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DOE announces final rules for targeted debt relief programs
On October 31, the Department of Education (DOE) announced final rules to streamline and improve targeted debt relief programs. (See DOE fact sheet here.) The final rules implement several changes to protect student borrowers, including:
- Borrower defense to repayment and arbitration. The final rules establish a strong framework for borrowers to raise a defense to repayment if their post-secondary institution misleads or manipulates them. Claims pending on or received on or after July 1, 2023, can be decided individually or as a group, and may be based on one of the following categories of actionable circumstances: substantial misrepresentation, substantial omission of fact, breach of contract, aggressive and deceptive recruitment, or judgments or final secretarial actions. The final rules will only provide full relief (partial discharges will not be considered), with approved claims requiring “that the institution committed an act or omission which caused the borrower detriment of such a nature and degree that warrant full relief” based upon a preponderance of the evidence. Additionally, the final rules establish certain recoupment processes for DOE to pursue institutions for the cost of approved claims, and will allow borrowers to litigate their case “by preventing institutions that participate in the Direct Loan program from requiring borrowers to engage in pre-dispute arbitration or sign class action waivers.”
- Closed school discharges. The final rules provide an automatic discharge of a borrower’s loan “one year after a college’s closure date for borrowers who were enrolled at the time of closure or left 180 days before closure and who do not accept an approved teach-out agreement or a continuation of the program at another location of the school.” Borrowers who accept but do not complete a teach-out agreement or program continuation will receive a discharge one year after the last date of attendance.
- Total and permanent disability discharge. The final rules include new options for borrowers who have had a total and permanent disability to receive a discharge, including borrowers (i) who receive additional types of disability review codes from the Social Security Administration (SSA); (ii) who later aged into retirement benefits and are no longer classified by one of SSA’s codes; (iii) who have an established disability onset date determined by SSA to be at least 5 years in the past; and (iv) whose first continuing disability review is scheduled at three years. The final rules also eliminate a three-year income monitoring requirement.
- Interest capitalization. Under the final rules, “interest will no longer be added to a borrower’s principal balance the first time a borrower enters repayment, upon exiting a forbearance, and leaving any income-driven repayment plan besides Income-Based Repayment.” Specifically, the final rules eliminate all instances where interest capitalization—which occurs when a borrower has outstanding unpaid interest added to the principal balance—is not required by law.
- Public Service Loan Forgiveness. As previously covered by InfoBytes, the final rules will provide benefits for borrowers seeking Public Service Loan Forgiveness, including providing credit toward the program for borrowers who have qualifying employment.
- False certification. The final rules will provide borrowers with an easier path to discharge when a college falsely certifies a borrower’s eligibility for a student loan. This includes expanding allowable documentation, clarifying applicable discharge dates, and allowing for the consideration of group discharges.
The final rules are effective July 1, 2023.
Commissioner says CFTC should take a “same risk, same regulatory outcome” approach for addressing crypto risks
On October 26, CFTC Commissioner Christy Goldsmith Romero spoke before the International Swaps and Derivatives Association’s Crypto Forum 2022, where she presented thoughts on the financial stability risks of cryptocurrency assets. Romero cautioned that the “rapidly developing crypto market” is facing similar financial stability risks as the traditional financial system, including parallel themes from the 2008 financial crisis. She highlighted events such as those that happened earlier in the year where an algorithmic stablecoin and related crypto-asset collapsed and triggered a broad sell off of cryptocurrency that spread losses to several institutions who abruptly cut off lending. These vulnerabilities serve as a warning for growing intra-market risks, Romero said, explaining that “[j]ust as regulators could not see the true exposures or risk in 2008 due to unregulated companies and products, [regulators] cannot see that today with unregulated crypto markets.” Moreover, without additional regulatory authority, the CFTC’s ability to monitor these risks is hampered, she said, adding that “[f]inancial stability risk will increase, and could rise to the level of systemic risk if in the future there are greater interconnections between the crypto industry and traditional finance players performing critical market functions.”
Romero recognized that novel technologies bring novel risks, and said that the CFTC should address these risks by using its existing authority to follow a “same risk, same regulatory outcome” approach and establish customer protections and guardrails that investors and customers are familiar with and have come to expect from other regulated financial products and markets. She emphasized that financial institutions interested in entering the digital asset space “should undertake substantial due diligence to determine vulnerabilities” in areas such as cyber theft, money laundering, and sanctions evasion; fraud, scams, and market manipulation; customer asset segregation; and conflicts of interest.
DOE expands support for veterans/servicemembers and incarcerated individuals
On October 27, the Department of Education (DOE) announced final rules cracking down on deceptive practices affecting veterans and servicemembers and expanding college access to incarcerated students. (See DOE fact sheet here.) The final rules, among other things, (i) implement a change to the “90/10 rule” made by the American Rescue Plan in 2021, which closed a loophole in the Higher Education Act that previously incentivized some for-profit colleges to aggressively recruit veterans and servicemembers in order to receive more DOE funding (going forward, these institutions may no longer count money from veteran and service member benefits toward a 10 percent revenue requirement); (ii) expand access to DOE’s Second Chance Pell Experimental Sites Initiative to allow incarcerated individuals in nearly all states to participate; (iii) provide incarcerated individuals with access to the FSA’s Fresh Start initiative, which will help borrowers with defaulted loans access income-driven low monthly payments as well as with access to Pell Grants; and (iv) clarify requirements and processes for post-secondary institutions when changing ownership, which may require institutions to provide additional financial protection or impose other conditions to protect against risks arising from the transaction.
CSBS provides tips on NMLS annual renewal
On October 20, the Conference of State Bank Supervisors (CSBS) announced that individuals and businesses in the mortgage, money transmission, debt collection, and consumer financial services industry are encouraged by state regulators to prepare for November 1, which is the beginning of the Nationwide Multistate Licensing System (NMLS) annual license renewal. The announcement noted the number of individual state licenses eligible for renewal is 13 percent higher than the same time last year, while the number of company licenses eligible for renewal is up 16 percent compared to this time last year. CSBS provided five tips for licensees to prepare for NMLS renewal, which include, among other things, resetting NMLS passwords to conform with new requirements that went into effect this past March and to review state-specific renewal requirements. CSBS also noted that the renewal period in most states runs from November 1 to December 31.
Arizona streamlines DBA licensing requirements
At the end of September, amended financial services licensing provisions under Arizona SB 1394 took effect. SB 1394 streamlines licensing requirements for companies that are currently required to obtain separate licenses for trade names or assumed names (often known as “doing business as” or DBAs). Specifically, SB 1394 will allow most companies that the Department of Insurance and Financial Institutions (DIFI) licenses to operate with additional trade names under a single license, provided the company notifies DIFI in writing prior to using the assumed name or trade name. Companies, however, may not use an assumed name or trade name that (i) is “so substantially similar” to another company’s name that it may cause public uncertainty or confusion; or (ii) may deceive or mislead the public as to the type of business conducted by the company. DIFI applauded the bill’s passage in an announcement released earlier this year, saying consumers will still be able to look up companies under a trade name and file complaints against a company’s trade name. “Licensees will save time and money by linking additional DBAs to a single license name without having to pay for and maintain multiple licenses,” DIFI said, noting that it still “maintains all regulatory authority including the ability to investigate, examine, and take action against the parent business.”
CFPB argues funding constitutionality holding does not make sense
On October 25, the CFPB responded to a notice of supplemental authority filed by a credit reporting agency (CRA) in the U.S. District Court for the Northern District of Illinois, which sought to use a recent decision issued by the U.S. Court of Appeals for the Fifth Circuit as justification for the dismissal of a lawsuit against the CRA. In April, the Bureau sued the CRA, two of its subsidiaries, and a former senior executive (collectively, “defendants”) for allegedly violating a 2017 consent order in connection with alleged deceptive practices related to their marketing and sale of credit scores, credit reports, and credit-monitoring products to consumers. (Covered by InfoBytes here.) Following the 5th Circuit’s decision, in which a three-judge panel unanimously held in CFSA v. CFPB that the CFPB funding structure created by Congress violated the Appropriations Clause of the Constitution (covered by a Buckley Special Alert), the defendants filed a notice of supplemental authority on October 20, arguing that the suit must be dismissed and that the Bureau may not use unappropriated funds when prosecuting the suit. The defendants further contended that the 2017 consent order is invalid because the Bureau used unappropriated funds in its preparation.
The Bureau countered in its response that the 5th Circuit’s holding does not “make sense,” is “without support in law,” and does not help the defendants’ defense. According to the Bureau, “the court mustered no case from more than 230 years of constitutional history that has ever held that Congress violates the Appropriations Clause or separation of powers when it authorizes spending by statute, as it did for the Bureau.” Moreover, the Bureau argued that the appellate court’s contention that the CFPB’s funding was “impermissibly ‘double-insulated’ from congressional oversight” was incorrect because “Congress is fully capable of overseeing the Bureau’s spending, including because of several provisions in the Bureau’s statute that ensure its ability to supervise.” Adding that the court “should reject” the 5th Circuit’s analysis and “join every other court to address the issue—including the en banc D.C. Circuit—in upholding the Bureau’s statutory funding mechanism,” the agency further argued that even if the district court should disagree with this contention, it should still deny the defendants’ motion to dismiss because any alleged defect in the agency’s funding authorization “would not deprive the Bureau of the power to carry out the responsibilities given it by Congress to enforce the law.”
SEC says exchanges must have policies on incentive compensation given in error
On October 27, the SEC announced final rules requiring securities exchanges to adopt listing standards that require issuers to develop and implement policies providing for the recovery of erroneously awarded incentive-based compensation received by executive officers. The final rules require a listed issuer to file the policy as an exhibit to its annual report and to include disclosures related to its recovery policy and recovery analysis where a recovery is triggered. The SEC first proposed new rules for executive compensation disclosure in 2015, but they were not finalized. The SEC reopened consideration of the rules last year, and in August, adopted a new requirement that a reporting company’s proxy statement and other disclosures include a table showing executive compensation and financial performance measures.
According a statement released by SEC Chairman Gary Gensler, the new rules will “strengthen the transparency and quality of corporate financial statements, investor confidence in those statements, and the accountability of corporate executives to investors.” Commissioner Hester M. Peirce also released a statement, where she noted that implementing the statutory clawbacks mandate is “commendable,” but “doing it—expansively, inflexibly, and impractically—is not.” Peirce noted that the final rule “does not permit company boards, guided by their fiduciary duty, to determine when clawing back compensation makes sense,” and that “[s]uch an approach would have served shareholders by ensuring that companies claw back erroneously awarded compensation when doing so yields a net benefit to shareholders.” The final rules will become effective 60 days after publication in the Federal Register. Exchanges will be required to file proposed listing standards no later than 90 days following publication of the release in the Federal Register, with listing standards effective no later than one year following such publication.
OFAC sanctions Iranian leaders
On October 26, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions pursuant to Executive Order 13553 against 10 Iranian officials related to the ongoing crackdown on nationwide protests in Iran and internet censorship, as well as two Iranian intelligence actors and two Iranian entities involved in the Iranian government’s efforts to disrupt digital freedom. As previously covered by InfoBytes, on October 6, OFAC sanctioned seven senior leaders within Iran’s government and security apparatus for the shutdown of Iran’s internet access. OFAC also sanctioned Iran’s Morality Police along with seven senior leaders who oversee Iran’s security organizations (covered by InfoBytes here). According to OFAC, the recently announced sanctions “coupled with additional initiatives such as the release of Iran General License D-2, which expands and clarifies the range of U.S. software and internet services available to Iranians under OFAC’s sanctions program, demonstrate the United States’ commitment to support the Iranian people’s call for accountability and justice, as well as their right to freely exchange information, including online.” As a result of the sanctions, all property and interests in property belonging to the sanctioned persons that are in the U.S. or in the possession or control of U.S. persons must be blocked and reported to OFAC. U.S. persons are also prohibited from engaging in any dealings involving the property or interests in property of blocked or designated persons, and “persons that engage in certain transactions with the individuals or entities designated today may themselves be exposed to sanctions,” OFAC said. Additionally, OFAC warned that “any foreign financial institution that knowingly facilitates a significant transaction or provides significant financial services for any of the individuals or entities designated today could be subject to U.S. correspondent or payable-through account sanctions.”
NYDFS revises state CRA regulations
On October 26, NYDFS released revisions to its proposed state Community Reinvestment Act regulation, which would allow the Department to obtain the necessary data to evaluate the extent to which New York-regulated banking institutions are serving minority- and women-owned businesses in their communities. The revised proposed regulation addresses comments received during a prior 60-day comment period that began last November (covered by InfoBytes here), and is intended to minimize compliance burdens by making sure the regulation’s proposed language complements requirements in the CFPB’s proposed rulemaking for collecting data on credit access for small and minority- and women-owned businesses. Among other things, the revised proposed regulation would require regulated entities to inquire as to whether a business applying for a loan or credit is minority- or women-owned or both, and submit a report to the Department providing application details, such as the date, type of credit applied for and the amount, whether the application was approved or denied, and the size and location of the business. Additionally, the revised proposed regulation (i) establishes processes for regulated entities when soliciting, collecting, storing, and reporting information related to their provision of credit to minority- and women-owned businesses, including when requests for information should be made, and notifications informing applicants of their right to refuse to offer information in response to a request and that the provided information may not be used for any discriminatory purpose; (ii) provides that, to the extent feasible, underwriters should not be able to access information provided by an applicant; (iii) stipulates how long a regulated entity is required to preserve gathered information; and (iv) provides a sample data collection form that regulated entities may choose to use. According to NYDFS, the revisions are designed to make sure regulated entities abide by fair lending laws when collecting and submitting the necessary data. Comments will be accepted for 45 days following publication in the State Register.
CFPB launches rulemaking on consumers’ rights to their data
On October 27, the CFPB released a 71-page outline of proposals and alternatives under consideration related to the Bureau’s Dodd-Frank Section 1033 rulemaking efforts. The outline describes proposals under consideration that “would specify rules requiring certain covered persons that are data providers to make consumer financial information available to a consumer directly and to those third parties the consumer authorizes to access such information on the consumer’s behalf, such as a data aggregator or data recipient (authorized third parties).” Emphasizing that “[c]lear data rights for consumers have the potential to give individuals more bargaining leverage,” the Bureau claimed that companies compiling vast amounts of personal data, including information about consumers’ use of financial products and services, are able to monopolize the use of this data, thereby blocking competition and stifling the development of competitors’ products and services.
Highlights from the outline include a series of discussion questions for small businesses and a list of topics, including:
- Data providers subject to the proposals under consideration. The proposals, if finalized, would impact data providers, including “depository and non-depository financial institutions that provide consumer funds-holding accounts or that otherwise meet the Regulation E definition of financial institution, as well as depository and non-depository institutions that provide credit cards or otherwise meet the Regulation Z definition of card issuer.” Notably, “a financial institution would be a covered provider if it issues an ‘access device’ (as the term is defined in Regulation E § 1005.2(a)(1)), such as a digital credential storage wallet, and provides EFT services, even if it does not hold consumer accounts.” Additionally, “a card issuer would be a covered data provider if it issues a ‘credit card’ (as the term is defined in Regulation Z § 1026.2(a)(15)(i)), such as by issuing digital credential storage wallets, even if it does not hold consumer credit accounts.” The outline also defines covered accounts and states the Bureau is considering potential exemptions for certain data providers.
- Recipients of information. To be considered an authorized third party under the proposals, a third party must: (i) provide an “authorization disclosure” informing consumers of key terms of access; (ii) obtain consumers’ informed, express consent to the key terms of access contained within the authorization disclosure; and (iii) certify to consumers that it will abide by certain obligations related to the collection, use, and retention of a consumer’s information. The Bureau is considering proposals that would address “a covered data provider’s obligation to make information available upon request directly to a consumer (direct access) and to authorized third parties (third-party access).”
- Types of information covered data providers would need to make available. The outline proposes six categories of information data providers would have to make available with respect to covered accounts, including (i) periodic statement information; (ii) information on certain types of prior transactions and deposits that have not-yet-settled; (iii) information regarding prior transactions not typically shown on periodic statements or online account portals; (iv) online banking transactions that have not yet occurred; (v) account identity information; and (vi) other information, such as consumer reports, fees, bonuses, discounts, incentives, and security breaches that exposed a consumer’s identity or financial information.
- Exceptions to the requirement to make information available. The outline provides four exceptions to the requirement for making information available: (i) confidential commercial information; (ii) information obtained to prevent fraud, money laundering, or other unlawful conduct; (iii) information that is required to be kept confidential; and (iv) information a “data provider cannot retrieve in the ordinary course of business.”
- How and when information would need to be made available. The outline states the Bureau is considering ways to define the methods and the circumstances in which a data provider would need to make information available with respect to both direct access and third-party access.
- Third party obligations. The Bureau is examining proposals to limit authorized third parties’ collection, use, and retention of consumer information to that which “is reasonably necessary to provide the product or service the consumer has requested.” This includes (i) limiting duration, frequency, and retention periods; (ii) providing consumers a simple way to revoke authorization; (iii) limiting a third party’s secondary use of consumer-authorized information; (iv) requiring third parties to implement data security standards and policies and procedures to ensure data accuracy and dispute resolution; and (v) requiring third parties to comply with certain disclosure obligations, including a mechanism for consumers to request information about the extent and purposes of a third party’s access to their data.
- Record retention obligations. Proposals under consideration would establish requirements for data providers and third parties to demonstrate compliance with their obligations under the rule.
- Implementation period. The Bureau is seeking feedback on time frames to ensure consumers are able to benefit from a final rule, while also considering implementation factors for data providers and third parties.
An appendix to the highlights provides examples of ways the proposals would apply to hypothetical transactions involving consumer-authorized data access to an authorized third party.
The Bureau’s rulemaking process will include panel convenings, as mandated under the Small Business Regulatory Enforcement Fairness Act of 1996, after which the panel will prepare a report for the Bureau to consider as it develops the proposed rule. “Dominant firms shouldn’t be able to hoard our personal data and appropriate the value to themselves,” CFPB Director Rohit Chopra said in announcing the rulemaking outline. Chopra further elaborated on the rulemaking’s purposes during an industry event earlier in the week (covered by InfoBytes here) where he said the Bureau plans to propose requiring financial institutions that offer deposit accounts, credit cards, digital wallets, prepaid cards, and other transaction accounts to set up secure methods for data sharing as a way to “facilitate new approaches to underwriting, payment services, personal financial management, income verification, account switching, and comparison shopping.”