recovery.” The report noted that “an important subject for future research is whether these patterns are driven by differences across groups and credit types in the type or frequency of the underlying issues that result in a dispute flag, or whether they are driven by furnishers’ practices for reporting dispute flags or responding to disputes.” Additionally, the Bureau said in its press release that it “is committed to further researching the root causes of credit information disputes, as well as investigating the reasons for the demographic disparities found in the report.” As previously covered by InfoBytes, the CFPB, along with the FTC and the North Carolina Department of Justice, filed an amicus brief in support of the consumer plaintiffs in Henderson v. The Source for Public Data, L.P., arguing that a public records website, its founder, and two affiliated entities cannot use Section 230 liability protections to shield themselves from credit reporting violations.
Chopra testifies on CFPB direction
On October 27, newly sworn in CFPB Director Rohit Chopra appeared for the first time before the House Financial Services Committee to offer some of the first insights into his priorities at the Bureau. Chopra’s opening remarks focused on concerns regarding “Big Tech” and its control over the flow of money in the economy (these comments followed the issuance of information requests to six technology companies, covered by InfoBytes here). Chopra also focused on a need to ensure robust competition in financial markets and listen to local financial institutions and nascent players about obstacles they face when seeking to challenge dominant incumbents. Chopra also stressed the importance of holding “repeat offenders” accountable, highlighted an intent to coordinate efforts with federal and state regulators, and indicated a preference for scrutinizing larger market participants over smaller entities. He noted, however, potential leniency for companies that self-identify their own issues and violations. Additional highlights of the hearing include the following:
Enforcement. Chopra noted that “markets work well when rules are easy to follow and easy to enforce.” He also expressed his view that the CFPB should focus its resources on larger industry participants and “repeat offenders” rather than “strong-arming” small businesses into settlements to create law. Chopra also expressed a preference for setting regulatory guidelines through enforcement, indicating that “markets work well when rules are easy to follow, and easy to enforce.”
Section 1033 of Dodd-Frank. With respect to implementing this set of requirements, which deals with consumers’ rights to access information about their financial accounts, Chopra indicated a desire to “unlock more competition,” but warned that there also needs to be assurance that “banks and nonbanks are operating under the same set of rules” and that there is “not regulatory arbitrage.” While Chopra did not specify a timeline for promulgating the final rule implementing this section, he noted that the process is underway and that the Bureau is consulting with various experts. (Issuance of the ANPR was covered by InfoBytes here.)
Abusive acts and practices. Chopra said that he agreed with former acting Director Dave Uejio’s decision to rescind a policy statement on “abusive” conduct issued by former Director Kathy Kraninger. Chopra stated he has “huge aspirations to create durable jurisprudence” regarding the definition of “abusive” in Dodd-Frank. He noted that “it could be a mix” of judicial decisions and “how the CFPB may use rules and guidance to help articulate those standards.”
Cryptocurrency and stablecoins. Chopra expressed concerns about the potential for big payment platforms to process stablecoins—cryptocurrencies pegged to stable commodities or currencies like the dollar. However, Chopra clarified that it is not his intention to use his regulatory authority to ban or limit the use of cryptocurrency or blockchain technology. Regarding the CFPB’s role in cryptocurrency, Chopra claimed that depending on the laws implicated, there is a “fact-based determination as to any sort of law that cryptocurrencies or digital currencies have to comply with.” He further described that this is “something that the CFPB is working with the other regulators on,” and emphasized that “where digital payments [are] involved, the Electronic Fund Transfer Act is a key law with key consumer protections.”
QM Rule. When asked about the postponement of the mandatory compliance date of the General Qualified Mortgage final rule to October 2022 (covered by InfoBytes here), Chopra said he is eager “to hear of places where it needs to be changed” but emphasized that the postponement was before his time and that the rule has gone into effect. He also stated that “QM is a key part of the mortgage market and the mortgage regulatory guidelines.” Therefore, he wants to ensure that the CFPB is always looking at it to make sure the objectives that Congress laid forward in Dodd-Frank are being carried out. When asked about his support of the proposed change in the QM rule, Chopra said he did not know but wants “to make sure he understands the full basis of it.”
Chopra echoed such sentiments in his October 28 testimony before the Senate Banking Committee.
FTC updates Safeguards Rule for financial institutions
On October 27, the FTC announced a final rule updating the Safeguards Rule to strengthen data security protections for consumer financial information following widespread data breaches and cyberattacks. The final rule follows a 2019 notice of proposed rulemaking (covered by InfoBytes here) and makes the following modifications to the existing rule:
- Adds specific criteria financial institutions must undertake when conducting a risk assessment and implementing an information security program, including provisions related to access controls, data inventory and classification, authentication, encryption, disposal procedures, and incident response, among others. The final rule also adds measures to ensure employee training and service provider oversight are effective.
- Requires financial institutions to designate a single qualified individual to oversee the information security program. Periodic reports must also be made to an institution’s board of directors or governing bodies.
- Provides an exemption from requirements related to written risk assessments, incident response plans, and annual reporting to the board of directors, for financial institutions that collect information on fewer than 5,000 consumers.
- Expands the definition of “financial institution” to include “entities engaged in activities that the Federal Reserve Board determines to be incidental to financial activities.” Included in the definition are “finders” (i.e. companies that bring together buyers and sellers of products or services that fall within the scope of the Safeguards Rule).
- Adds several definitions and related examples into the Safeguards Rule itself instead of incorporating them through a reference from a related FTC rule.
Provisions of the final rule under Section 314.5 are effective one year after the date of publication in the Federal Register. The remainder of the provisions are effective 30 days following publication.
Additionally, the FTC issued a supplemental notice of proposed rulemaking seeking comments on a proposal to further amend the Safeguards Rule to require financial institutions to report security events to the Commission where a determination has been made that consumer information has been misused, or is reasonably likely to be misused, in an event affecting at least 1,000 consumers. Comments are due 60 days after publication in the Federal Register.
The FTC also announced a final rule adopting largely technical changes to its authority under the Privacy of Consumer Financial Information Rule (Privacy Rule) under the Gramm-Leach-Bliley Act, which requires financial institutions to inform consumers about their information-sharing practices and allow consumers the ability to opt out of having their information shared with certain third parties. The Privacy Rule is amended to revise the rule’s scope, modify the definitions of “financial institution” and “federal functional regulator,” and update requirements pertaining to annual customer privacy notices. The FTC noted that these changes align the Privacy Rule with changes made under Dodd-Frank and the FAST Act.
CFPB announces new chiefs for supervision and enforcement
On October 29, the CFPB announced two significant leadership changes within the Bureau. Lorelei Salas will serve as the Assistant Director for Supervision Policy as well as the Acting Assistant Director for Supervision Examinations. Salas’ experience prior to joining the Bureau includes serving as Commissioner of the New York City Department of Consumer and Worker Protection where she focused on pursuing corporations that employed unlawful, predatory practices targeting low-income and immigrant consumers. Her background also includes expertise in immigration, housing, and employment, as well as consumer and worker protection laws.
Eric Halperin will serve as Assistant Director for the Office of Enforcement. Halperin previously served as executive director at a legal defense nonprofit group and served in the Obama administration as the acting Deputy Assistant Attorney General, overseeing the civil rights division’s fair housing, fair lending and employment non-discrimination enforcement program.
OCC to focus supervisory efforts on non-SOFR rates after LIBOR ends
On October 26, acting Comptroller of the Currency Michael J. Hsu warned banks not to be complacent when transitioning away from LIBOR. Hsu reiterated that federal regulators will not allow new contracts that use LIBOR as a reference rate after December 31. Hsu stressed that banks must look outside of activities that directly involve LIBOR exposure, such as lending, derivatives activities, and market-making capacities, to screen for LIBOR exposure in other contexts, such as LIBOR-based loan participation interests or as part of an instrument for a bank’s investment or liquidity portfolio paying LIBOR-based income or otherwise reflecting LIBOR exposures. As previously covered by InfoBytes, the CFPB, Federal Reserve Board, FDIC, NCUA, and OCC recently released a joint statement providing supervisory considerations for institutions when choosing an alternative reference rate. Hsu addressed the use of these alternative reference rates and reminded banks that they are expected to be able to demonstrate that their replacement rate is robust and appropriately tailored to their risk profile. He further commented that because the Secured Overnight Financing Rate (SOFR) “provides a robust rate suitable for use in most products, with underlying transaction volumes that are unmatched by other alternatives,” the OCC will initially focus its supervisory efforts on non-SOFR rates.