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CFTC speech highlights new executives, dataset use, and AI Task Force
On November 16, the Chairman of the CFTC, Rostin Behnam, delivered a speech during the 2023 U.S. Treasury Market Conference held in New York where he showcased the CFTC’s plans to better use data and roll out an internal AI task force. One of the CFTC’s initiatives comes with the hiring of two new executive-level roles: a Chief Data Officer and a Chief Data Scientist. These executives will manage how the CFTC uses AI tools, and oversee current processes, including understanding large datasets, cleaning the datasets, identifying and monitoring pockets of stress, and combating spoofing.
The CFTC also unveiled its plans to create an AI Task Force and to “gather[] information about the current and potential uses of AI by our registered entities, registrants, and market participants in areas such as trading, risk management, and cybersecurity.” The Commission plans to obtain feedback for the AI Task Force through a formal Request for Comment process in 2024. The CFTC hopes these comments will help the agency create a rulemaking policy on “safety and security, mitigation of bias, and customer protection.”
Fed releases paper on debt substitution dynamics
On November 21, the Fed released a paper concluding that when mortgage rates rise on cash-out refinancings, households do not significantly increase overall borrowing, but instead switch to alternative borrowing options (i.e. credit cards, personal loans, HELOCs, and second liens). Analyzing rate increases and using monetary policy surprises from 2006 to 2021, the paper finds that changes in cash-out refinancing are balanced by shifts to alternative borrowing.
The paper’s findings further reveal that higher mortgage rates and the amount borrowed through cash-out refinancing have a positive correlation. The parallel showcases a pattern where borrowers are choosing the most cost-effective borrowing option based on the size of their liquidity need, the paper noted. The paper suggests that the way borrowers react to changes in monetary policy, like interest rate adjustments, can depend on whether they have existing mortgages and what interest rates they have on those mortgages. The paper also suggests that while some borrowers might change their mortgage terms when interest rates shift, others might choose different types of loans that don't change their original mortgage rate. This offsets the impact of changing monetary policies on refinancing decisions, the paper explained.
OCC releases enforcement actions
On November 16, the OCC released a list of recent enforcement actions taken against national banks, federal savings associations, and individuals currently and formerly affiliated with such entities. Included is a cease and desist order against an Indiana bank for allegedly engaging in unsafe or unsound practices, related to corporate governance and enterprise risk management, credit underwriting and administration, liquidity risk management, and interest rate risk management. The order requires the bank to, among other things, (i) provide quarterly reports detailing corrective action and efforts to comply with the order; (ii) develop a written strategic plan; (iii) maintain specified capital ratios; (iv) engage an independent third party to review board and management supervision; (v) submit a written concentration risk management program and a written liquidity risk management program; (vi) adopt a credit underwriting and administration program; (vii) submit and adopt a written adequate allowance for credit losses; and (viii) adopt a written credit derivatives program.
CFPB approves pilot program for construction loans
On November 21, the CFPB announced it approved an application from a community banking trade organization to pilot disclosures for construction loans. The application was submitted pursuant to the CFPB’s trial policy programs under Section 1032(e) of Dodd-Frank. According to the community banking trade organization, the application aims to increase the number of affordable loans that combine a construction phase loan with a mortgage, all within a single set of closing costs, i.e., a single-close construction-to-permanent loan. The community banking trade organization hopes to increase the number of these specific loans because first-time homebuyers in rural and small-town communities are more likely to build their first home than purchase existing ones. The community banking trade organization also stated that the current loan disclosure requirements offered by the CFPB were designed for either standard home purchase or refinance mortgage loans. The Bureau states that it wishes to receive applications for this pilot disclosure from lenders rather than single-market participants.
CFPB orders large bank to pay $25.9 million
On November 8, the CFPB announced an enforcement action against a large bank for allegedly discriminating against credit card applicants of Armenian descent. According to the consent order, from at least 2015-2021, respondent allegedly engaged in discriminatory practices that involved denying credit applications and providing false reasons for denials to credit applicants based on their national origin. Respondent’s supervisors also allegedly instructed employees not to discuss these practices in writing or on recorded phone lines. Respondent will pay $1.4 million to affected consumers and a $24.5 million civil money penalty. The CFPB found that respondent violated the Equal Credit Opportunity Act and its implementing Regulation B by unlawfully denying credit based on national origin stereotypes, as well as the CFPA.
NYDFS introduces guidelines for coin-listing and delisting policies in virtual currency entities
On November 15, NYDFS announced new regulatory guidance which adopts new requirements for coin-listing and delisting policies of DFS-regulated virtual currency entities, updating its 2020 framework for each policy. After considering public comments, the new guidance aims to enhance standards for self-certification of coins and includes requirements for risk assessment, advance notification, and governance. It emphasizes stricter criteria for approving coins and mandates adherence to safety, soundness, and consumer protection principles. Virtual currency entities must comply with these guidelines, requiring DFS approval for coin-listing policies before self-certifying coins, and submitting detailed records for ongoing compliance review. The guidance also outlines procedures for delisting coins and necessitates virtual currency entities to have an approved coin-delisting policy.
As an example under coin listing policy framework, the letter states that a virtual currency entity risk assessment must be tailored to a virtual currency entity's business activity and can include factors such as (i) technical design and technology risk; (ii) market and liquidity risk; (iii) operational risk; (iv) cybersecurity risk; (v) illicit finance risk; (vi) legal risk; (vii) reputational risk; (viii) regulatory risk; (ix) conflicts of interest; and (x) consumer protection. Regarding consumer protection, NYDFS says that virtual currency entities must “ensure that all customers are treated fairly and are afforded the full protection of all applicable laws and regulations, including protection from unfair, deceptive, or abusive practices.”
Similar to the listing policy framework, the letter provides a fulsome delisting policy framework. The letter also stated that all virtual currency entities must meet with the DFS by December 8 to preview their draft coin-delisting policies and that final policies must be submitted to DFS for approval by January 31, 2024.
FTC publishes letter to CFPB on its law enforcement and public outreach
On November 16, the FTC released its letter of its annual summary of activities in 2022 to the CFPB. The CFPB used the findings in its annual report to Congress on the Fair Debt Collection Practices Act (FDCPA). In the letter, the FTC outlined several of its important procedural law enforcement activities, such as debt collection issues affecting small businesses, redressing consumers harmed by debt collection schemes, halting collection in consumer debt, and combating unauthorized charges to consumers. The second part of the letter outlines how the FTC enables public outreach and cross-agency coordination. For public outreach, the FTC proactively educates consumers about their rights under the FDCPA, and how debt collectors can comply with the law. The FTC also noted that it publishes material in both English and Spanish to broaden its outreach. In addition, the FTC added that it distributes print publications to libraries and businesses and logs more than 50 million views on its website pages. In its efforts to raise awareness about scams targeting the Latino community, the FTC highlighted its series of fotonovelas (graphic novels) in Spanish.
DOJ and DOE share success after first year of student loan bankruptcy discharge process
On November 16, the DOJ and DOE announced a successful first year of their new student loan bankruptcy discharge process during 2022. The discharge process extinguishes a borrower’s obligation to pay back either some or all of a student loan in bankruptcy based on undue hardship. The DOJ cites two previous standards used by bankruptcy courts to determine if a borrower’s repayment would cause an undue hardship: the Brunner and Totality Tests. The DOJ’s guidance simplified the current standards to enhance “consistency and equity in the handling of these cases” and applies in both Burner and Totality Test jurisdictions. The guide permits a court to grant a discharge if three conditions are satisfied: (i) “the debtor presently lacks an ability to pay the loan”; (ii) “the debtor’s inability to pay the loan is likely to persist in the future”; and (iii) “the debtor has acted in good faith in attempting to repay the loan.”
The DOJ reported the success of their new guidance with several findings: (i) there were 632 cases filed in the first 10 months of the new process, a significant increase from recent years; (ii) this process was used by 97 percent of all borrowers; (iii) 99 percent of borrowers received either full or partial discharges; and (iv) two bankruptcy courts adopted this process. The DOJ is optimistic that some or all these trends will continue.
CFPB’s Language Access Plan breakdown for consumers with limited English proficiency
On November 15, the CFPB issued a report, titled “The CFPB Language Access Plan for consumers with limited English proficiency,” on expanding consumer needs in the financial marketplace for individuals with limited English proficiency. The CFPB released this report consistent with the mandates under E.O. 13166 to “educate and empower all consumers, provide information and assistance to traditionally underserved consumer and communities, enforce fair lending laws, and promote an equitable workforce for all consumers.”
The CFPB cites that 22 percent of the U.S. population over the age of five speak a language other than English at home. The CFPB commits itself to ensuring that tools, programs, and services are available to those who need language assistance by (i) understanding the needs of the population; (ii) conducting outreach and engagement; (iii) providing products and services in eight different languages other than English; and (iv) promoting fair and equitable access to the financial marketplace.
The CFPB’s report also lists several public enforcement actions involving communicating with consumer with limited English proficiency. The report mainly outlines how well the agency does in addressing the diverse language needs of the U.S. population, including translated disclosures, websites, and outreach and engagement sessions.
HUD increases inspection fee limits for single-family homes
On November 15, HUD increased its fee limits for property inspections for single-family homes. HUD requires federal mortgage holders to perform property inspections to determine “occupancy status, ascertain property condition and to maintain property preservation.” For example, according to the Mortgage Letter, the cost for an initial occupancy inspection increased from $20 to $30, with the cost per additional unit increased from $15 to $20, to “align with industry standards,” as found in the FHA Single Family Housing Policy Handbook 4000.1. Deputy Assistant Secretary for Single Family Housing Sarah Edelman called this the “first step in updating our policies governing property and preservation fees,” and will help prevent blight from poorly maintained homes.