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Treasury requests information on AI in financial services sector
On June 6, the Department of the Treasury released a request for information (RFI) to collect from financial institutions, consumers, advocates, academics, and other stakeholders’ data on the uses, opportunities and risks presented by artificial intelligence (AI). The Treasury’s release stated that the Department will be interested in gaining greater insight into how AI would be used in risk management, capital markets, internal operations, customer service, regulatory compliance, and marketing. The RFI posed 19 questions related to general topics such as types of models, AI use, and barriers to entry, as well as questions focused on potential opportunities and risks associated with AI.
The Secretary of the Treasury, Janet Yellen, discussed the RFI in her remarks at the Financial Stability Oversight Council (FSOC) Conference on AI and Financial Stability. Yellen noted that the Treasury would be convening a roundtable on AI and insurance and would support FSOC’s monitoring and analysis of AI’s impact on financial stability.
Colorado tightens regulations related to debt settlement and collection practices
On June 6, the Governor of Colorado signed into law HB 1380 (the “Act”) which revised the state’s consumer protection laws related to debt collection, credit services organizations, and debt management service providers. Key provisions of the law included:
- Debt collectors must now include their name and the original creditor’s name in legal actions against consumers and possess full authority to settle the debt.
- Credit services organizations will be required to provide the state administrator with essential business information (including name and address) and pay an annual notification fee.
- The state administrator can issue cease-and-desist orders and impose penalties of up to $1,500 per violation of the Code.
- Debt-management service providers cannot provide their services to consumers unless they have prepared a debt management plan for the individual that, among other things, lists all the creditors that the service provider expects to participate, and not to participate, in the plan, as well as those that it expects to participate but will not grant concessions to the consumer.
- Providing the state administrator the ability to adopt rules regarding debt settlement service fees by March 1, 2025, provided the rules do not “unduly limit consumer access to debt management services programs based on available state and national data.”
The Act’s amendments will go into effect 91 days following final adjournment of the General Assembly, subject to approval by Colorado voters if a referendum would be filed.
Acting Comptroller Hsu addresses AI integration risks and advocates for consumer financial health measures
On June 6, Acting Comptroller of the Currency, Michael J. Hsu, delivered two statements addressing distinct concerns regarding both artificial intelligence (AI) and consumer financial health.
In the first statement at the 2024 Conference on Artificial Intelligence and Financial Stability, Hsu said that AI was capable of being a tool for innovation or a weapon that could undermine the financial system. Hsu detailed potential risks arising from AI’s deployment, such as rapid adoption without adequate controls. He advocated taking a cautious approach, with “risk management control gates” at different stages of AI integration to ensure innovations are beneficial rather than harmful. Hsu stressed the need for a shared responsibility model for AI, where accountability would be defined clearly across different stakeholders, particularly in cases of AI-enabled fraud and cyberattacks.
In the second statement, made at the Financial Health Network Emerge Conference, Hsu discussed the OCC’s engagement in enhancing consumer financial health as part of its broader goal to foster a fair and inclusive economy. Comptroller Hsu described three possible results given “clear and objective measures of consumers’ financial health”: (i) product offerings could better align with consumer needs; (ii) banks that support their customers’ efforts to improve their financial health would have better customer relationships and build trust; and (iii) improvements in mental well-being for individuals and communities.
Hsu presented the concept of Financial Health Vital Signs (FHVS) as a set of metrics—positive cash flow, liquidity buffers, and on-time payments—that could indicate consumer financial health. The OCC’s report, “Community Development Insights: How Banks Can Measure and Support Customer Financial Health Outcomes,” was introduced as a resource for banks to understand and improve their customers’ financial well-being. Hsu encouraged banks to pilot these metrics, which could lead to better product alignment with customer needs, improved financial decision-making, and reduced financial stress among consumers.
Fed seeks to renew TILA, Regulation Z information collection
On June 4, the Fed published a request for comment on a proposal to extend the “Recordkeeping and Disclosure Requirements Associated with CFPB’s Regulation Z” for three years without revision. According to the notice, the Fed’s request would support the CFPB’s Regulation Z by ensuring consumers receive detailed information about credit terms and costs, particularly in the context of residential real estate transactions, to promote informed credit use. As part of this request, the Fed will invite public comments to address the efficacy of the information collection requirements and seek ways to enhance the quality of collected information, among other things. Comments must be received by August 6.
GAO urges Fed to address outstanding recommendations
On June 3, GAO released a letter addressed to Fed Chair, Jerome Powell, to provide an update on the Fed's implementation of past GAO recommendations. As of May, GAO noted 13 open recommendations under the Fed. The Fed recently implemented two of the GAO’s four 2023 priority recommendations: one on stress test capital ratio estimates, and the other pertaining to risk tolerance articulation. GAO did not add any new priority recommendations for the Fed, but instead emphasized the importance of addressing the remaining two items: one related to blockchain technology and the other on financial technology.
Regarding the blockchain recommendation, GAO urged the Fed to work with other regulators to create a formal mechanism for identifying risks associated with this technology. GAO observed that the Fed had stated in April that it would participate in the Digital Asset Working Group to work with other agencies to address blockchain risks, but GAO recommended that the working group must include a “planning process for identifying and addressing” blockchain risks. Regarding the fintech partnerships recommendation, and in coordination with other federal financial regulators, GAO recommended clear communication on the appropriate use of alternative data in the underwriting process since fintech lenders “may analyze large amounts of alternative data on borrower characteristics … when determining borrowers’ creditworthiness.”
GAO’s letter also emphasized the importance of Congressional oversight to implement recommendations, suggesting strategies such as legislative incorporation and oversight hearings.
FHFA enhances Fannie and Freddie flex modification policies
Recently, the FHFA announced that Fannie Mae and Freddie Mac will update their Flex Modification policies to help struggling borrowers reduce their mortgage payments. Flex Modification would be for eligible borrowers experiencing a permanent hardship and cannot make regular monthly mortgage payments. According to the FHFA, the enhanced policies will aim to decrease a borrower’s monthly payments by up to 20 percent through three incremental steps: (i) interest rate reduction; (ii) extending the loan term; and (iii) principal forbearance for those with loan-to-value ratios above 50 percent. These updates were built on the Servicing Alignment Initiative started in 2011 and have been aimed at better resolving mortgage payment delinquencies. The new Flex Modification policies will take effect on December 1.
SEC provides companies the opportunity to review their diversity policies
On June 5, the SEC began its biennial collection of Diversity Self-Assessment Submissions from regulated entities. Regulated entities included, among others, brokers and dealers, investment advisers, and transfer agents. Notably, publicly-traded companies were not included. The Commission will provide organizations the opportunity to review their own diversity and inclusion policies for strengths, opportunities, and risks as part of the voluntary self-assessment. The data collection supported an interagency policy statement issued in 2015 which established joint standards for assessing regulated entities diversity policies and practices. The SEC used data from the submissions to assess and report on progress and trends in regulated entity diversity-related activities. Participation will be voluntary and will not be part of any examination process. Regulated entities may use the Diversity Self-Assessment Tool or submit self-assessments in another format.
NYDFS pens guidance for virtual currency companies on customer service
On May 30, NYDFS issued an industry guidance letter for all virtual currency businesses licensed under 23 NYCRR Part 200 and others. The guidance was created in the hopes to foster a more transparent and responsive environment for customers engaging with virtual currency businesses. The guidance emphasized the need for virtual currency businesses to address customer inquiries and complaints in a "timely and fair manner." NYDFS provided specific recommendations for maintaining effective communication channels, including using phone lines and electronic text communication staffed by trained representatives during normal business hours. Additionally, the guidance emphasized the importance of monitoring and responding to customer inquiries outside of regular business hours.
While the guidance saw the value in employing AI tools for customer service, it stressed the importance of informing customers when they are interacting with AI. It also required that customers should always have the option to escalate to a human customer service representative. Rigorous testing and monitoring of AI tools were recommended to ensure the accuracy of information provided to customers.
To assess the effectiveness of their customer service practices, virtual currency businesses were advised to track and analyze key metrics such as the volume of inquiries, response times, and customer feedback. Finally, the guidance mandated that businesses submit quarterly reports to the regulator detailing the number of customer inquiries, complaint topics, and average resolution times. The guidance will go into effect on November 1, and businesses will be expected to have all recommended practices in place by then.
SEC’s Division of Examinations provides guidance on broker-dealer examination process
On June 5, the SEC’s Division of Examinations issued a risk alert to help broker-dealers prepare for an examination by the Division. The alert highlighted: (1) information that may be considered when selecting firms to examine; (2) areas of focus for the examination; and (3) types of information and documents that may form part of an initial exam request. The alert noted various reasons why the Division staff may consider firms for examination, including:
- A firm’s examination history
- Supervisory and disciplinary concerns
- Tips or complaints on the firm
- The length of time since the firm’s last examination
- Customer base of the firm
- Products and services offered by the firm
- Any signals of financial stress the firm may experience
- New reports on the firm
- Filings by the firm with the SEC
- If the firm holds cash or securities
The alert also included a sample request list of information and documents that Division staff would request. Although the list was not necessarily meant to be exhaustive, the sample request list was grouped into the following categories:
- General Information: Organizational Information; Business and Operations: Financial Information; Legal and Disciplinary.
- Supervisory and Compliance Structure: Books and Records, and Compliance and Oversight Processes; Branch Office Oversight; Information Processing, Reporting, and Protection.
- Regulatory Requirements (Select Topics): Sales Practices, Regulation Best Interest, and Form CRS; Anti-Money Laundering; Net Capital and Customer Protection
CFTC reports on success of whistleblower policy by citing recent $4.5 mil. award
On June 3, the CFTC awarded over $4.5 million to an anonymous whistleblower who provided information and industry expertise as part of an enforcement action. The CFTC noted that the award highlighted the pivotal role whistleblowers play in maintaining the integrity of the futures markets. Ian McGinley, the CFTC's Director of Enforcement, commended the whistleblower for their extensive cooperation with the enforcement staff. Additionally, Brian Young, who leads the CFTC's Whistleblower Office, emphasized that the award program is open to individuals from diverse backgrounds.
The CFTC noted this award solidified the CFTC Whistleblower Program's impact since its inception in 2014. With approximately $370 million awarded to date, the program has been instrumental in numerous enforcement actions that have resulted in over $3.2 billion in sanctions. The program was funded entirely by monetary sanctions paid by violators of the Commodity Exchange Act, ensuring no funds are taken from harmed customers.