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On October 25, the CFPB released its biennial report on the credit card market pursuant to the Credit Card Act. The report found that credit card companies charged consumers more than $105 billion in interest and $25 billion in fees, with the bulk of the fees being late fees. According to the 175-page report, consumers are rolling balances month to month, and more consumers are falling into debt over time, while credit card companies’ profit margins remain high. The CFPB highlighted additional trends, including how: (i) the profits of major credit card companies have increased, surpassing pre-pandemic levels, which the CFPB suggests could indicate a lack of competition in the industry; (ii) annual Percentage Rates (APRs) for credit cards continue to rise; (iii) many cardholders with subprime credit scores paid a significant percentage of their average balance in interest and fees; (iv) late fees charged to cardholders have risen to pre-pandemic levels, and more consumers are delinquent; (v) credit card debt reached a record $1 trillion by the end of 2022, and annual spending on credit cards increased, returning to pre-pandemic levels; (vi) consumers who roll debt from month to month are paying a significant portion of interest and fees but earning only a small percentage of rewards. The report also notes a rise in digital communication—around 80 percent of cardholders, especially those under 65, use mobile apps for card management, which exhibits a shift in how consumers and financial institutions interact in the credit card industry.
On October 25, the Fed, OCC, and FDIC issued final interagency guidance titled Principles for Climate-Related Financial Risk Management for Large Financial Institutions. The principles are intended to help the largest institutions supervised by the Federal banking agencies, i.e., those with over $100 billion in assets, manage climate-related risk.
These climate-related risks include both physical and transition risks. Physical risks include “hurricanes, wildfires, floods, and heatwaves, and chronic shifts in climate, etc.,” while transition risks “refer to stresses to institutions or sectors arising from the shifts in policy, consumer and business sentiment, or technologies associated with the changes… [towards] a lower carbon economy.”
These climate-related risks affect the values of assets of liabilities and damage property, leading to a loss of income, defaults, and liquidity risks. The agencies created these principles to direct board of directors and managers make sound business practices with making progress toward mitigating climate-related financial risks.
CFPB Director Rohit Chopra, a member of the FDIC Board of Directors, shared remarks on the final principles, noting that climate change poses a dual challenge to protect infrastructure and fortify the financial system. He also stressed the need for regulatory guidance to convey clear and practical rules. FDIC Chairman Gruenberg also shared a statement on the final principles, highlighting the FDIC’s focus on the financial aspects of climate change, clarifying its role in managing risks rather than setting climate policy and encouraging cooperation among federal banking agencies to ensure consistency in addressing climate-related financial risks.
On October 24, FDIC announced a proposed rule to implement the Fair Hiring in Banking Act (FHB Act). The proposed rule amends 2 C.F.R. part 303, subpart L, and part 308, subpart M. The Federal Deposit Insurance Act (FDI Act) prohibits a person from participating in the affairs of an FDIC-insured institution if he or she has been convicted of an offense involving dishonesty, breach of trust, or money laundering, or has entered a pretrial diversion or similar program in connection with a prosecution for such an offense, without the prior written consent of the FDIC, among other provisions. The proposed rule would incorporate several statutory changes to the FDI Act, such as:
- Excluding certain offenses from the scope of the FHB Act based on the amount of time that has passed since the offense occurred or since the individual was released from incarceration;
- Clarifying that the FHB Act does not apply to the following offenses, if one year or more has passed since the applicable conviction or program entry: using fake identification, shoplifting, trespassing, fare evasion, and driving with an expired license or tag;
- Excluding certain offenses from the definition of “criminal offenses involving dishonesty,” including “an offense involving the possession of controlled substances”;
- Excluding certain convictions from the scope of the FHB Act that have been expunged, sealed, or dismissed. While existing FDIC regulations already exclude most of those offenses, the proposed rule would modestly broaden the statutory language concerning such offenses to harmonize the FDIC’s current regulations concerning expunged and sealed records with the statutory language; and
- Prescribing standards for the FDIC’s review of applications submitted under the FHB Act.
The proposed rule also provides interpretive language that addresses, among other topics, when an offense “occurs” under the FHB Act, whether otherwise-covered offenses that occurred in foreign jurisdictions are covered by the FDI Act, and offenses that involve controlled substances.
Comments will be accepted for 60 days after publication in the Federal Register.
On October 20, the Fed issued a joint press release with the FDIC and the OCC announcing the extension of the comment period on proposed rules to expand large bank capital requirements. Earlier this year, the agencies announced the proposed rule which would implement the final components of the Basel III Agreement. The components would revise capital requirements for large banking organizations, among other things. (Covered by InfoBytes here.) Adding an additional six weeks (from the original 120-day comment period set to expire on November 30), the new comment period deadline is by January 16, 2024.
On October 19, FinCEN announced a notice of proposed rulemaking (NPRM) that identifies international Convertible Virtual Currency mixing (CVC) as a primary money laundering concern. In its NPRM, FinCEN highlighted the prevalence of illicit actors, including Hamas and Palestinian Islamic Jihad, who use CVC mixing to fund their illegal activity, and how increased transparency can combat their efforts. According to FinCEN, CVC mixing is used to conceal the source, destination, or amount involved in transactions. The proposed rule would require covered financial institutions to collect records of, and report suspicious CVC mixing transactions, as defined, to FinCEN within 30 days of initial detection. The proposed rule would not require covered financial institutions to source additional report information from the transactional counterparty, adding that the information required for the report is similar to information already collected by financial institutions. FinCEN also noted this is its first ever use of its authority under Section 311 of the USA PATRIOT Act.
FinCEN invites comments for the proposed rule, including responses to questions addressing the impact of the proposed rule, definitions, reporting, and recordkeeping. Comments must be received by January 22, 2024, and they can be submitted via instructions found in the announcement.
On October 20, FCC Chairwoman Rosenworcel announced a proposed inquiry for how artificial intelligence could impact unwanted robocalls and texts. If adopted during the Commission’s forthcoming public open meeting on November 15, 2023, this proposal will initiate an examination of how the use of AI technologies could impact regulation under the Telephone Consumer Protection Act (TCPA). Specifically, the inquiry would seek public comment on (i) how AI technology fits into the commission’s duties outlined in the TCPA; (ii) the circumstances under which future AI technology would fall under TCPA; (iii) the influence of AI on existing regulatory structures and the development of future policies; (iv) whether the commission should explore methods of verifying the legitimacy of AI-generated voice or text content from reliable sources; and (v) next steps.
CFPB report reveals high credit card costs, growing debt, and digital shifts led to consumers’ revolving debts in 2022
On October 25, the CFPB released a report on credit card interest rates and fees in 2022 highlighting the impact of the cost to consumers. The report found that credit card companies charged consumers more than $105 billion in interest and $25 billion in fees, with the bulk of the fees being late fees.
According to the 175-page report, consumers are rolling balances month-to-month, falling into debt, while credit card companies’ profit margins remain high. The CFPB highlighted additional trends, including how (i) the profits of major credit card companies have increased, surpassing pre-pandemic levels, which could indicate a lack of competition in the industry, with a few dominant players; (ii) Annual Percentage Rates (APRs) for credit cards continue to rise above the cost of offering credit (meaning cardholders are paying more in interest); (iii) many cardholders with subprime credit scores paid a significant percentage of their average balance in interest and fees; (iv) late fees charged to cardholders have risen to pre-pandemic levels, and more consumers are delinquent; (v) credit card debt reached a record $1 trillion by the end of 2022, and annual spending on credit cards increased, returning to pre-pandemic levels; and (vi) consumers who roll debt from month to month are paying a significant portion of interest and fees but earning only a small percentage of rewards. The report also notes a rise in digital communication—around 80 percent of cardholders, especially those under 65, use mobile apps for card management, which exhibits a shift in how consumers and financial institutions interact in the credit card industry.
The FTC and the State of Wisconsin announced that they filed a complaint in the District Court for the Western District of Wisconsin against an auto dealer group, and its current and former owners, and general manager, alleging that the defendants deceived consumers by tacking hundreds or even thousands of dollars in illegal junk fees onto car prices and discriminated against American Indian customers by charging them higher financing costs and fees relative to similarly situated non-Latino whites.
The complaint also notes the disparity only increased since a change of ownership in 2019. Specifically, the complaint alleges that the defendants regularly charged many of their customers junk fees for “add-on” products or services without their consent, which resulted in additional fees and interest on the customers’ loans. Further, the defendants allegedly discriminated against American Indian customers in the cost of financing by adding more “markup” to their interest rates. This additional markup cost American Indian customers, on average, $401 more compared to non-Latino white customers.
The complaint resulted in two proposed settlements. The proposed settlement with the auto dealer, its current owners, and the general manager requires the company to stop deceiving consumers about whether add-ons are required for a purchase and obtain consumers’ express informed consent before charging them for add-ons. The settlement will also the require the defendants to establish a comprehensive fair lending program that, among other components, will allow consumers to seek outside financing for a purchase and cap the additional interest markup the auto dealer can charge consumers. The current owners and general manager will also be required to pay $1 million to be used to refund affected consumers.
Separately, the former owners agreed to pay $100,000 to be used to refund affected consumers.
On October 24, Assistant Secretary for Financial Institutions at the U.S. Department of Treasury Graham Steele delivered remarks at the Gov2Gov Summit to discuss the benefits and risks of artificial intelligence (AI) and machine learning (ML) in the financial services sector.
First, Assistant Secretary Steele discussed the role of cloud computing and cloud service providers (CSPs) in supporting financial institutions’ work, following the Department’s release of a February report which discussed the financial sector’s adoption of cloud services. Assistant Secretary Steele indicated, among other things, that while cloud services can offer more scalable and flexible solutions for financial services institutions to store and manage their data, financial institutions have struggled to understand clearly and implement the cloud services they are purchasing from large, market-dominating CSPs. Assistant Secretary Steele stated that the Department is working toward a model that will allow financial institutions to “unbundle” cloud service packages so that financial institutions can provide more individualized services.
Next, Assistant Secretary Steele discussed the potential advantages and disadvantages of the use of AI among financial institutions, which use AI for tasks including credit underwriting, fraud prevention, and document review. Among the benefits AI offers to financial institutions are reduced costs, improved performance, and the identification of complex relationships. The risks of AI, according to Assistant Secretary Steele, fall into three categories: (i) the design of AI, which can raise discrimination concerns, such as in consumer lending; (ii) how humans implement AI, including the possible overreliance on AI to render financial decisions; and (iii) operational and cyber risks, including the dangers around data quality and security, as AI consumes significant volumes of data.
Last, Assistant Secretary Steele discussed how policymakers are addressing privacy and discrimination concerns with AI. He mentioned the White House’s Blueprint for an AI Bill of Rights, which would require, among other things, regular assessment of algorithms for certain disparities and biases. Assistant Secretary Steele also cited regulatory actions that can address the risks of AI, including a CFPB rulemaking under the FCRA and Federal banking agency guidance on third party risk management.
On October 24, the Fed, FDIC, and OCC issued an interagency announcement regarding the modernization of their rules under the Community Reinvestment Act (CRA), a law enacted in 1977 to encourage banks to help meet the credit needs of their communities, especially low- and moderate-income (LMI) neighborhoods, in a safe and sound manner. The new rule overhauls the existing regulatory scheme that was first implemented in the mid-1990s.
For banks with assets of at least $2 billion (Large Banks), the final rule adds a new category of assessment area to the existing facility based assessment area (FBAA). Large Banks that do more than 20 percent of their CRA-related lending outside their FBAAs will have that lending evaluated in retail lending assessment areas, i.e., MSAs or states where it originated at least 150 closed-end home mortgage loans or 400 small business loans in both of the previous two years. All Large Banks will be subject to two new lending and two new community development tests, with lending and community development activities each counting for half a bank’s overall CRA rating. Banks with assets between $600 million and $2 billion will be subject to a new lending test. Large Banks with assets greater than $10 billion will also have special reporting requirements.
Additionally, the rule (i) implements a standardized scoring system for performance ratings; (ii) revises community development definitions and creates a list of community development activities eligible for CRA consideration, regardless of location; (iii) permits regulators to evaluate “impact and responsiveness factors” of community development activities; (iii) continues to make strategic plans available as an alternative option for evaluation; (iv) revises the definition of limited purpose bank so that it includes both existing limited purpose and wholesale banks and subjects those banks to a new community development financing test; and (v) considers online banking in the bank’s evaluations.
Most of the rule’s requirements will be effective January 1, 2026. The remaining requirements, including the data reporting requirements, will apply on January 1, 2027.