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  • Payments processor fined $20 million by State Money Transmission Regulators and State AGs

    State Issues

    On October 16, a national payment processor entered into two settlement agreements totaling $20 million with 44 state and territory money transmission regulators and 50 state and territory attorneys general to resolve issues stemming from alleged erroneous payment transactions.  The alleged erroneous payments involved the mistaken initiation of payments on behalf of almost 480,000 mortgage borrowers, with the total amount at issue totaling nearly $2.4 billion.

    According to the settlement entered into between the payment processor and the money transmission regulators, who were working through the Multi-State Money Service Business Examination Taskforce, the mistaken payments resulted from a breakdown of internal data security controls that allowed customer data intended for use in the testing of processing code to trigger actual payments.  The payment processor, who regularly provided payment processing services to a large residential mortgage lending and servicing company, was using actual customer mortgage payment data for test purposes.  As alleged in the settlement, it was determined that in the process of conducting testing on processing code to optimize the payment processors’ payment platform, more than 1.4 million payment entries were unintentionally and erroneously processed.  This erroneous payment processing was said to be primarily the result of “circumvention of internal data security controls and a lack of segregation between internal production and testing environments.”

    The settlement reached with the money transmission regulators requires the payment processor to maintain a comprehensive risk and compliance program and to provide regular reporting to a state regulator monitoring committee to ensure the adequacy of its risk management programs. 

    Under the terms of the settlement with the money transmission regulators, the payment processor is required to pay a total of $10 million, with approximately $9.5 million of that total being shared evenly by each participating state, with the remaining roughly $500,000 being used to cover the administrative costs of the investigating states.  Under the agreement with the state attorneys general, the payment processor is required to pay an additional $10 million to the various participating states and territories.  These amounts are in addition to the $25 million fine previously agreed to in the CFPB Consent Order, bringing the total amount to be paid by the payment processor to $45 million.

    State Issues Settlement DFPI Enforcement Mortgages

  • Fifth Circuit affirms dismissal of Fannie, Freddie shareholders’ claims related to FHFA removal restriction and funding

    Courts

    On October 12, the U.S. Court of Appeals for the Fifth Circuit affirmed dismissal of Fannie Mae and Freddie Mac shareholders’ claims that the FHFA’s unconstitutional removal restriction caused them harm and that the FHFA’s funding mechanism is inconsistent with the Appropriations Clause. After the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship, it entered into several preferred stock purchase agreements with the U.S. Treasury. As a result of these agreements, any value the companies generated would go to the Treasury and not to junior preferred and common stockholders such as plaintiffs.

    The plaintiff shareholders sued in 2016, arguing that the “for cause” removal protection for the director of the FHFA was unconstitutional. The district court granted summary judgment in favor of FHFA, but a panel of the 5th Circuit reversed. Sitting en banc, the 5th Circuit then determined that the removal provision violated the separation of powers, and held that the proper remedy was to sever the removal restriction from the rest of the authorizing statute. On further appeal, the Supreme Court held that for-cause restriction on the President’s removal authority violates the separation of powers, but it refused to hold that the relevant preferred stock purchase agreement must be undone.

    The Supreme Court remanded the case for lower courts to resolve whether the unconstitutional removal provision caused harm to plaintiffs as shareholders, and the 5th Circuit, again sitting en banc, remanded that question to the district court. Plaintiffs filed an amended complaint on remand, bringing claims under the Administrative Procedure Act (“APA”) and directly under the Constitution. The amended complaint also alleged, for the first time, that the FHFA’s financing structure violates the Appropriations Clause. Defendants moved to dismiss, and the district court granted the motion in its entirety and dismissed all claims with prejudice.

    The 5th Circuit determined that the removal claims were within the scope of the remand order, contrary to the district court’s conclusion, but that the plaintiff’s APA claim was barred by an anti-injunction clause in the authorizing statute. Turning to the Constitutional claim, the 5th Circuit concluded that judicial review was not precluded and proceeded to the merits of the claim.

    To show compensable harm from the unconstitutional removal provision, plaintiffs had to allege, among other things, a “nexus between the desire to remove and the challenged actions taken by the insulated actor.” More specifically, they had to allege a connection between the Trump Administration’s desire to remove the director of the FHFA and the Administration’s failure to have FHFA exit the conservatorships and return Fannie Mae and Freddie Mac to private control. The amended complaint, however, failed to plead facts demonstrating that the Trump Administration’s purported plan for re-privatization would have been completed if President Trump had been able to remove the existing FHFA director. Those allegations, the Fifth Circuit held, were insufficient.

    The 5th Circuit agreed with the district court that the plaintiffs’ Appropriations Clause argument was outside the mandate of the earlier remand order. The appeals court reasoned that the remand order “[left] no opening for plaintiffs to bring a challenge under a completely different constitutional theory for the first time on remand,” nor was there an intervening change in the law such that the mandate rule would not apply.

    Courts Fifth Circuit Appellate FHFA Fannie Mae Freddie Mac Shareholders Constitution U.S. Supreme Court

  • FDIC’s crypto risk oversight criticized in OIG report

    On October 18, the FDIC Office of Inspector General released a report on the FDIC’s strategies addressing the risks posed by crypto assets. According to the report, the FDIC has started to develop and implement strategies that address crypto risks but has not assessed the significance and potential impact of the risks. Additionally, although the FDIC requested that financial institutions provide information pertaining to their crypto‑related activities, its process for providing supervisory feedback is unclear. Between March 2022 and May 2023, the FDIC sent pause letters to several institutions related to their crypto activities, but it had not provided supervisory feedback to all of those institutions, it did not have an expected timeline for reviewing information and responding to institutions, and its procedures did not describe what constitutes the end of the review process for supervised institutions that received a pause letter.

    The OIG report recommends that the FDIC set a timeframe for assessing risks pertaining to related activities and update and clarify the supervisory feedback process related to its review of supervised institutions’ crypto-related activities. The FDIC agreed with both recommendations and plans to complete corrective actions by January 30, 2024.

    Bank Regulatory Federal Issues FDIC Cryptocurrency Risk Management

  • CFPB proposes rule to accelerate a shift toward open banking

    Agency Rule-Making & Guidance

    On October 19, the CFPB announced a proposed rule that it said would accelerate a shift toward open banking, would give consumers more control over their financial data, and would offer new protections against companies misusing consumer data. The proposed Personal Financial Data Rights rule activates a dormant provision of law enacted by Congress more than a decade ago, Section 1033 of the Consumer Financial Protection Act. According to the CFPB, the rule would “jumpstart competition” by prohibiting financial institutions from “hoarding” a person’s data and requiring companies to share data with other companies at the consumer’s direction about their use of checking and prepaid accounts, credit cards, and digital wallets. This would allow consumers to access competing products and services while ensuring that their data would be used only for their own preferred purpose. Among other things, the proposed rule would ensure that consumers: (i) can obtain their personal financial data at no cost; (ii) have a legal right to grant third parties access to information associated with their credit card, checking, prepaid, and digital wallet accounts; and (iii) can walk away from bad service. Comments on the proposed rule must be received on or before December 29, 2023.

    Agency Rule-Making & Guidance Federal Issues CFPB Consumer Protection Privacy, Cyber Risk & Data Security Open Banking

  • EBA report recommends environmental and social risk enhancements for financial sector

    On October 12, the European Banking Authority (EBA) announced the publication of a report on the role of environmental and social risks in the prudential framework of credit institutions and investment firms. The report recommends risk-based enhancements to the risk categories of the Pillar 1 framework, which sets capital requirements, noting that environmental and social risks are “changing the risk picture for the financial sector” and are expected to be more prominent over time. The report puts forward recommendations for actions over the next three years as part of the revised capital requirements regulations. Specifically, the EBA is proposing to: (i) include environmental risks as part of stress testing programs; (ii) encourage the inclusion of environmental and social factors as part of external credit assessments by credit rating agencies; (iii) encourage the inclusion of environmental and social factors as part of due diligence requirements and valuation of immovable property collateral; (iv) require institutions to identify whether environmental and social factors constitute triggers of operational risk losses; and (v) develop environment-related concentration risk metrics as part of supervisory reporting. With respect to revisions to the Pillar 1 framework, the report proposes: (i) the possible use of scenario analysis to enhance the forward-looking elements of the prudential framework; (ii) changes to the role that transition plans could play in the future; (iii) reassessing the appropriateness of revising the internal ratings-based supervisory formula and the corresponding standardized approach for credit risk to better reflect environmental risk elements; and (iv) the introduction of environment-related concentration risk metrics under the Pillar 1 framework.

    Bank Regulatory EU Of Interest to Non-US Persons ESG Capital Requirements Stress Test

  • Fed governor speaks on responsible innovation in money and payments

    On October 17, Federal Reserve Board Governor Michelle Bowman provided remarks on innovation in money and payments, including crypto assets, central bank digital currency (CBDC), and the development of instant payments, in which she laid out her vision for “responsible innovation,” which recognizes the important role of private-sector innovation and leverages the U.S. banking system supported by clear prudential supervision and regulation. With respect to CBDC, Bowman said that she has yet to see a compelling argument that CBDC could address frictions within the payment system, promote financial inclusion, or provide the public with access to safe central bank money any more effectively or efficiently than alternatives. She explained that, given that the U.S. has a safe and well-functioning banking system, the potential uses of a U.S. CBDC remain unclear and, at the same time, could introduce significant risks and tradeoffs. Bowman also expressed skepticism over stablecoins, stating that in practice they have been less secure, less stable, and less regulated than traditional forms of money. Finally, Bowman discussed technological innovations in wholesale payments, which are large-value, interbank transactions. Bowman said that the Fed is researching emerging technologies that could enable or be supported by future Fed-operated payment infrastructures, including depository institutions transacting with “tokenized” forms of digital central bank money. Bowman noted that banks and other eligible institutions already hold central bank money as digital balances at the Fed. She also stressed that wholesale payment infrastructures operated by the Fed “underpin domestic and international financial activities” by serving as a “foundation” for payments and the broader financial system. Because these wholesale systems function “safely and efficiently” today, it is necessary to investigate and understand the potential opportunities, risks, and tradeoffs for wholesale payment innovation to support a safe and efficient U.S. payment system.

    Find continuing InfoBytes coverage on CBDCs here.

    Bank Regulatory Federal Issues Federal Reserve Cryptocurrency CBDC Fintech Digital Assets Money Service / Money Transmitters

  • FHFA revises policies for Covid-19 forbearance on GSE mortgages

    Agency Rule-Making & Guidance

    On October 16, the Federal Housing Finance Agency (FHFA) announced it will revise how Fannie Mae and Freddie Mac (GSE) single-family mortgages are treated for borrowers who have entered Covid-19 forbearance under the GSEs’ representations and warranties framework. Under the revised policies, loans for which borrowers elected Covid-19 forbearance will be treated similarly to loans for which borrowers obtained forbearance due to a natural disaster. The GSEs’ current representations and warranties framework for natural disaster forbearance allows for consideration of the period during which a borrower is in forbearance as part of their demonstrated satisfactory payment history for the initial 36 months after the loan's origination. This framework will now be extended to loans with Covid-19 forbearance. FHFA Director Sandra L. Thompson said, "Servicers went to great lengths to implement forbearance quickly amid a national emergency, and the loans they service should not be subject to greater repurchase risk simply because a borrower was impacted by the pandemic."

    The updates will be effective on October 31.

    Agency Rule-Making & Guidance Federal Issues FHFA Covid-19 Forbearance GSEs Mortgages Consumer Finance Fannie Mae Freddie Mac

  • CFPB sues nonbank mortgage lender for alleged HMDA and CFPA violations

    Federal Issues

    On October 10, the CFPB filed a lawsuit against a Florida-based nonbank mortgage originator for allegedly failing to accurately report mortgage data in violation of the Home Mortgage Disclosure Act (HMDA). According to the complaint, in 2019 the Bureau found that the lender violated HDMA by intentionally misreporting data regarding applicants’ race, ethnicity and gender from 2014-2017, which resulted in the lender paying a civil money penalty and taking corrective action. In this action, the Bureau alleges that during its supervision process, it found the lender submitted HMDA data for 2020 contained “widespread errors across multiple data fields” including 51 errors in 159 files and the lender violated a 2019 consent order condition that required it to improve its data practices. The alleged errors include (i) mistakes in inputting data concerning subordinate lien loans and acquired loans; (ii) inclusion of loans in HMDA reporting that did not meet the HMDA criteria for reportable applications; (iii) incorrect characterization of purchaser type for tens of thousands of loans; (iv) erroneous rate spread calculations, leading to errors in interconnected fields; (iv) inaccurate data related to lender credits; and (v) incorrect categorization of specific loan applications as “approved but not accepted” when they were, in fact, withdrawn, resulting in discrepancies in associated fields. Along with the HDMA violations and the violations of the 2019 consent order, the CFPB also alleges violations of the CFPA and requests that the court permanently enjoin the lender from committing future violations of HMDA, require the lender to take corrective action to prevent further violations of HMDA, injunctive relief, and the imposition of a civil money penalty.  

    Federal Issues CFPB Enforcement Lending Mortgage Lenders Mortgages Consumer Finance HMDA CFPA Data Collection / Aggregation

  • CFPB, DOJ issue guidance on immigration status and fair lending

    Agency Rule-Making & Guidance

    On October 12, the CFPB and DOJ issued a joint statement on fair lending and credit opportunities for noncitizen borrowers. The statement warned that, under the Equal Credit Opportunity Act (ECOA) and its implementing regulations, it is unlawful for lenders to discriminate against credit applicants based on their national origin or race, regardless of their immigration status. In its press release announcing the joint statement, DOJ explained that the statement was prompted by reports of consumers being rejected for credit cards as well as auto, student, and personal loans because of their immigration status, even when they were otherwise qualified to receive the loans. The joint statement explained that, although a creditor may consider an applicant’s immigration status when necessary to ascertain the creditor’s rights regarding repayment, “unnecessary or overbroad reliance on immigration status in the credit decision process, including when that reliance is based on bias, may run afoul of ECOA’s antidiscrimination provisions and could also violate other laws.” Among other things, the agencies cautioned against the overbroad consideration of criteria that may “serve as a proxy for citizenship of immigration status,” such as how long a consumer has had a social security number. Likewise, requiring only certain groups of noncitizens to provide documentation, identification, or in-person applications may also violate ECOA by “harming applicants on the basis of national origin or race.”

    Agency Rule-Making & Guidance Federal Issues CFPB DOJ ECOA Consumer Finance Consumer Protection Credit Cards Fair Lending

  • FTC settles with bankrupt crypto company and bans asset management

    Federal Issues

    On October 12, the FTC announced it has reached a settlement with a bankrupt crypto company, which will permanently ban the company from managing consumer assets. According to the federal court complaint, the FTC alleged that from at least 2018, respondent attracted customers by promising their deposits would be secure, but when the company failed, consumers lost access to significant assets, resulting in over $1 billion in cryptocurrency asset losses.  The FTC alleges violations of the FTC Act and the Gramm-Leach-Bliley Act's prohibition on obtaining financial information through false statements.  Respondent allegedly misled consumers by claiming their assets were safe on the platform, stating that "YOUR USD IS FDIC INSURED." However, respondent is not a bank and the deposits were not eligible for FDIC insurance. The FTC complaint also alleged that the FDIC does not insure cryptocurrency assets, and consumers' cash deposits were placed in an account held by respondent at a traditional bank. Consumers' funds were protected only if that bank failed, but their cryptocurrency was not protected at all.

    The proposed settlement with respondent and its affiliates permanently bans them from offering, marketing, or promoting any product or service related to depositing, exchanging, investing, or withdrawing assets. Respondent and its affiliates have agreed to a judgment of $1.65 billion, which will be suspended to allow the bankrupt company to return its remaining assets to consumers through bankruptcy proceedings. The proposed settlement also prohibits respondent and its affiliates from managing consumer assets, misrepresenting product benefits, making false representations to obtain financial information, and disclosing nonpublic personal information without consent.

    The FTC also announced that it is filing a lawsuit against the respondent’s CEO for making false claims that consumer accounts were FDIC-insured. Respondent’s CEO has not agreed to a settlement, and the FTC's case against him will proceed in federal court. “In a parallel action, on October 12, the Commodity Futures Trading Commission separately charged [respondent’s CEO] with fraud and registration failures,” the FTC added.

     

    Federal Issues Settlement FTC Cryptocurrency Bankruptcy FTC Act Deceptive Enforcement FDIC

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