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Hsu notes a “trip wire approach” for FSOC review of payments, private equity systemic risk
On February 21, Acting Comptroller of the Currency Michael Hsu delivered remarks at Vanderbilt University, discussing banking and commerce, regulatory effectiveness, and financial stability. Hsu further discussed the “blurring of the line” between banking and private credit/equity, its relevance to different market crashes, and how it can create risk. Hsu mentioned the potential to fill a regulatory gap regarding payments.
Hsu highlighted that the FSOC’s recent analytic framework indicated vulnerable points that can commonly contribute to financial stability risks and discussed how FSOC may address the risks. The framework also established how the council determines whether a given nonbank should be under the Fed’s supervision and prudential standards (covered by InfoBytes here). In his speech, Hsu defines banking as “institutions that take deposits, make loans, and facilitate payments” and commerce as “everything else” including nonbank finance.
He added that the FSOC should use its macro-prudential tools to address risk and develop metrics and thresholds to identify when a payments or private equity firm may need an assessment of systemic risk. This “trip wire approach” would leverage the FSOC’s framework, moving a firm from the identification phase to the assessment phase of the FSOC’s analytic framework, and the assessment would inform if there was a need for FSOC response. Because of the rise in cash managed by nonbanks on behalf of consumers, Hsu said that could serve as a metric for the trip wire for payments-focused fintechs and other nonbank companies. “The standardization, scalars, and level at which an FSOC assessment would be triggered would be informed by public comment,” he added. Finally, Hsu highlighted how the trip wire approach offered a transparent and proactive method for identifying and addressing systemic risks before they escalate.
House Democrats urge agencies to finalize Basel III Endgame rule
On February 16, the Ranking Member for the House Committee on Financial Services, Maxine Waters (D-CA), and 41 other House Democrats sent a letter to the FDIC, Fed, and OCC regarding the Basel III Endgame and the proposed rule which would impose higher capital requirements. The letter urged the agencies to finalize the rule, highlighting the purpose of capital requirements “to shield banks from unexpected losses, preventing their failure, while serving as a source of funding that banks use…” The letter commended the agencies for providing the public with almost six months to comment and argued the endgame rule’s impact on access to credit is low. The letter also noted that the expected funding impact on a large bank’s average lending portfolio is expected to increase by just 0.03 percent, which it describes as “insignificant” compared to Fed interest rate increases. The letter specifically urged the heads of the agencies to finalize the rules this year “to ensure we have a banking system that will promote stable economic growth.”
CFPB reports “all-time high” interest rate margins on credit cards
On February 22, the CFPB released a blog post on credit card interest rates stating that the interest rate margins are at an all-time high. According to the Bureau, the margin is the difference between the average APR and the prime rate. The blog post notes that both the average APR and the margin between the average APR and the prime rate have reached record highs. Specifically, the Bureau noted that, over the last 10 years, the average APR on credit cards interest has nearly doubled from 12.9 percent in 2013 to 22.8 percent in 2023. Likewise, the average APR margin has increased from 3.3 percent in 2013 to 8.5 percent in 2023. According to the Bureau, this change has been brought on by banks and issuers who have raised their APR margins to increase profits. The CFPB noted that, although the CARD Act of 2009 kept APR margins lower throughout the 2010s, issuers began to increase the APR in 2016. The Bureau intends to take steps to ensure a fair market and to “help consumers avoid debt spirals.”
District Court addresses plain meaning of “pattern or practice of noncompliance” under RESPA.
On February 7, the U.S. District Court for the District of Maryland granted in part and denied in part a defendant mortgage company’s motion to dismiss a class action lawsuit alleging RESPA violations related to escrow account management for borrowers. Class action plaintiffs claim that the defendant’s failure to pay their property taxes in a timely manner, resulting in their homes being potentially subject to local tax sale procedures for unpaid taxes, created a “pattern or practice of noncompliance” within the meaning of RESPA.
In moving to dismiss, defendant argued that alleged violations of servicing obligations that fall under separate subsections of RESPA cannot create a “pattern or practice of noncompliance” for obligations of the section setting for the escrow-handling obligations. While noting that “case law interpreting RESPA statutory damages claims is still developing,” the court found that the statute does not require identical violations from the same subsection of RESPA to state a “pattern or practice” claim. The court reasoned that the absence of the word “subsection” from the statute is noteworthy, and it indicates that Congress did not intend to confine “pattern or practice” to a single subsection, and held that the plain meaning of the provision only requires plaintiffs to allege repeated violations of the “[s]ervicing of mortgage loans and administration of escrow accounts” section of RESPA (i.e., all of the obligations set forth in 12 U.S.C. § 2605). The court also rejected defendant’s argument that plaintiffs failed to state a claim because they “cannot rely upon their own allegations or the existence of public complaints and lawsuits which have not resulted in a judgment against it for violations of RESPA,” finding that allegations of servicing violations from multiple named plaintiffs in separate jurisdictions was sufficient to survive a motion to dismiss.
Separately, the court dismissed allegations that defendant violated RESPA by failing to respond to plaintiffs’ qualified written requests, finding that plaintiffs’ claims of “emotional distress, without more, do[] not establish the causal link necessary to show actual damages,” and that plaintiffs did not support claims that voluntary postage costs for sending correspondence to defendants could be recognized as economic damages.
FCC ruling determines AI calls are subject to TCPA regulations
On February 8, the FCC announced the unanimous adoption of a declaratory ruling that recognizes calls made with AI-generated voices are “artificial” under the Telephone Consumer Protection Act (TCPA). The declaratory ruling notes that the TCPA prohibits initiating “any telephone call to any residential telephone line using an artificial or prerecorded voice to deliver a message without the prior express consent of the called party” unless certain exceptions apply. The TCPA also prohibited “any non-emergency call made using an automatic telephone dialing system or an artificial or prerecorded voice to certain specified categories of telephone numbers including emergency lines and wireless numbers.”
The ruling, effective immediately, deemed voice cloning and similar AI technologies to be artificial voice messages under the TCPA, subject to its regulations. Therefore, prior express consent from the called party is required before making such calls. Additionally, callers using AI technology must provide identification and disclosure information and offer opt-out methods for telemarketing calls.
This ruling provided State Attorneys General nationwide with additional resources to pursue perpetrators responsible for these robocalls. This action followed the Commission’s November proposed inquiry for how AI could impact unwanted robocalls and texts (announcement covered by InfoBytes here).
New York Fed Bank analyzes BNPL usage
On February 14, the Federal Reserve Bank of New York (NY Fed) published a blog post evaluating different households’ use of buy now pay later (BNPL) products, which it generally described as “loans that are payable in four or fewer installments and carry no finance charges.” To understand BNPL usage and its relationship with consumers’ financial situations, the NY Fed conducted a study which revealed distinct usage patterns between the financially fragile and the financially stable.
The study revealed that financially fragile individuals, or individuals who have a credit score below 620, who have been declined for a credit application in the past year, or who have fallen 30 or more days delinquent on a loan in the past year, typically use BNPL to make frequent small purchases when compared to financial stable individuals. The study also found that using BNPL often leads to repeat transactions, indicating a potential trend towards repeat use of the product, particularly among those facing credit challenges.
The study also found that consumers’ motivations for using BNPL differ. Financially stable individuals often cite zero interest as a key advantage, while the financially fragile prioritize ease of access and convenience. The NY Fed summarized that BNPL usage among financially fragile individuals resembles using a credit card for medium-size, out-of-budget purchases, while financially stable users tend to make fewer purchases with a focus of avoiding interest on high-priced items. The NY Fed noted, however, that there is evidence of misunderstanding among users, such as the belief that BNPL helps build credit, concluding that “those with this view may be better off using a credit card.”
Fed, FDIC, and OCC release stress test scenarios for 2024
On February 15, the Fed, OCC, and the FDIC released their annual stress test scenarios for 2024 to assist the agencies in evaluating their respective covered institution’s risk profile and capital adequacy. The Fed released its “2024 Stress Test Scenarios” to be used by banks and supervisors for the 2024 annual stress test. The scenarios include hypothetical sets of conditions to evaluate the banks under baseline and severely adverse scenarios. The OCC similarly released economic and financial market scenarios to be used by national banks and federal savings associations and include both baseline and severely adverse scenarios as mandated by the stress testing requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The FDIC also released its stress test scenarios for certain state nonmember banks and state savings associations in conjunction with the OCC and the Fed.
Plaintiffs seek preliminary approval of $9 million class action settlement involving unsolicited texts
On February 8, the U.S. District Court for the Western District of Washington received an unopposed motion for preliminary approval of a class action settlement against a broker-dealer alleging that the defendant violated the Washington Commercial Electronic Mail Act (CEMA) and the Washington Consumer Protection Act (CPA) by having consumers send “unsolicited advertising text messages” to other Washingtonians through a referral program. The proposed settlement would establish a $9 million settlement fund that would compensate an estimated one million affected class members, consisting of consumers who received a referral program text message during the relevant period, were Washington residents, and did not “clearly and affirmatively” consent to receive referral program text messages.
Fed finds CEO engaged in crypto “pig butchering” scam which led to bank failure
On February 7, the Federal Reserve issued an evaluation report, as required by the Federal Deposit Insurance Act (where a loss to the deposit insurance fund is considered material), on a recently failed bank; the Fed concluded the bank failed due to alleged fraudulent activity by the bank’s CEO. In particular, the Fed found that the CEO initiated a series of wire transfers over the course of three months totaling about $47.1 million of the bank’s money as part of a cryptocurrency scam known as “pig butchering.” According to a FinCEN alert, “pig butchering” occurs when a scammer convinces its victims to invest in purportedly legitimate cryptocurrency investments but then steals the victim’s money.
The Fed found that the bank’s employees neglected to follow proper internal controls and policies that could have “prevented or detected” the alleged fraudulent activity, attributing the failure to a reluctance to challenge the CEO given the CEO’s “dominant role in the bank and prominent role in the community.” Specifically, the employees did not comply with the bank’s BSA/AML policy or file suspicious activity reports as outlined under the policy. As a result, the Fed recommended (i) increasing the awareness among state member banks of cryptocurrency scams; and (ii) providing training to examiners on cryptocurrency scams.
Supreme Court agrees with Third Circuit that consumers may sue “any” government entity under FCRA
On February 8, the Supreme Court of the United States unanimously decided that a consumer can sue any government agency—in this case the U.S. Department of Agriculture (USDA)—for damages for violating the Fair Credit Reporting Act of 1970, as amended by the Consumer Credit Reporting Reform Act of 1996 (the Act). The court found that government agencies are expressly included in the definition of any “person” who violates the statute. On appeal from the 3rd Circuit, the case involved an individual who sued the USDA for monetary damages under FCRA, alleging that the USDA furnished incorrect information to a credit reporting company stating that his account was past due, damaging his credit score and impairing his ability to access affordable credit.
In affirming the 3rd Circuit’s reversal of the lower court’s dismissal of the case, the Supreme Court noted that, while the U.S. is “generally immune” from monetary judgment suits as a sovereign body, Congress can waive this immunity. Applying a “clear statement” rule, the Supreme Court interpreted the Act’s statutory language that authorizes consumer suits for money damages against “[a]ny person” who willfully or negligently fails to comply with [the law]” to constitute a clear waiver of federal government sovereign immunity. As the Court explained, “the Act defines the term ‘person’ to include “any . . . governmental . . . agency,” therefore “FCRA clearly waives sovereign immunity in cases like this one.”