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Congressmembers write to tech firm on its non-disparagement clauses
On August 8, two congressmembers wrote to the CEO of a tech company about the company’s whistleblower and conflict of interest protections, questioning whether federal intervention would be necessary. Senator Elizabeth Warren (D-MA) and Representative Lori Trahan (D-MA) expressed concerns that artificial intelligence (AI) models could destabilize public safety and national security. Their letter followed an open letter from a group of employees who stated they had “lost confidence that [the company] will behave responsibly.” This open letter was released after it became public that the company included non-disparagement clauses in contracts, which would cause employees to lose all vested equity if they criticized the company. The employees acknowledged that the company made some reforms but argued that enforcement may still be needed. The congressmembers outlined five items for the CEO to address by August 22:
1. The company’s “Integrity [Phone] Line” meant for employees to raise concerns.
2. The company’s employee handbook and employees’ comments on it.
3. This letter to Senators regarding the company’s non-disparagement provisions.
4. Changes in the company’s safety processes following a product’s rushed release.
5. The company’s audit committee and new conflicts policy.
FTC proposes fines, bans based on alleged credit repair scheme
On August 5, the FTC announced proposed court orders that would require a defendant credit repair operation, its owners and associated companies (collectively, defendants) to pay more than $12 million to resolve allegations related to their credit repair products. As previously covered by InfoBytes, defendants allegedly targeted consumers with low credit scores, promising that the company’s products could remove all negative information from consumers’ credit reports and significantly increase their credit scores. Defendants also allegedly charged consumers upfront for the service. Additionally, the FTC claimed that the defendants sought to recruit consumers to participate in a “pyramid scheme” by representing that consumers could make tens of thousands of dollars recruiting others into the service. The operation allegedly violated the FTC Act, the Credit Repair Organizations Act, and the Telemarketing Sales Rule. The proposed settlements will result in over $12 million being turned over to the FTC for consumer refunds, and also impose conduct prohibitions on individual defendants, including industry bans.
Sen. Reed calls on Fed to reform credit risk transfers
On August 1, Senator Jack Reed (D-RI), a member of the Banking Committee, called on the Fed to create stricter regulations on credit risk transfer (CRT) transactions, which are transactions banks use to offload credit risk to private funds and investors. As outlined in the letter, the Senator noted that CRT transactions have increased in activity, citing deals worth about $17 billion this year, and that it is expected to grow by “30% to 40% each year for the next two years.” The Senator warned that such rapid CRT growth could engender a new financial crisis if these transactions continue without adequate oversight. The Senator emphasized that as CRTs increase in complexity and become leveraged through loan instruments, they pose more significant risks to the banking sector. High leverage in CRT transactions could lead to a situation where banks may face substantial losses if riskier loans within CRTs default simultaneously, questioning whether leveraged CRTs “truly transfer credit risk.”
The Senator’s letter to the Fed highlighted the need for greater transparency and regulation. He urged the Fed to require public reporting on banks’ use of CRTs, including details on the amount of risk transferred, the counterparties involved, and the credit quality of assets. The Senator warned that without a comprehensive understanding of the risks associated with CRTs, efforts to circumvent stronger capital and regulatory requirements could expose the financial system to new vulnerabilities reminiscent of those that contributed to the 2008 financial crisis. He called on the Fed to take specific actions:
1. Require public regulatory reporting of each bank's use of CRTs.
2. Establish quantitative limits on banks using CRTs to reduce capital requirements, treating CRT proceeds as unrestricted cash, and providing leverage to nonbanks for CRT investments.
3. Ensure that stress testing methodology considers the impact of CRTs on the banking system during economic downturns or financial crises.
4. Update the response to the letter dated November 30, 2023 with an assessment of the risks associated with CRTs based on supervisory experience.
DOJ announces Corporate Whistleblower Awards Pilot Program
Recently, the DOJ announced the launch of the Corporate Whistleblower Awards Pilot Program, starting on August 1. This initiative aims to address corporate crime by encouraging whistleblowers to submit original information about specific types of corporate misconduct not covered by existing federal programs. The program focuses on crimes involving financial institutions, foreign and domestic corruption, and healthcare fraud targeting private insurers. Whistleblowers may receive a portion of asset forfeitures resulting from successful prosecutions, with awards based on the "net proceeds forfeited." DOJ said the program complements existing voluntary self-disclosure programs and encourages internal reporting within companies. The DOJ plans to regularly evaluate the pilot program and may seek additional legislation to expand its scope.
FHA finalizes rule for modernization of engagement with mortgagors in default
On August 2, the FHA finalized a rule allowing mortgagees to communicate with borrowers in default remotely, rather than in-person which was previously required, citing positive feedback after waivers of the in-person requirement were issued during the Covid-19 pandemic. According to the FHA, in an effort to modernize its practice, the final rule allows for the use of electronic and other remote methods of communication to satisfy HUD’s requirement to meet with a borrower who is in default, while preserving consumer protections. However, the rule also eliminates certain exceptions to the meeting requirements, including in situations where the borrower did not reside in the mortgage property and where the mortgaged property was not within 200 miles of the mortgagee’s offices, servicers, or branches. The final rule is effective on January 1, 2025.
FHA also noted it will soon post a draft of the Mortgagee Letter that will implement the provisions of the rule on the Single Family Housing Drafting Table for stakeholder feedback.
FTC asks court to approve $43.5M settlement against for-profit school
On July 29, the FTC released its complaint and stipulated order against a for-profit educational institution located in Georgia for allegedly making false or unsubstantiated representations to convince consumers to enroll in its programs, in violation of Section 5(a) of the FTC Act, Section 521 of the GLBA, the Telemarketing Act, and the Telemarketing Sales Rule. The FTC sought relief, including a permanent injunction and monetary relief. According to the complaint, the educational institution allegedly “lured” consumers — specifically, servicemembers and their families — with false employment rates and deceptive job placement rates, misrepresented externships and the time-to-completion of its programs, and used deceptive incentivized reviews to promote its services. The FTC levied five counts against the defendant. Three counts were for violations of the FTC Act — one for misrepresenting its educational services, one for falsely claiming that its consumer reviews were conducted independently, and one for failing to disclose its material connections to consumers who submitted reviews and endorsed the educational institution. Another count alleged a violation of the GLBA for making false statements to obtain consumers’ customer information about a financial institution, and the final count alleged a violation of the Telemarking Sales Rule for making deceptive telemarketing calls. The FTC requested that the court enter a permanent injunction to prevent future violations of the law and award monetary relief, among other things. The FTC’s stipulated order asked the federal court to approve a settlement to pay $43.5 million, which included $15.7 million for consumer redress and a cancellation of $27.8 million for debts owed to the defendant by consumers and former students.
FHLBs urged to increase affordable housing, community economic development allocations
On July 30, senators from several states sent letters to multiple FHLBs urging them to require their respective banks to allocate at least 20 percent of their net income to affordable housing and community economic development grants through the Affordable Housing Program and creating new voluntary programs. Despite substantial government subsidies, the senators criticized FHLB for their inadequate response to a crisis in affordable housing, and claimed that the FHLBs have spent only a small fraction of their net income on affordable housing. The letters point out that while the FHLBs pledged to increase their contributions to 15 percent, they have yet to fulfill this promise and should aim for at least 20 percent. The senators argue that FHLBs have the financial capacity to contribute more, citing historical precedents and the current high levels of retained earnings.
The following day, Deputy Secretary of the Treasury Wally Adeyemo met with leaders of the 11 FHLBs and FHFA Director Sandra Thompson to discuss enhancing support for affordable housing development. Adeyemo urged the FHLBs to allocate at least 20 percent of their net income to affordable housing and to use part of their unrestricted retained earnings to create a capital pool aimed at reducing the cost of new housing production nationwide. The Treasury noted that this meeting is part of the Biden administration's broader effort to lower costs for Americans and follows months of Treasury engagement with FHLB leadership.
Congress members: 1033 Rule could hinder innovation of fraud prevention tools
On July 31, a bipartisan group of Congress members sent a letter to CFPB Director Rohit Chopra raising concerns regarding the Bureau’s proposed 1033 Rule, which relates to consumer financial data privacy (covered by InfoBytes here). While the Congress members supported the overall goals of the proposed rule, including promoting data privacy and enabling consumers to control their own financial information, they expressed concerns that the inflexible restrictions on the secondary use of data may hinder innovation and fraud prevention efforts that could benefit consumers and small businesses. Specifically, they argued that the proposed limitations on data use beyond the consumer’s “requested product or service” could impact the development of fraud detection products and other new financial products and services, particularly those benefiting low-income consumers and improving access to credit. The letter urges the CFPB to consider allowing some secondary uses of data, provided consumer privacy is maintained through practices like data minimization and deidentification.
GOP Senators express concern on FDIC proposed rules regarding corporate governance and risk management
On July 31, Republican members of the U.S. Senate penned a letter to the Chairman of the FDIC, Martin Gruenberg, to convince the Chairman that an FDIC proposed rule regarding soundness standards for corporate governance and risk management may “hinder, not improve, safety and soundness in the U.S. financial system.” As previously covered by InfoBytes, the FDIC last sought comment on its NPRM titled “Guidelines Establishing Standards for Corporate Governance and Risk Management for Covered Institutions with Total Consolidated Assets of $10 Billion or More” in October 2023, which, among other things, would expand the responsibilities of the board of directors for financial institutions.
The Senators expressed three principal concerns about the proposed rules: first, that the proposed rules would impose new responsibilities on a financial institution’s board of directors that may be better suited to senior management, effectively “blur[ring] the lines between the responsibilities of senior management and responsibilities of the [b]oard,” particularly in respect of risk management processes; second, consistent with the criticisms by state supervisors, that some of the rules may conflict with other state and federal regulatory requirements, such as the preference that “risk management functions reside with the firm’s chief risk officer”; and third, the proposed rules would impose “burdensome” corporate governance standards to the smallest banks without any “empirical evidence” that any “discernible benefit” would be obtained. To confirm their findings, the Senators argued that the OCC removed requirements that were found to be analogous from a prior rulemaking — yet the FDIC has not.
The GOP Senators requested answers to several questions no later than August 16, such as whether the FDIC plans to amend or withdraw the proposed rules, and what level of engagement the FDIC had with state-based regulators or stakeholders in developing the proposal. The Senators also directed a question to the OCC’s Acting Comptroller regarding whether the OCC still “believes that board or risk committee approval of material policies under the Framework would be burdensome, and that these policies should be approved by management instead.” The Senators requested the FDIC withdraw the NPRM entirely.
NIST, Department of Commerce announce new guidance to help AI developers
On July 26, the U.S. Department of Commerce announced new guidance and tools to enhance the safety, security, and trustworthiness of AI systems pursuant to President Biden’s Executive Order on AI (covered by InfoBytes here). NIST issued three final guidance documents, which include two documents to help manage the risks of generative AI and a plan for U.S. stakeholders to work globally on AI standards, as well as a draft guidance document from the U.S. AI Safety Institute to help AI developers mitigate risks associated with generative AI and dual-use foundation models. Additionally, NIST introduced Dioptra, a software package designed to test AI systems against adversarial attacks.
The newly released draft guidance from the U.S. AI Safety Institute focuses on managing the risks for misuse of dual-use foundation models, offering seven approaches to prevent harm. The Dioptra software helps AI developers and users evaluate how adversarial attacks can degrade AI system performance. The three finalized documents include (i) AI RMF Generative AI Profile, which identifies risks and proposes actions for managing generative AI; (ii) Secure Software Development Practices for Generative AI and Dual-Use Foundation Models, which addresses risks related to training AI systems; and (iii) A Plan for Global Engagement on AI Standards, which aims to foster international cooperation on AI standards.
These initiatives are part of a broader effort to ensure AI technologies are developed and deployed responsibly and to support innovation while mitigating potential risks.