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President Biden vetoes SEC crypto-asset rule nullification resolution
On May 31, President Biden vetoed H.J.Res. 109 subsequently returning the bill to Congress. This resolution, as previously covered by InfoBytes, was passed by the U.S. House of Representatives on May 8 to nullify an SEC Staff Accounting Bulletin 121 (SAB 121). The guidance, which has been in effect since April 11, 2022, described how the SEC staff expected entities to account for and disclose their custodial obligations to “safeguard crypto-assets held for their platform users.” In his veto message to the House, President Biden stated that the resolution would “inappropriately constrain” the SEC’s ability to “set forth appropriate guardrails and address future issues.” The resolution will now be sent back to the House of Representatives and would require an override vote of two-thirds of the House.
New Jersey proposes disparate impact discrimination rule
On June 3, New Jersey Attorney General, Matthew Platkin, and the state’s Division on Civil Rights announced a proposed rule that described and clarified prohibitions against disparate impact discrimination under the New Jersey Law Against Discrimination (LAD), including employment, housing, places of public accommodation, credit, and contracting. The proposed rule provided examples of policies and practices that may result in a disparate impact on members of a protected class under the LAD.
The proposed rule aimed to clarify that the LAD outlawed practices or policies that have an adverse impact on members of a protected class, regardless of whether there was intent to discriminate. Such practices or policies were only permissible if they were necessary to attain an important and legitimate non-discriminatory goal and there was no alternative method that was less discriminatory and equally effective in achieving that goal. The rule would codify largely the existing legal standard and burdens of proof used in New Jersey and Federal courts when reviewing claims of disparate impact discrimination pursuant to the LAD for determining whether a practice or policy was discriminatory unlawfully, along with the framework used in evaluating claims of disparate impact. Comments on the proposed rule must be received by August 2.
Colorado extends its money transmitter regulations
On June 3, Colorado enacted HB 1328, (the “Act”), which will extend the state’s regulation of money transmitters until September 2030. The law had previously been scheduled to sunset on September 1. The Act will implement the recommendations of the Department of Regulatory Agencies, as specified in the Department's sunset review of the regulation of money transmitters. Specifically, the Act will (i) authorize the State Banking Board to suspend a money transmitter’s license and issue cease and desist orders; (ii) expand the requirement to furnish surety bond coverage to include all money transmission, rather than any exchange; (iii) increase the maximum penalty for failure to allow an examination from $100 to $1,000 per day the refusal continues and for failure to report up to $750 per day; and (iv) expand the licensing exemption to cover out-of-state banks. The Act will go into effect 90 days following the adjournment of the General Assembly, assuming a referendum petition will not be filed.
District Court denies class certification in lending discrimination suit
On May 30, the U.S. District Court for the Eastern District of Virginia entered an opinion denying class certification in a suit accusing a credit union (defendant) of lending discrimination. Each plaintiff applied to defendant for at least one home loan product, including first-lien mortgages, VA-backed loans, and refinancings. Plaintiffs’ complaint alleged that defendant’s mortgage underwriting policies violated the Fair Housing Act (the FHA) and the ECOA because they have had a “disparate impact on minority loan applicants” and defendant’s “refusal to correct those discrepancies constitutes intentional discrimination.” Plaintiffs based their claims on three independent reports analyzing publicly-available HMDA data from 2019-2022.
The court found that plaintiffs failed to establish a disparate treatment claim under the FHA, the ECOA, section 1981, and state law. Among other things, the court found that plaintiffs failed to address defendant’s argument that the data relied on in the reports lacked important metrics relating to credit scores and debt-to-income ratios. The court reasoned that plaintiffs’ sole reliance on reports analyzing defendant’s HMDA data – absent other allegations of evidence of discriminatory intent – did not make out a plausible claim of intentional discrimination. Moreover, the court found defendant’s argument persuasive that some of the plaintiffs attained loans elsewhere at higher interest rates than the loans originally sought from defendant, which suggested that plaintiffs were unqualified for the lower-interest rate loans for which they originally applied.
The court did, however, find that the complaint sufficiently pled a claim for disparate impact under the FHA and the ECOA at the motion to dismiss stage because the statistical analyses cited in the complaint revealed a disparate impact among non-white loan applicants and the underwriting algorithm and process was alleged to have caused the disparity. However, the court cautioned that if plaintiffs later failed to link during discovery the described “secret” underwriting process to the precise disparities and adverse consequences experienced by plaintiffs, the court may revisit whether the claim can survive at summary judgment.
Finally, the court struck the class allegation because the circumstances of plaintiffs’ loan application processes are too varied. Even though the proposed class was denied, plaintiffs may proceed on their FHA and ECOA disparate impact claims.
Agencies issue host state loan-to-deposit ratios
On May 31, the FDIC, Fed, and OCC (the agencies) released the current host state loan-to-deposit ratios for each state or territory, which the agencies used to determine compliance with Section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Interstate Act). Under the Interstate Act, banks were prohibited from establishing or acquiring branches outside of their home state for the primary purpose of deposit production. Branches of banks controlled by out-of-state bank holding companies were also subject to the same restriction. Determining compliance with Section 109 required a comparison of a bank’s estimated statewide loan-to-deposit ratio to the annual host state loan-to-deposit ratios. If a bank’s statewide ratio was less than one-half of the published state ratio, an additional review would be undertaken by the appropriate agency, which would involve a determination on whether the bank’s interstate branches were reasonably helping to meet the credit needs of the communities. A bank that failed in both the ratio and assessment would violate Section 109 and subjected to sanctions by the appropriate agency.
FDIC publishes its 2024 Risk Review
On May 22, the FDIC published its 2024 Risk Review which summarized emerging risks in the U.S. banking system in 2023 across five broad categories: credit risk, market risk, operational and cyber risks, climate-related financial risk, and crypto-asset risk. The risk review paid particular attention to risks that may affect community banks. Among other issues to be aware of, the report noted banks continue to be targeted by ransomware threat actors. These cyber threats require banks to continuously improve cybersecurity and other internal controls to effectively combat cyber threats and mitigate the risk of a significant service disruption. The FDIC also reported that economic conditions were strong, and despite a period of stress in early 2023, the banking industry demonstrated resilience. By the end of the year, “overall asset quality metrics were favorable, and liquidity stabilized.” The report also noted that credit risk differed across loan categories, with commercial real estate and consumer loans seeing more asset quality decline. While the commercial real estate sector stayed strong overall, office and retail mall markets struggled. The FDIC remarked that the ability to refinance commercial real estate loans remained a challenge to the industry due to high interest rates, softening property values, and emerging credit weakness.
FINRA study examines trust in AI for financial advice
On June 4, the FINRA Investor Education Foundation published a new study which revealed consumers may be more likely to trust personal finance advice from AI-generated sources over financial professionals.
The report emphasized the importance of understanding consumer perceptions of AI, particularly in the context of financial decision-making. The findings suggested while financial professionals are generally trusted more than AI, there are certain areas like savings, where some consumers showed a preference for AI-generated advice. The study surveyed over 1,000 U.S. adults and compared the perceived trustworthiness of AI-generated financial advice to that of human financial professionals across four areas: homeownership, future performance of stocks and bonds, portfolio allocation, and savings and debt.
The main insights from the report were:
- Reliance on AI for financial guidance is low currently.
- Information about homeownership was generally trusted regardless of the source; however, trust was higher when the advice was attributed to financial professionals.
- About one-third of all participants trusted AI-generated predictions of stock and bond performance.
- Individuals with higher self-rated financial knowledge showed a greater tendency to trust AI over a financial professional.
- Regarding portfolio allocation advice, information from financial professionals was trusted more than from AI.
- Savings and debt advice was trusted in general, whether it came from AI or a financial professional; a larger proportion of Black respondents trusted a financial professional over AI.
CFPB sues student loan servicer over discharged student loan collections
On May 31, the CFPB announced its lawsuit against a Pennsylvania-based student loan servicer (the defendant) for allegedly collecting on discharged loans. According to the complaint, the defendant lacked policies and procedures for identifying serviced loans that were discharged by bankruptcy courts. The CFPB alleged that the defendant continued to collect on discharged non-qualified education loans by making misrepresentations to consumers through repayment schedule letters and billing statements. Furthermore, the Bureau alleged that the defendant’s failure to establish policies for private student loans that were discharged resulted in its furnishing inaccurate information to consumer reporting agencies. The Bureau added that even if consumers did not continue to pay on their discharged loans, they were not reasonably able to avoid the defendant’s collection attempts and the credit information it furnished. The CFPB also claimed that consumers were unable to protect their interests because they could not choose their loan servicer and had no control over its collection practices. The defendant’s actions were in violation of the CFPA based on several violation of Regulation V. The defendant allegedly violated the FCRA, too. The Bureau sought injunctive relief, consumer redress, a civil money penalty, and other relief.
CFPB cautions against unenforceable contract terms and conditions
On June 4, the CFPB issued Circular 2024-03, which cautioned covered persons under the CFPA against contracts for consumer financial products or services, including illegal or non-binding clauses. The Bureau said that such clauses may mislead consumers into thinking they have forfeited legal rights, which would violate the CFPA. Specifically, consumer contracts that falsely claim to restrict consumer rights (including liability waivers and mandatory arbitration clauses) can violate the prohibition on deceptive acts. CFPB Director, Rohit Chopra, said in an accompanying press release that the Bureau will address companies that “deceptively slip these terms into their fine print.” The Bureau reiterated prior guidance that disclaimers in a contract such as “subject to applicable law” do not cure misrepresentations caused by an unenforceable contract term. Past CFPB actions have addressed “deceptive contract terms” in various consumer finance areas, including mortgages, bank accounts, remittance transfers, and auto loans. The CFPB said it will continue to ensure fair consumer interactions with financial institutions, including efforts to regulate nonbank companies' contract terms and uphold the right to post honest online reviews. The Bureau also said it supported servicemembers' rights to challenge unlawful contract terms through legal action.
VA announces its targeted foreclosure moratorium on VA loans
On May 29, the VA announced a targeted foreclosure moratorium on VA-guaranteed loans, which will give servicers time to implement the Veterans Affairs Servicing Purchase (VASP) program. Servicers can implement the VASP program beginning May 31, and the VA expects servicers to fully implement VASP no later than October 1.
According to the circular, which went into effect immediately, the VA is urging servicers to put in place a targeted foreclosure moratorium for VA-guaranteed loans through December 31. During this period, servicers should refrain from initiating, advancing or completing the foreclosure process unless an exception applies. Exceptions include when a property is vacant or abandoned, a borrower has clearly expressed no interest in maintaining homeownership or preventing foreclosure, no mortgage payment has been received for at least 210 days and the borrower is nonresponsive, or after determining no possible home retention option, including VASP, is feasible for the borrower. Additionally, during the targeted moratorium, servicers will be expected to continue loss mitigation efforts for delinquent loans and offer workable solutions to borrowers, as detailed in the VA Servicer Handbook. Servicers are also encouraged to avoid negative credit reporting on affected loans. For borrowers affected by Covid-19, servicers should offer loan deferments, disaster extend modifications, and Covid-19 refund modifications until they implement VASP or through September 30, whichever is sooner.