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NYDFS issues guidance on AI insurance discrimination
On July 11, NYDFS issued Insurance Circular No. 7 to address the use of AI systems and External Consumer Data and Information Sources (ECDIS) in the underwriting and pricing of insurance policies in New York State. NYDFS outlined its expectations for insurers regarding the responsible and compliant use of the technologies, emphasizing the need to abide by existing laws and regulations that prohibit unfair discrimination.
Key points in the circular included:
- Definitions of AI systems and ECDIS, and insurers will be expected to understand that “traditional underwriting” does not include the use of these technologies.
- Insurers must conduct proxy assessments to ensure ECDIS will not result in discrimination based on protected classes. The circular also clarified what the proxy assessment may entail.
- NYDFS expected insurers to maintain robust governance and risk management practices, including board and senior management oversight, policies and procedures, and risk management frameworks.
- Insurers will be responsible for the oversight of third-party vendors providing AI systems and ECDIS, ensuring compliance with laws and regulations.
- NYDFS will not guarantee the confidentiality of submitted information, as it must comply with disclosure laws.
- The circular emphasized transparency, requiring insurers to disclose the use of AI systems and ECDIS in underwriting and pricing decisions, and to provide reasons for any adverse decisions to consumers.
- Insurers must keep up-to-date documentation and be prepared for NYDFS audits and reviews regarding the use of these technologies.
CFPB takes action against national bank for auto loan practices, unauthorized account openings
On July 9, the CFPB issued a consent order against a national bank regarding its auto loans practices that allegedly violated the CFPA. According to the order, if borrowers failed to secure insurance for physical damage to their vehicles, the bank would impose its own physical-damage insurance on the vehicle, known as force-placed insurance. The CFPB alleged that from 2011 through 2019, the bank imposed insurance policies on borrowers who either consistently had their own insurance or secured required insurance within 30 days after their previous policy had lapsed. The Bureau determined that the bank’s practices of applying redundant force-placed insurance on auto loans, billing for premiums on force-placed insurance policies that had ended, and not adequately notifying consumers about the resulting increase in monthly payments due to force-placed insurance — all violated the CFPA.
Furthermore, the Bureau alleged that the bank was deceptive in informing borrowers about the time it would take to cancel force-placed insurance policies and misrepresented the total amounts owed in right-to-cure notices, leading to wrongful delinquency fees. Additionally, the bank allegedly violated the FCRA by reporting incorrect information on repossessions to credit agencies. The bank allegedly failed to properly inform customers about increases in preauthorized electronic fund transfers caused by force-placed insurance, violating the EFTA and Regulation E. As a result of these findings, the bank was ordered to adjust its practices to legal standards, compensate affected consumers, and pay a $5 million civil penalty to the Bureau.
The CFPB concurrently filed a proposed consent order in the U.S. District Court for the Southern District of Ohio to resolve allegations of the bank’s sales practices and opening fake accounts. According to the proposed order, the Bureau initiated a lawsuit against the bank in 2020 for alleged deceptive sales practices. The proposed settlement, pending the court’s approval, would mandate that the bank pay a $15 million civil penalty, provide and implement a redress plan for consumers, comply with the law, and eliminate employee incentives that encourage unauthorized account openings.
FTC refers ROSCA case against software company and executives to DOJ
On June 17, the FTC announced an enforcement action against a software company and two of its executives for its practices related to its subscription model. According to the redacted complaint filed by the DOJ (upon referral from the FTC), defendant allegedly failed to adequately disclose to consumers the terms associated with its year-long subscription, and allegedly failed to obtain the consumer’s express informed consent before charging them. Defendant’s “Annual, Paid Monthly” subscription plan allegedly included early termination fees (ETF) that were not clearly disclosed to consumers upon enrollment. In particular, the ETF disclosures were buried on the company’s website in small print or required consumers to hover over small icons to find the disclosures. The DOJ also alleged defendant used the early termination fees to discourage consumers from canceling their plans, which was also difficult for consumers to do. Defendant’s practices allegedly violated the Restore Online Shoppers’ Confidence Act (ROSCA). The DOJ will be seeking injunctive relief, civil penalties, equitable monetary relief, as well as other relief.
CFPB bans two companies for reverse mortgage servicing violations
On June 18, the CFPB issued an order against two reverse mortgage servicing companies (along with certain affiliates and subsidiaries), after determining that the companies misrepresented loan defaults and failed to respond appropriately to borrower communications to effectively service their reverse mortgages, leading to unnecessary costs and foreclosure fears for borrowers. Specifically, the CFPB alleged the companies failed to respond to borrower communications – including requests for information and payoff statements – in violation of RESPA. The companies also sent false repayment letters to older adult homeowners stating that their reverse mortgage loans were due and must be paid within 30 days due to a default, when no such trigger event had occurred. Further, the companies allegedly had inadequate resources and staffing to handle as many as 150,000 borrowers, leading to systematic regulatory failures.
Both companies were ordered to permanently cease reverse mortgage servicing activities and pay a civil money penalty (although for one company, the civil money penalty was $1 due to an inability to pay). The other company was ordered to pay over $11 million in consumer redress and $5 million in civil money penalties.
CFPB reports negative equity findings from the Auto Finance Data Pilot
On June 17, the CFPB published the first report in a series that will analyze detailed information from nine major auto lenders – including banks, finance companies, and captive lenders – following the launch of its Auto Finance Data Pilot. The initiative aimed to monitor the market to better understand loan attributes that may result in increased consumer distress.
This report analyzed financing of negative equity, “where the trade-in value offered for a consumer’s vehicle is less than the outstanding loan balance and the unpaid balance is rolled into the new loan.” According to the CFPB’s report, between 2018 and 2022, 11.6 percent of all vehicle loans in the dataset collected by the CFPB from industry participants included negative equity, ranging from about 8 percent of such loans in 2022, to about 17 percent in 2020. Among other findings, the report also highlighted that when compared to consumers who had a positive trade-in balance, consumers who financed negative equity: (i) financed larger loans; (ii) had lower credit scores and household income; (iii) had longer loan terms; and (iv) were more than twice as likely to have their account assigned to repossession within two years. The Bureau concluded that a higher proportion of consumers buying less expensive vehicles tended to finance negative equity into their auto loans compared with those purchasing more expensive vehicles. The CFPB said data from the pilot suggested that financing negative equity can result in unfavorable outcomes for consumers, with both the occurrence and the amount of negative equity financed increasing through 2023.
Connecticut amends its Money Transmission Act
On June 6, Connecticut enacted HB 5211 (the “Act”), amending laws regulating virtual currency and money transmission. The Act updated "permissible investment" to include additional forms of assets and clarified that “cash” will include demand deposits and cash equivalents, such as international wires in transit to the payee, transmission receivables funded by debit cards or credit cards, and AAA-rated mutual funds. The Act also stated that after October 1, 2024, the owning, operating, solicitation, marketing, advertising, or facilitation of virtual currency kiosks will be considered to “money transmission” business and thus will require persons to be state licensed as a money transmitter.
Additionally, the Act will require money transmission licensees to maintain a detailed accounting plan on winding down operations, as well as meet certain conditions to terminate a licensee’s businesses. Furthermore, the Act will require licensees to communicate third party disclosure information to consumers, as well as provide a physical receipt for transactions to senders. The Act also expanded the banking commissioner’s authority to adopt forms and orders governing digital assets to expressly include nonfungible tokens.
Connecticut amends its Money Transmission Act
On June 6, Connecticut enacted HB 5211 (the “Act”), amending laws regulating virtual currency and money transmission. The Act updated "permissible investment" to include additional forms of assets and clarified that “cash” will include demand deposits and cash equivalents, such as international wires in transit to the payee, transmission receivables funded by debit cards or credit cards, and AAA-rated mutual funds. The Act also stated that after October 1, the owning, operating, solicitation, marketing, advertising, or facilitation of virtual currency kiosks will be considered to “money transmission” business and thus will require persons to be state licensed as a money transmitter.
Additionally, the Act will require money transmission licensees to maintain a detailed accounting plan on winding down operations, as well as meet certain conditions to terminate a licensee’s businesses. Furthermore, the Act will require licensees to communicate third party disclosure information to consumers, as well as provide a physical receipt for transactions to senders. The Act also expanded the banking commissioner’s authority to adopt forms and orders governing digital assets to expressly include nonfungible tokens.
California appellate court upholds ruling on debt collection practices
Recently, the California Court of Appeal for the First Appellate District upheld a ruling against a defendant and its related entities. Plaintiff had filed a class action lawsuit against the defendants, alleging that they had violated the FDCPA and California’s Unfair Competition Law (UCL) in their debt collection practices related to homeowners’ associate (HOA) assessments.
The case was removed from federal to state court after the parties agreed on the move. Plaintiff was permitted to amend her complaint to include allegations against the law firm representing the debt collector and its associates, asserting they were “alter egos” of the debt collector. The state court agreed to bifurcate the claims and first addressed the UCL claim. The court found in favor of plaintiff, ruling that defendant had violated the FDCPA (a prerequisite to finding liability under the UCL) and that the law firm was jointly and severally liable for restitution and attorney fees for class counsel.
On appeal, defendants contended first that the trial court incorrectly upheld the federal court's decision that a waiver of California Civil Code section 5655(a), which required the application of payments be first applied to assessments owed, was invalid. This waiver was included as part of the payment plan that plaintiff agreed to, but the federal court determined it was void as a matter of public policy. Second, the defendants argued that the court was incorrect that defendants breached the FDCPA by issuing pre-lien notices and letters before issuing a notice of default. Finally, the defendants challenged the trial court's decision to approve plaintiff’s request to split the trial and prioritize a non-jury trial on her claim under the UCL.
In denying defendants’ claims, the appellate court agreed that the section 5655(a) waiver was invalid because it contradicted public policy intended to protect homeowners. Additionally, the court doubted whether the collection agency’s pre-lien letter could reasonably be characterized as threatening foreclosure and agreed with the trial court that “the least sophisticated debtor would reasonably understand this language in [defendant’s] pre-[notice of default] letter as threatening foreclosure in violation of section 5720.” Finally, regarding the decision to bifurcate plaintiff’s claims, the court decided that defendant did not sufficiently demonstrate that the trial court had abused its discretion in granting plaintiff’s motion to bifurcate.
Treasury requests information on AI in financial services sector
On June 6, the Department of the Treasury released a request for information (RFI) to collect from financial institutions, consumers, advocates, academics, and other stakeholders’ data on the uses, opportunities and risks presented by artificial intelligence (AI). The Treasury’s release stated that the Department will be interested in gaining greater insight into how AI would be used in risk management, capital markets, internal operations, customer service, regulatory compliance, and marketing. The RFI posed 19 questions related to general topics such as types of models, AI use, and barriers to entry, as well as questions focused on potential opportunities and risks associated with AI.
The Secretary of the Treasury, Janet Yellen, discussed the RFI in her remarks at the Financial Stability Oversight Council (FSOC) Conference on AI and Financial Stability. Yellen noted that the Treasury would be convening a roundtable on AI and insurance and would support FSOC’s monitoring and analysis of AI’s impact on financial stability.
CFPB finalizes standards setting body component of open banking rule
On June 5, the CFPB announced it finalized in part its proposed Personal Financial Data Rights rule, thus establishing the minimum qualifications necessary for the Bureau to become a recognized industry standard setting body when the full rule becomes final. Last October, the CFPB proposed the Personal Financial Data Rights rule to implement Section 1033 of the CFPA (covered by InfoBytes here) which was intended to offer consumers more control over their financial data and more consumer protections for misused data.
After considering relevant public comments, the CFPB made several changes to the sections concerning standard setters and the standards they issue. Commenters asked for clarity regarding changes in standards, such as when a consensus standard ceases to have consensus status, and how it could potentially cause market uncertainty. In response, the Bureau replaced the term “qualified industry standard” with “consensus standard” and added a newly defined “recognized standard setter” term. The final rule defined “consensus standard” to clarify when a given standard will be a consensus standard, and also added that a “consensus standard” must be one that will be adopted and maintained by a recognized standard setter. In response to concerns about market uncertainty, the CFPB responded that they expect revocation of recognition for a standard setter to be a rare occurrence.
Regarding periodic review, the final rule extended the maximum duration of the CFPB’s recognition of a standard-setting body from the proposed duration of three years to five years. The Bureau expects this change will incentivize standard-setting bodies to obtain recognition. The final rule included “data recipients” as an interested party in response to commenter concern that certain fintech sectors may be excluded. Additionally, meeting the criteria in the final rule is just the starting point for approval, as the CFPB may also assess whether the standard-setting body will be committed to developing and upholding open banking standards.
The final rule also included a guide that detailed how standard setters can apply for CFPB recognition, how the Bureau will evaluate applications, and what standard setters can expect once recognized. The final rule will go into effect 30 days after publication in the Federal Register.