InfoBytes Blog

State AGs submit response to Treasury RFI on using AI in finance

On August 12, a coalition of 15 Republican State Attorneys General sent a letter addressed to the Secretary of the Treasury, Janet Yellen, in response to the the Treasury’s Request for Information (RFI) on the uses, opportunities and risks of AI in the financial services industry.

The State AGs emphasized potential benefits of the implementation of AI by financial services firms including improved customer interactions through AI chatbots, expedited credit risk evaluations, enhanced investment management, and improved fraud detection. The AGs urged the Department to avoid heavy-handed regulation that might stifle innovative uses of AI, noting that enforcement should be limited to deceptive acts or practices or direct harms to competition. The AGs also noted that existing consumer protection laws were already well-positioned to address potential harms arising from these technologies.

The letter also admonished against the politicization of AI regulation, suggesting that any regulation implemented by the Treasury must focus solely on risks to financial reliability and consumer protection. The AGs expressed a concern that, in their view, recent Treasury regulations used financial oversight as a guise to advance non-financial goals, such as environmental regulation, racial equity and other ideological agendas. The AGs asserted that such non-financial purposes were improper justification for Treasury regulations and that any AI regulation should be limited to addressing concerns relating to financial stability.

The letter further advised the Treasury to be mindful of the impact of AI regulations on competition, warning against regulations that could stifle innovation and harm the ability of smaller entities to compete. The AGs also advocated for regulations that complement state laws and that do not preempt existing state enforcement mechanisms, emphasizing the role of State AGs in pursuing recent and successful consumer protection actions.

State Issues Federal Issues Artificial Intelligence Department of Treasury

Attorneys General criticize Treasury letter regarding de-banking

Recently, 20 state attorneys general (AGs) sent a letter addressed to U.S. Treasury Secretary Janet Yellen objecting to the Treasury’s recent letter which criticized state laws protecting individuals from de-banking. The AGs’ letter argued that these state laws, such as Florida’s HB 989, prohibited discrimination against consumers “based on factors that are not grounded in measurable risks” by financial service providers, and criticized the Treasury for allegedly misleading financial institutions about the implications of these laws. The AGs contend that the Treasury has incorporated political activism into financial regulation, citing past actions related to climate change and net-zero recommendations. The letter concluded by urging the Treasury to focus on its statutory duties rather than political agendas. 

Federal Issues State Attorney General Department of Treasury State Legislation Congress U.S. House

FHLBs urged to increase affordable housing, community economic development allocations

On July 30, senators from several states sent letters to multiple FHLBs urging them to require their respective banks to allocate at least 20 percent of their net income to affordable housing and community economic development grants through the Affordable Housing Program and creating new voluntary programs. Despite substantial government subsidies, the senators criticized FHLB for their inadequate response to a crisis in affordable housing, and claimed that the FHLBs have spent only a small fraction of their net income on affordable housing. The letters point out that while the FHLBs pledged to increase their contributions to 15 percent, they have yet to fulfill this promise and should aim for at least 20 percent. The senators argue that FHLBs have the financial capacity to contribute more, citing historical precedents and the current high levels of retained earnings.

The following day, Deputy Secretary of the Treasury Wally Adeyemo met with leaders of the 11 FHLBs and FHFA Director Sandra Thompson to discuss enhancing support for affordable housing development. Adeyemo urged the FHLBs to allocate at least 20 percent of their net income to affordable housing and to use part of their unrestricted retained earnings to create a capital pool aimed at reducing the cost of new housing production nationwide. The Treasury noted that this meeting is part of the Biden administration's broader effort to lower costs for Americans and follows months of Treasury engagement with FHLB leadership.

Federal Issues Department of Treasury Federal Home Loan Banks Affordable Housing Congress

President Biden taps Goldsmith Romero to become next FDIC Chair

On June 13, President Biden announced Christy Goldsmith Romero as his nominee for FDIC Chair. Goldsmith Romero most recently served as a Commissioner at the CFTC since 2022, where she sponsored the CFTC’s Technology Advisory Committee examining cybersecurity, artificial intelligence, digital assets, and blockchain technologies. Goldsmith Romero spent 12 years at the Treasury where she served as the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), as well as on a Council of Inspectors General overseeing the FSOC. Her oversight of SIGTARP resulted in the recovery of more than $11 billion in civil charges against large financial institutions and criminal charges against hundreds of individuals. Goldsmith Romero has also held positions at the SEC as well as in academia as a law professor.

Federal Issues FDIC CFTC TARP Department of Treasury

FSB’s Liang speaks on AI in finance

On June 4, the U.S. Under Secretary for Domestic Finance, Nellie Liang, delivered a speech at the OECD-FSB Roundtable on Artificial Intelligence (AI) in Paris. Liang noted that while AI has been around for many years, the recent advances of generative AI will be evolving and will have the potential to transform the financial sector even more. The latest advancements in AI models can process vast amounts of data, generate content, and automate decision-making, welcoming new opportunities and challenges for financial institutions and regulators. The biggest takeaway was that AI holds transformative potential for the financial sector by enhancing efficiency and innovation, yet it also posed challenges such as model risk and privacy issues, necessitating vigilant evolution of regulatory frameworks to ensure safety and fairness.

On AI uses, Liang highlighted that financial institutions have explored AI applications to reduce costs, increase productivity, and develop new products. For instance, AI can be used to automate back-office functions, enhance customer service through chatbots, and inform trading strategies. AI’s expertise will be its abilities to process large volumes and types of information that would be otherwise impractical or impossible to analyze. Concerning risks, Liang pinpointed model risk as a prime issue, contending that robust data governance and careful design can counteract potential pitfalls. AI may also introduce or amplify interconnections among financial firms, leading to potential financial stability risks. Furthermore, Liang focused on the increased use of AI in financial services and the concerns it raised about data privacy, surveillance, and potential biases in AI-driven decision-making.

Liang noted how addressing these AI risks through existing regulatory frameworks, such as principles of model risk management, third-party risk management, and consumer protection laws would be possible. However, she noted, regulators need to assess whether AI will introduce new risks that require adjustments to the regulatory framework. Additionally, policymakers will be exploring the use of AI for identifying data anomalies, countering illicit finance and fraud, and improving fraud detection through comprehensive databases. 

Fintech Artificial Intelligence Department of Treasury Risk Management Big Data

CFTC subcommittee issues report on responsible AI use

On May 2, a CFTC subcommittee on Emerging and Evolving Technologies issued a report on the responsible use of artificial intelligence (AI) by exchanges, clearinghouses, futures commission merchants, brokers, and data repositories, among others, interested in using AI in financial markets. The report examined AI use cases in financial services, reviewed the risks of AI for CFTC-registered entities, and set out five recommendations for the CFTC: (1) the CFTC should host a public roundtable discussion with industry leaders; (2) the CFTC should define and adopt an AI risk management framework to assess consumer harms and benefits of AI use by CFTC-registered entities; (3) the CFTC should create an inventory of existing AI regulations and identify gaps where staff guidance or rulemaking would be needed; (4) the CFTC should establish a process to align its policies with other federal agencies; and (5) the CFTC should increase staff participation in domestic and international dialogues around AI.

Fintech Artificial Intelligence Department of Treasury Governance Anti-Money Laundering

Alabama judge finds the Corporate Transparency Act unconstitutional, DOJ quickly appeals

On March 1, the federal district court in the Northern District of Alabama entered a final declaratory judgment concluding that the Corporate Transparency Act (CTA) is unconstitutional. The plaintiffs, including a non-profit small business association consisting of more than 60,000 small business members as well as an individual small business owner, sued the Treasury Department, Secretary Janet Yellen, and FinCEN Acting Director Himamauli Das in their official capacities, alleging that the CTA’s mandatory disclosure requirements violate the First, Fourth, Fifth, Ninth, and Tenth Amendments and exceed Congress’s authority under Article I of the Constitution.

Corporations, LLCs, or other similar entities that are either “(i) created by the filing of a document with a secretary of state… or (ii) formed under the law of a foreign country and registered to do business in the United States” are required to provide certain beneficial ownership information, as well as disclose any related changes to FinCEN under the CTA, excluding exempt entities. The CTA was passed in 2021 as part of the National Defense Authorization Act and required most entities incorporated under state law to disclose beneficial ownership information to FinCEN to prevent financial crimes often committed through shell corporations. In September 2022, FinCEN issued a final rule implementing the CTA, which went into effect on January 1 of this year, and required currently existing entities and five million new entities formed each year from 2025 to 2034 to disclose the identity and information of any “beneficial owner” to FinCEN (see Orrick Insight here).

According to the court, the CTA exceeds the Constitution’s limits on Congress’s power and does not have a strong enough connection to any of Congress’s listed powers to be considered a necessary or appropriate way to reach Congress’s policy objectives. The court rejected the government’s claims that the CTA is covered by various constitutional provisions, including the Commerce Clause, Taxing Clause, Necessary and Proper Clause, and Congress’s powers related to foreign affairs and national security.

The judgment permanently enjoined the Department of the Treasury and FinCEN from enforcing the CTA against the plaintiffs and as a result they are not required to report beneficial ownership information to FinCEN at this time. The order does not ban enforcement of the CTA and its beneficial ownership disclosure requirements to FinCEN generally.

On March 11, the U.S. Department of Justice filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit after U.S. District Judge Liles C. Burke’s March 1 ruling.

Courts Alabama Corporate Transparency Act Constitution Congress FinCEN Department of Treasury

Yellen testifies on FSOC Annual Report, key areas of focus

On February 8, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing titled “The Financial Stability Oversight Council Annual Report to Congress” with testimony provided by U.S. Treasury Secretary Janet Yellen. Secretary Yellen discussed progress, and continued focus, related to five topics addressed in FSOC’s 2023 Annual Report (covered by InfoBytes here): capital risks posed by nonbank financial institutions; climate-related financial stability risks; cybersecurity risks; monitoring artificial intelligence (AI) use in financial services; and digital asset oversight. In response to questioning from Senator Cortez Masto (D-NV), Yellen discussed how FSOC highlighted that about 70 percent of single-family mortgages were originated by nonbank mortgage originators during the first half of 2023. When Secretary Yellen was asked if the shift from banks to nonbanks in the mortgage space poses a financial stability risk “due to non-banks’ lack of access to deposits,” she responded that FSOC is “very focused” on the issue since non-banks are reliant on short-term financing. In addition, Yellen spoke about AI and learning its impact on vulnerabilities and risk, as well as the Basel III proposal, urging regulators to “finalize these rules as quickly as possible.”

Federal Issues FSOC Department of Treasury U.S. Senate Basel Mortgage Lenders

FinCEN issues FAQs on PPP

On January 12, FinCEN and the SBA issued FAQs on the Paycheck Protection Program (“PPP”), established under the CARES Act, to assist borrowers and lenders in interpreting the CARES act and the PPP Interim Final Rule. Among the issues addressed in the FAQs, FinCEN and the SBA provided guidance regarding whether under the CDD Rule, lenders are required to collect, certify, or verify beneficial ownership information for existing customers, stating that it is not necessary to re-verify “[i]f the PPP loan is being made to an existing customer, and the existing customer and the necessary information was previously verified. Additionally, FinCEN and the SBA addressed the question of whether a lender’s collection of the information required with respect to owners of 20% or greater interest in PPP applicants is sufficient to satisfy a lender’s obligation to collect beneficial ownership information under the Bank Secrecy Act. FinCEN and the SBA stated that for lenders with existing customers the lender does not need to reverify beneficial ownership information for owners that hold ownership interests of at least 20 percent, and with respect to new customers with the same ownership interest, all natural persons will need to provide the same information in order to satisfy BSA requirements. FinCEN also answered more FAQs on its April 2020 FAQs regarding the PPP on Second Draw PPP Loans, on BSA/AML compliances, and on SBA Procedural Notice 5000-835955, the last stating that a “PPP lender may reveal the existence of a SAR to the SBA when requesting a guaranty purchase (without charge-off) from the SBA.” 

Federal Issues SBA FinCEN Department of Treasury PPP CARES Act Bank Secrecy Act Anti-Money Laundering Act of 2020

Treasury opens comment period for financial inclusion initiatives

On December 22, 2023, the Treasury released its request for information to develop a national strategy for financial inclusion. Financial inclusion is loosely defined by the Treasury as expanding accessibility, developing financial security, and expanding opportunities for Americans to build wealth, including closing the racial wealth gap among underserved communities, where “discrimination… [has] resulted in significant disparities in access to… financial products and services across… communities, including low-income and low-wealth communities and [minority groups].” The Treasury’s initiative fulfills its requirements from the Financial Services and General Government Appropriations Act portion of the 2022 omnibus spending bill known as the Consolidated Appropriations Act, 2023, and will help the Treasury advance its strategic vision for financial inclusion and create a roadmap for any future actions. The Treasury offers its request for information to identify opportunities through “policy, government programs, financial products and services, technology, and other tools and market infrastructure.” Comments can be submitted here and will be open until February 20, 2024.

Federal Issues Department of Treasury Congress