InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
CFPB finalizes rule to change its supervision designation procedures for nonbanks
On April 16, the CFPB issued a procedural rule to change how the Bureau will designate nonbanks for supervision. Under the CFPA, the CFPB was authorized to supervise a nonbank covered person if the Bureau had reasonable cause to determine if the nonbank covered person was engaged in financial services-related conduct that posed a risk to consumers. In 2013, the CFPB issued a rule providing procedures to govern supervisory designation proceedings under this authority; in 2022, the CFPB published a final rule amending the procedural rule to allow it to publicize its resolution of any contested designation proceeding (covered by InfoBytes here). In late February 2024, the CFPB transitioned to a new organizational structure for its supervision and enforcement work, and this rule will reflect the technical changes of the new structure in the context of supervisory designation proceedings.
According to the Bureau, there were small differences between two separate provisions under the 2013 rule that allowed nonbanks to consent to the CFPB’s exercise of supervisory authority. The new procedural rule will combine these provisions and clarify a few points of distinction from the two original provisions, including (i) a consent agreement does not constitute an admission; and (ii) supervision durations following consent agreements can be negotiated on a case-by-case basis, instead of applying a default duration of two years.
Regarding the Supervision Director’s notice of reasonable cause, the rule will expand the possible methods of delivery to include other methods that are “reasonably calculated to give notice.” Additionally, the rule states that the initiating official may withdraw a notice, and that they may file a written reply to the notice recipient’s response, neither of which was not contemplated under the previous rule. The Bureau said these changes could allow for more transparency in the decision-making process.
Concerning a supplemental oral response, the Bureau noted under the previous rule, a respondent nonbank entity presented supplemental oral responses to the Associate Director for Supervision, Enforcement, and Lending. In light of the elimination of the Associate Director position pursuant to a recent reorganization that split the Division of Supervision, Enforcement, and Fair Lending into a Division of Enforcement and a Division of Supervision, the rule provided that the Director of the Bureau will assume the Associate Director’s adjudicative roles and supervision-related functions. Therefore, the Director will be responsible for issuing a decision and order subjecting an entity to the Bureau’s supervision or terminating a proceeding.
The rule further stipulated that (i) an additional time limit for mail and delivery services are no longer warranted, since email would be “generally instantaneous”; (ii) there will be a 13,000-word limit for the proceeding filings; (iii) any changes to time or word limits can be decided between the initiating official and the respondent with a notice to the Director and will be subject to change by the Director.
Regarding the confidentiality of proceedings, the rule maintained a process for the CFPB to decide whether to publicly release final decisions and orders, including orders entered as a result of respondent failing to file a response and therefore defaulting. The Bureau did note, however, consent agreements entered into between the initiating official and the respondent will not be subject to public release under the rule.
The rule also established an issue exhaustion requirement, requiring respondents to raise arguments they have in their written response to the Bureau to avoid waiving the argument in future proceedings. The Bureau will invite public comments which must be submitted 30 days after publication in the Federal Register, although the rule will be exempt from the notice-and-comment rulemaking requirements under the APA as a rule of agency organization, procedure, or practice. The rule will be effective upon publication to the Federal Register, and it will apply to proceedings pending on the effective date, unless the Director determined that it will be “not practicable.”
FDIC releases comprehensive report on international, systemically important banks
On April 10, the FDIC released a report on the FDIC’s plans and readiness to step in as a receiver for a financial company under Title II of the Dodd-Frank Act. The FDIC Chairman said this report was the “most detailed description to date of the FDIC’s preparedness to use its Title II resolution authority.”
The report provided background on resolution-related authorities under Dodd-Frank, highlighted key measures that provided readiness of resolution under Title II authority, reviewed strategic decision-making for the use of such authority, and explained how the Commission expects to undertake a Title II resolution of a Global Systematically Important U.S. Bank (GSIB) using a Single Point of Entry (SPOE) resolution strategy. FDIC Chairman Martin Gruenberg said that such a resolution “will be a challenging process under any circumstance, with a number of steps that need to be taken quickly and in close coordination with a range of stakeholders.”
Under the SPOE resolution strategy, the FDIC would place only the holding company of the GSIB into receivership. The FDIC then would establish a bridge financial company under its control and would transfer the operating subsidiaries to the bridge institution. The bridge institution and its subsidiaries would remain operating while the FDIC performed its receivership duties, including the claims process. The final stage of GSIB receivership would be the implementation of a restructuring and wind-down plan that would aim to maintain value, address the causes of the failure, and transition operations. Chairman Gruenberg also noted that orderly resolution of a GSIB has not been executed before, “so there will be questions on whether it can be done.”
Chopra discusses open banking and standard-setting
On March 13, the Director of the CFPB, Rohit Chopra, delivered prepared remarks at the Financial Data Exchange Global Summit and discussed advancing the U.S. towards open banking. Chopra outlined the current efforts and considerations surrounding the development of industry standards that would help transition consumers with switching financial products. The CFPB had been finalizing rules on Section 1033 of the CFPA which would grant consumers the right to access their financial data and would aim to protect sensitive personal financial information while promoting open banking (covered by InfoBytes here).
Chopra highlighted the importance of creating industry standards for data sharing and communication protocols, drawing parallels with existing standards in electronics and financial services. While the CFPB's proposal acknowledged the role of standards, Chopra noted that it intentionally avoided being overly “prescriptive” to avoid stifling innovation, among other things.
The speech also addressed the potential for anticompetitive behavior in the standard-setting process. Chopra noted historical instances of anticompetitive behavior, a concern that the CFPB had been monitoring closely. The Bureau will be working with the DOJ to prevent such practices.
The Bureau sought to codify what standard-setting organizations must demonstrate to be recognized under the proposed rule, then invite those organizations to begin the process of receiving formal recognition from the CFPB. Based on the comments received on the proposed rule, Chopra expects that by this fall, the final rule will “identify the areas where standards are relevant to the requirements of the final rule.” Chopra also noted the CFPB considered whether standard-setting organizations should be balanced so no entity or group of entities can “dominate[] decision making.” He noted that the Bureau will investigate the makeup of entities’ standard-setting/modification groups and funding structure, warning if an entity’s composition or funding suggests favoritism, then “that will be a problem.” Chopra noted that if the CFPB cannot identify standard-setting organizations, it is prepared to implement more detailed guidance.
HUD Secretary Fudge resigns effective March 22
On March 11, Housing and Urban Development Secretary Marcia L. Fudge announced her resignation and will transition to life as a private citizen. Her statement highlighted her five decades of public service, including as a mayor, congressional staffer, congresswoman, and Secretary. According to Secretary Fudge, during her tenure, HUD has helped more than two million families avoid foreclosure; removed barriers for those with student loans buy a home with an FHA mortgage; and strengthened the number of Black and Hispanic borrowers based on the percentage of volume, among other accomplishments. According to the White House’s brief, Fudge provided HUD with the largest investment in affordable housing in U.S. history. Secretary Fudge’s resignation will go into effect on March 22, and Deputy Secretary Adrianne Todman will succeed her as Acting Secretary.
FHFA announces updates for implementation of GSE credit score requirements
On February 29, FHFA announced updates related to the implementation of new credit score requirements for single-family loans acquired by Freddie Mac and Fannie Mae (GSEs). As previously covered by InfoBytes, FHFA released a two-phase plan for soliciting stakeholder input on the agency’s proposed process for updating credit score requirements. The new process, called the FICO 10T model, will, among other things, require two credit reports (a “bi-merge” credit report) from the national consumer reporting agencies, rather than the traditional three (covered by InfoBytes here). After considering stakeholder input, FHFA expects to transition from the Classic FICO credit score model to the bi-merge credit reporting requirement in Q1 2025. The GSEs will also move up the publication of VantageScore 4.0 historical data to Q3 2024 “to better support market participants” and provide pertinent historical data before the transition. FHFA will provide more details on the timing for FICO 10T implementation once this initial process is complete.
Biden Administration, DOE withhold payments to student loan servicers
On January 5, the Biden Administration and the U.S. Department of Education (DOE) announced they are withholding payments to three student loan servicers as part of their efforts to strengthen protections for student loan borrowers and ensure accountability among servicers. The three servicers were found to have collectively failed in sending timely billing statements to a total of 758,000 borrowers during their first month of repayment. Consequently, the DOE is withholding $2 million from one servicer, $161,000 from the second, and $13,000 from the third servicer based on the number of affected borrowers.
U.S. Secretary of Education Miguel Cardona emphasized that the DOE “will continue to engage in aggressive oversight of student loan servicers and put the interests of borrowers first.” During this period, borrowers will not be required to make payments, and any accrued interest will be adjusted to zero. Additionally, the months spent in administrative forbearance will count toward forgiveness programs like Public Service Loan Forgiveness or income-driven repayment forgiveness. The DOE aims to ensure that borrowers are not negatively affected by these errors.
Furthermore, to protect borrowers from penalties due to late or missed payments during the repayment transition, the DOE recently sent a letter to credit reporting agencies and credit scoring companies to remind them that borrowers’ current payment behavior may not accurately reflect their ability or willingness to make payments.
NYDFS releases guidance on risk management
On December 21, 2023, NYDFS released guidance for managing significant financial and operational risks associated with climate change for New York State-regulated banking and mortgage institutions. The guidance emphasized the importance of ensuring operational resiliency which is “the ability to deliver operations, including critical operations and core business lines, through a disruption from any hazard.” Regulated organizations are encouraged to consider three key areas: 1) understanding climate-related financial risks; 2) prioritizing operational resilience; 3) and complying with consumer protection laws when adjusting risk frameworks for climate-related risks. The NYDFS categorizes climate-related financial risks as either physical risks, like hurricanes, floods, and wildfires, or transition risks from policy, regulations, adoption of new technologies, consumer, and investor preferences, and changing liability risks which can directly and indirectly affect financial institutions.
Regulated organizations are urged to consider potential impacts on at-risk communities while adapting their risk management approaches. NYDFS suggests they maintain reasonable, risk-based business strategies to prevent unnecessary market disruptions and comply with consumer protection laws and fair lending considerations at all times. The guidance suggests institutions also maintain fair lending practices while managing climate-related financial risks, and further suggests not divesting from low-income communities to manage risk.
The NYDFS has not set a timeline for implementation of the Guidance expectations as it would like “to provide regulated organizations with sufficient opportunity to integrate consideration of climate-related financial and operational risks into their governance frameworks, organizational structures, business strategies and risk management processes in a proportionate manner.” To offer an overview of these documents and highlight key feedback themes, NYDFS has scheduled a webinar for January 11, 2024, at 11:30 am ET. Interested parties can register for the webinar via the provided link. The Department also made additional resources available to aid organizations in implementing measures to tackle climate-related risks.
FSOC report highlights AI, climate, banking, and fintech risks; CFPB comments
On December 14, the Financial Stability Oversight Counsel released its 2023 Annual Report on vulnerabilities in financial stability risks and recommendations to mitigate those risks. The report was cited in a statement by the Director of the CFPB, Rohit Chopra, to the Secretary of the Treasury. In his statement, Chopra said “[i]t is not enough to draft reports [on cloud infrastructure and artificial intelligence], we must also act” on plans to focus on ensuring financial stability with respect to digital technology in the upcoming year. In its report, the FSOC notes the U.S. banking system “remains resilient overall” despite several banking issues earlier this year. The FSOC’s analysis breaks down the health of the banking system for large and regional banks through review of a bank’s capital and profitability, credit quality and lending standards, and liquidity and funding. On regional banks specifically, the FSOC highlights how regional banks carry higher exposure rates to all commercial real estate loans over large banks due to the higher interest rates.
In addition, the FSOC views climate-related financial risks as a threat to U.S. financial stability, presenting both physical and transitional risks. Physical risks are acute events such as floods, droughts, wildfires, or hurricanes, which can lead to additional costs required to reduce risks, firm relocations, or can threaten access to fair credit. Transition risks include technological changes, policy shifts, or changes in consumer preference which can all force firms to take on additional costs. The FSOC notes that, as of September 2023, the U.S. experienced 24 climate disaster events featuring losses that exceed $1 billion, which is more than the past five-year annual average of 18 events (2018 to 2022). The FSOC also notes that member agencies should be engaged in monitoring how third-party service providers, like fintech firms, address risks in core processing, payment services, and cloud computing. To support this need for oversight over these partnerships, the FSOC cites a study on how 95 percent of cloud breaches occur due to human error. The FSOC highlights how fintech firms face risks such as compliance, financial, operational, and reputational risks, specifically when fintech firms are not subject to the same compliance standards as banks.
Notably, the FSOC is the first top regulator to state that the use of Artificial Intelligence (AI) technology presents an “emerging vulnerability” in the U.S. financial system. The report notes that firms may use AI for fraud detection and prevention, as well as for customer service. The FSOC notes that AI has benefits for financial instruction, including reducing costs, improving inefficiencies, identifying complex relationships, and improving performance. The FSOC states that while “AI has the potential to spur innovation and drive efficiency,” it requires “thoughtful implementation and supervision” to mitigate potential risks.
DOE moves to empower student loan oversight for better borrower support
On November 9, the DOE announced it is outlining a framework for how it will increase borrower support and ensure student loan servicers are accountable for errors. Richard Cordray, Federal Student Aid (FSA) Chief Operating Officer, noted, “The landscape of loan servicing has substantially changed since the Department began collaboration with multiple servicers in 2009. FSA is dedicated to evolving servicing contracts to meet borrower requirements. As we approach the Direct Loan program’s unprecedented return to repayment, our upcoming transition to new contracts in 2024 will bring updated servicer obligations and increased avenues to ensure borrowers receive adequate support.”
The DOE has implemented various strategies to bolster oversight and monitoring of servicers:
- Direct Servicer Monitoring: FSA staff actively evaluate the quality of customer service provided by loan servicers, which involves scoring interactions between servicers’ representatives and borrowers, reviewing calls and chats, and conducting secret shopper calls to assess the accuracy of servicers’ responses to borrower inquiries.
- Partnership with Federal and State Regulators: The DOE collaborates with agencies like the CFPB and state attorneys general responsible for enforcing consumer financial laws. Updates in the interpretation of federal preemption provide clear guidance for the ability of states to enforce state consumer protection laws and allow for coordination between the DOE and state partners.
- Utilizing Borrower Complaints: The DOE leverages complaints filed through the FSA’s Office of the Ombudsman, which collaborates with the oversight team to discern if complaints signal wider servicer issues. The DOE also monitors social media and news stories to identify broader patterns of complaints, which allow the DOE to discern isolated instances from systemic errors affecting multiple borrowers. These listening tools serve as mechanisms for borrowers to report issues impacting their repayment directly.
The DOE and the Biden administration wield several measures to ensure servicers meet their obligations and maintain standards. The announcement highlighted that the DOE could withhold payments from servicers failing to serve borrowers adequately, as exemplified by the recent $7.2 million withheld from a Missouri servicer for delayed billing statements to 2.5 million borrowers. The DOE also has the authority to suspend or re-allocate borrowers to other servicers, which impacts the financial compensation of underperforming servicers. In addition, Contractor Performance Reports assess servicer performance and influence future contract awards, while Corrective Action Plans demand remedies for servicing errors to ensure borrower satisfaction and prevent reoccurrence. The DOE also safeguards borrowers from servicer errors by instructing servicers to grant affected borrowers a temporary administrative forbearance during error resolution. Additionally, the DOE directs servicers to count these periods as qualifying for loan forgiveness and adjusts accrued interest to zero when errors might impede borrowers’ progress toward forgiveness.
Finally, the DOE mentioned it is gearing up to transition to the USDS, a new loan servicing system, by spring 2024. This shift aims to enhance accountability, transparency, and performance evaluation for over 37 million federally managed student loan borrowers with a focus on rewarding good performance and ensuring servicers meet higher standards. By incentivizing servicers to maintain borrowers’ repayment status and improving tracking mechanisms, the DOE will prioritize borrower success and aim for a smoother repayment experience.
Regulators release final principles for climate-related financial risk management
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.