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CFTC amends regulations to allow direct access for U.S. introducing brokers
On July 29, the CFTC approved its final rule allowing U.S. introducing brokers (IBs) direct access to registered foreign boards of trade (FBOTs) for the submission of customer orders. Specifically, the CFTC will amend its regulations to allow FBOTs registered with the commission to provide direct access to their electronic trading systems to U.S.-based IBs for customer order submissions. The amendments will also establish a procedure for FBOTs to request revocation of their registration and remove outdated references to “existing no-action relief.” These changes will be intended to improve competition, risk management, and liquidity in the market while maintaining protections for U.S. customers trading foreign futures and options. The amendments respond to market developments since the original regulations were established in 2011.
CFPB opinion finds TILA applies to certain contracts for deed
On August 13, the CFPB released an advisory opinion regarding home purchases under a “contract for deed” and how the purchases must comply with federal mortgage protections. The advisory opinion stated the contract for deed transactions, secured by the buyer’s dwelling, were subject to specific TILA and Regulation Z protections. The CFPB issued this opinion to reinforce its previous classification of certain contracts for deed as consumer credit under the CFPA. In some cases, investigational targets were challenging other expansive CFPB interpretations of what constituted consumer credit (covered by InfoBytes here).
The Bureau explained that a contract for deed, also known as a land contract or agreement for deed, is a type of home loan in which the buyer makes periodic payments to the seller who retains the deed until the loan is repaid. According to the CFPB, TILA’s definition of “credit” includes contracts for deed as they allow buyers to acquire property and defer payment, creating a debt obligation. Additionally, in contract for deed transactions the buyer’s obligation to repay the property’s value over time constitutes a debt under TILA. The Bureau also highlighted that such transactions are considered “residential mortgage loans” under TILA when secured by the buyer’s dwelling thereby entitling buyers to residential mortgage loan protections. The opinion underscored the importance of compliance with TILA’s disclosure requirements and other protections, such as good-faith assessments of consumers’ ability to repay loans.
The CFPB also relied on TILA’s legislative history to support its determination that sellers using contracts for deed must comply with applicable TILA and Regulation Z requirements, depending on the nature of the contract and whether the seller is considered a creditor under TILA.
The CFPB also released a supplementary report that provides further context and elaborates on its interpretation of the law regarding contracts for deed.
CFPB proposes $3M fine in settlement with credit repair software company and CEO
On August 8, the CFPB proposed a stipulated final judgment and order to the U.S. District Court for the Central District of California against a credit repair software company. If approved by the District Court, this order would settle the CFPB’s allegations that a software company and its CEO violated the Telemarketing Sales Rule (TSR), the CFPA and approve a fine $1 million for the company and $2 million for the CEO — as well as enjoin them from future actions. In a complaint previously covered by InfoBytes, the CFPB found the defendants provided credit repair tools and services to businesses who offered these credit repair services to consumers; the CFPB alleged the defendants provided substantial assistance to their customers and violated the TSR and charged advance fees for credit repair services. An advance fee includes any fees charged to a customer enrolled in a credit repair service, monthly fees, or fees charged following removal from a consumer’s credit report. Credit repair services remove derogatory information from a person’s credit history.
The Bureau now seeks to permanently restrain the defendants from assisting anyone knowingly using telemarketing for credit repair services and charging advance fees for those services. It also seeks to enjoin the defendants from violating the TSR related to offering credit repair services. Additionally, the CFPB asked the court for several screening updates to identify suspect companies preemptively, among other compliance duties. The Bureau and the defendants have agreed to this order, which now awaits approval by the District Court. The defendants neither admitted nor denied the allegations in the complaint.
CFPB: Credit card delinquencies can be credited to loosened lending standards
On August 6, the CFPB published a blog post regarding a rise in credit card delinquencies since the Covid-19 pandemic. The Bureau reported an increase in credit scores and a decrease in credit card delinquencies during the pandemic because of pandemic aid and forced savings, whereas 2022 and 2023 exhibited an increase in delinquencies. The Bureau pointed to “loosened” lending standards during the pandemic as a key reason why credit card delinquencies were about two percentage points higher than in 2019.
According to the blog post, credit cards originated in 2021, 2022 and 2023 became delinquent more rapidly than credit cards originated in previous years. Specifically, about 8 percent of credit cards in 2022 and 2023 became delinquent around two years after origination; in 2016, the same percentage of delinquency occurred after about four years. Furthermore, the CFPB referenced data from the Fed’s Senior Loan Officer Opinion Survey to support its claim that “new credit cards were opened for borrowers who were relatively riskier despite lenders saying they were tightening standards in 2020.” The post concluded that a small but “significant” portion of those riskier borrowers went delinquent soon after getting the card.
CFTC awards over $1M to whistleblower
On August 8, the CFTC announced a $1+ million award to a whistleblower whose original information and voluntary assistance led to a successful CFTC digital assets-related enforcement action. According to the redacted order, the information from the whistleblower, who was the first, prompted the investigation’s start and led to the charges. The first whistleblower’s information also led to the discovery of the misconduct at issue, although it was “somewhat limited.” Conversely, the commission recommended denying the award applications of two other whistleblowers because the information they provided did not lead to the charges. Additionally, the commission also recommended denying the first whistleblower’s application for a related action award with respect to another agency because the other action was not based on the whistleblower’s original information.
CFPB comments on Treasury RFI regarding artificial intelligence in finance
On August 13, the CFPB submitted a comment to the Treasury’s RFI regarding the uses, opportunities, and risks of artificial intelligence (AI) in the financial services sector (the Treasury’s RFI was covered by InfoBytes here). The CFPB focused on monitoring the market for consumer financial products and services to identify risks and ensure compliance with federal consumer financial protection laws. The CFPB noted the adoption of new technologies, including AI, in the consumer financial marketplace and underscored the importance of companies competing rather than “exploiting legal loopholes.” The Bureau also noted that firms must comply with consumer financial protection laws when adopting new technologies and that regulators will enforce existing rules to prevent consumer harm. The CFPB asserted that innovation was fostered by clear regulatory requirements that do not unfairly advantage incumbent businesses. Additionally, the CFPB highlighted its own efforts to ensure consistent treatment under the law for similar products and services, combat anticompetitive practices, and monitor the market. Finally, the CFPB said that while AI was a significant aspect of technological innovation in the financial sector, it would be crucial that innovation grows, and that growth occurs when firms have incentives to compete by lawfully offering the best products at the lowest prices.
Attorneys General criticize Treasury letter regarding de-banking
Recently, 20 state attorneys general (AGs) sent a letter addressed to U.S. Treasury Secretary Janet Yellen objecting to the Treasury’s recent letter which criticized state laws protecting individuals from de-banking. The AGs’ letter argued that these state laws, such as Florida’s HB 989, prohibited discrimination against consumers “based on factors that are not grounded in measurable risks” by financial service providers, and criticized the Treasury for allegedly misleading financial institutions about the implications of these laws. The AGs contend that the Treasury has incorporated political activism into financial regulation, citing past actions related to climate change and net-zero recommendations. The letter concluded by urging the Treasury to focus on its statutory duties rather than political agendas.
For its part, the Treasury sent a letter to House representatives regarding their concerns that the state laws, such as Florida’s HB 989, could conflict with federal AML and illicit financing laws. According to the July 18 letter, the Treasury shares concerns that the recent state laws could hinder financial institutions’ compliance with national security requirements. The letter states that such laws restrict the factors banks can consider when assessing risks, potentially undermining AML, countering the financing of terrorism, and sanctions compliance programs. The Treasury argues that such restrictions could prevent banks from effectively identifying and managing risks associated with illicit activities, thereby threatening national security. The letter calls for collaboration with states to address these issues while ensuring compliance with federal regulations.
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.