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On May 12, acting Comptroller of the Currency Michael J. Hsu spoke before the Asian Real Estate Association of America Diversity and Fair Housing Summit focusing on the agency’s efforts to decrease barriers to homeownership and promote financial inclusion. In his remarks, Hsu described the agency’s commitment to expanding diversity and inclusion by “encouraging banks to expand their financing of affordable housing and other community needs, especially in low- and moderate-income (LMI) areas.” He further discussed the interagency Community Reinvestment Act (CRA) notice of proposed rulemaking (NPR) on new regulations updating how CRA activities qualify for consideration, where CRA activities are considered, and how CRA activities are evaluated. (Covered by InfoBytes here.) Hsu noted that the provisions of the NPR “are intended to expand access to credit, investment, and basic banking services in LMI areas where they are most needed,” and that it “significantly update[s] regulations intended to encourage banks to meet the credit needs of the entire communities they serve.” Hsu also stated that the agency will “continue to diversify its staff, and train and promote a diverse leadership team.” Hsu explained that through Project REACh (Roundtable for Economic Access and Change), the agency “is harnessing the energy and ideas of concerned civil rights, community, banking, business, and other industry leaders across the nation” and that progress has been made through its various workstreams. As previously covered by InfoBytes, Project REACh brings together leaders from the banking industry, national civil rights organizations, and various businesses and technology organizations to identify and reduce barriers to accessing capital and credit. Finally, Hsu mentioned that he is “concerned by the hype and the risk consumers face” regarding the growing interest in cryptocurrency investments and other digital assets. He believes that “better financial education and information will benefit all consumers and help reduce our nation’s broad racial wealth gap.”
On April 19, acting Comptroller of the Currency Michael J. Hsu delivered remarks before the Black Homeownership Collaborative’s Fair Housing Month Virtual Forum. In his remarks, Hsu described initiatives to expand fair access and homeownership opportunities for minorities, low- and moderate-income areas, and communities of color. Regarding home valuations, Hsu quoted a PAVE Program report (covered by InfoBytes here) that cited research finding that “12.5 percent of appraisals for home purchases in majority-Black neighborhoods and 15.4 percent in majority-Latino neighborhoods resulted in a value below the contract price—or what a buyer was willing to pay—compared with only 7.4 percent of appraisals in predominantly White neighborhoods.” Second, Hsu mentioned the OCC’s Project REACh (covered by InfoBytes here), which was launched in 2020 and promotes greater access to capital and credit for minority and underserved populations. Hsu compared Project REACh and the Black Homeownership Collaborative by claiming they both “recognize that there is power in bringing a range of stakeholders together to collaborate and solve problems.” Finally, Hsu noted that the federal banking agencies are modernizing and strengthening the CRA regulations to expand financial access and inclusion to low- and moderate-income communities, and noted that he expects an interagency CRA Notice of Proposed Rulemaking to come soon.
On March 7, acting Comptroller of the Currency Michael J. Hsu spoke before the Institute of International Bankers Annual Washington Conference to discuss climate-related financial risk and diversity and inclusion in the banking industry. In his remarks, Hsu described the agency as “laser-focused on the safety and soundness aspects of climate change risks.” Specifically, he noted that the OCC is concentrating on “large banks’ climate risk management capabilities: identifying, measuring, monitoring and mitigating climate-related exposures and risks.” He stated that “[w]eaknesses in risk management could adversely affect a bank’s safety and soundness, as well as the overall financial system.” Hsu also stressed the importance of cyber defense, saying “[h]eightened vigilance is clearly warranted.”
Hsu further discussed draft principles, which were released in December 2021, and are intended to support the identification and management of climate-related financial risks at OCC-regulated institutions with over $100 billion in total consolidated assets. (Covered by InfoBytes here). He noted that the principles will be finalized later this year when more detailed guidance will be developed in collaboration with the Federal Reserve Board and FDIC. After “an appropriate transition period,” Hsu noted that an assessment of large banks’ climate risk management capabilities would begin. He also noted that for midsize and community banks, it will be a number of years before OCC examiners conduct climate risk management examinations and suggested to bankers to use time “wisely.”
At the end of his remarks, Hsu compared “diversity and inclusion” to “safety and soundness,” in that it should be treated as a single idea, and without it, “diversity over time becomes a box to be checked, not a state to strive for or a value to be upheld.”
On February 25, NYDFS announced a proposal to partner with Community Development Financial Institutions (CDFIs) to deliver $150 million to small businesses. According to the announcement, the partnership was announced after Governor Kathy Hochul held a roundtable related to “how New York State can spur economic recovery in Black and brown communities,” as well as “new efforts to fight structural racism embedded in the financial system and support innovative community lending programs and economic development services focused on reaching communities of color.” The announcement pointed out that the partnership is part of the governor’s FY2023 budget, which proposed an unprecedented assistance package for small businesses, including more than $500 million to the state. Governor Hochul also announced an advisory council of New York State-chartered CDFIs and minority depository institutions, which will be led by NYDFS Superintendent Adrienne Harris, and “will elevate the specific concerns of New York CDFIs and MDIs to support communities of color and ensure their needs are met.”
On February 17, the FDIC released its 2021 Annual Report, providing an overview of the agency’s goals and agenda over the past year, and describing the financial health of the agency, its funds, and insured financial institutions. The report highlighted areas of focus for the FDIC over the past year, such as:
- Financial inclusion. According to the report, the FDIC “has seen meaningful improvements in recent years in reaching the ‘last mile’ of unbanked households in this country. Based on the results of our biennial survey of households, the proportion of U.S. households that were banked in 2019 – 94.6 percent – was the highest since the survey began in 2009.” The report noted several FDIC-led initiatives related to inclusive banking. In June 2021, the FDIC’s technology lab, FDiTech, announced a tech sprint, Breaking Down Barriers: Reaching the Last Mile of Unbanked U.S. Households, which challenged participants to “explore new technologies and techniques that would help expand the capabilities of banks to meet the needs of unbanked individuals and households.” (Covered by InfoBytes here.) The FDIC also expanded its #GetBanked public awareness campaign into the Los Angeles, Dallas, and Detroit metropolitan areas in continuation of the agency’s efforts to increase financial inclusion to the unbanked population. (Covered by InfoBytes here.)
- Mission-Driven Banks. According to the report, the FDIC increased Minority Depository Institutions (MDI) representation on the agency’s Community Bank Advisory Committee (CBAC), which “established a new MDI subcommittee of the CBAC to highlight the work of MDIs in their communities and to provide a platform for MDIs to exchange best practices, and enabled MDIs to review potential purchases of a failing MDI before non-MDI institutions are given this opportunity.” As previously covered by InfoBytes, these efforts were incorporated in a Statement of Policy.
- Competitiveness of Community Banking. According to the report, the FDIC held a “rapid phased prototyping competition” where more than 30 technology firms were invited to participate in the competition "to develop tools for providing more timely and granular data to the FDIC on the health of the banking sector while also making such reporting less burdensome for banks. Of those 30 firms, we asked four participants to move forward in the competition by proposing a proof of concept for their technologies – either independently or jointly.” The FDIC also facilitated the development of “a public/private standard-development organization to establish standards for due diligence of vendors and for the technologies they develop.”
- Deposit Insurance Fund (DIF). According to the report, the DIF balance increased to a record $123.1 billion in 2021–a $5.2 billion increase from the year-end 2020 balance. No insured financial institutions failed in 2021 and “contingent liability for anticipated failures declined to $20.8 million as of December 31, 2021, compared to $78.9 million as of December 31, 2020.”
On February 10, FHFA released Advisory Bulletin (AB) 2022-02 to Fannie Mae and Freddie Mac (GSEs) on managing risks related to the use of artificial intelligence and machine learning (AI/ML). Recognizing that while the use of AI/ML has rapidly grown among financial institutions to support a wide range of functions, including customer engagement, risk analysis, credit decision-making, fraud detection, and information security, FHFA warned that AI/ML may also expose a financial institution to heightened compliance, financial, operational, and model risk. In releasing AB 2022-02 (the first publicly released guidance by a U.S. financial regulator that specifically focuses on AI/ML risk management), FHFA advised that the GSEs should adopt a risk-based, flexible approach to AI/ML risk management that should also be able “to accommodate changes in the adoption, development, implementation, and use of AI/ML.” Diversity and inclusion (D&I) should also factor into the GSEs’ AI/ML processes, stated a letter released the same day from FHFA’s Office of Minority and Women Inclusion, which outlined its expectations for the GSEs “to embed D&I considerations throughout all uses of AI/ML” and “address explicit and implicit biases to ensure equity in AI/ML recommendations.” The letter also emphasized the distinction between D&I and fairness and equity, explaining that D&I “requires additional deliberation because it goes beyond the equity considerations of the impact of the use of AI/ML and requires an assessment of the tools, mechanisms, and applications that may be used in the development of the systems and processes that incorporate AI/ML.”
Additionally, AB 2022-02 outlined four areas of heightened risk in the use of AI/ML: (i) model risk related to bias that may lead to discriminatory or unfair outcomes (includes “black box risk” where a “lack of interpretability, explainability, and transparency” may exist); (ii) data risk, including concerns related to the accuracy and quality of datasets, bias in data selection, security of data from manipulation, and unfamiliar data sources; (iii) operational risks related to information security and IT infrastructure, among other things; and (iv) regulatory and compliance risks concerning compliance with consumer protection, fair lending, and privacy laws. FHFA provided several key control considerations and encouraged the GSEs to strengthen their existing risk management frameworks where heightened risks are present due to the use of AI/ML.
On January 19, the CFPB’s Office of Minority Women and Inclusion (OMWI) released a report on diversity and inclusion in the financial services industry. The report, among other things, summarized the results of the Bureau’s research in 2020 to further understand how companies under the Bureau’s jurisdiction publicly show their commitment to diversity. According to the report, the sample showed an “extremely mixed picture of progress in the financial services sector on public diversity and inclusion information: 44% of the sample (119 entities) had no public information about diversity and inclusion efforts on their website or in annual reports. In contrast, 22% of entities sampled (60) had high information availability on their websites or public documents.” The report found that few organizations outside of depository lenders had either a dedicated diversity and inclusion executive or a formal body that directed diversity and inclusion efforts, and instead, centered their diversity and inclusion efforts within the human resources office, or opted to not publicize that information. The report also outlined recommendations for financial services companies of different sizes to improve the diversity and inclusion information that is available to the public, including that small companies with little to no information about diversity and inclusion should add a public value statement on their website. For large companies, the report recommended employing a chief diversity officer, expanding their workforce demographic data, and publicizing their professional development resources. The report also emphasized that executing an organizational commitment to diversity and inclusion is important for institutions to remain competitive. In continuing with its diversity-focused research, the Bureau plans to continue its diversity-focused industry research and will “track the progress of researched entities annually.”
On October 25, the U.S. Treasury Department released a blog post that highlights how the Department is focusing on advancing racial equity. Among other things, the blog noted that this focus has informed the Treasury’s decision to establish “a dedicated Office of Recovery Programs and has flowed through the policy and operational decisions [it has] made to implement the historic American Rescue Plan.” According to the blog, the Office of Recovery Programs addresses urgent needs and makes lasting investments to mitigate long-term disparities by making equity a foundational priority in the delivery of the program, which has improved the circumstances of vulnerable households and created opportunities for small businesses, cities, and states. In addition, Treasury announced the appointment of Janis Bowdler to be the Department’s first Counselor for Racial Equity. The blog also noted that Treasury’s “efforts go beyond [Treasury’s] diverse, dedicated political appointees,” because Treasury is “also deeply committed to improving diversity and inclusion among the broader career Treasury workforce, where we acknowledge much more work remains to be done.”
On October 15, the FTC released a staff report, Serving Communities of Color, that discusses the Commission’s enforcement and outreach efforts related to the impact of fraud on majority Black and Latino communities. The report details various studies and research. For example, one FTC study examined disparities related to payment methods received from consumers who live in communities of color compared to consumers who live in majority White communities. According to the study, consumers in communities of color more often reported a larger share of losing money when using payment methods that offer few legal protections—e.g. cash, cryptocurrency, money orders, and debit cards. In contrast, consumers living in majority White areas filed the largest share of reports about credit cards, which offer more robust fraud protection. Another study revealed that “different demographic populations reported different types of concerns at different rates,” with consumers living in majority Black communities filing a higher number of reports than consumers living in majority White communities related to credit bureaus, banks and lenders, used auto issues, and debt collection. According to FTC findings, consumers living in majority Latino communities also filed a larger share of reports about credit bureaus, banks and lenders, debt collection, auto issues and business opportunities. The report discusses, among other things, more than 25 enforcement actions where the FTC identified that the unlawful conduct either targeted or disproportionately affected communities of color. Examples include auto buying cases, for-profit colleges, student loan debt relief programs, prepaid card scams, fake Covid-19 products and services, business “opportunities” and pyramid schemes, payday lending, and credit and consumer reporting accuracy. The report also shares information about FTC outreach programs to consumers in these communities.
NYDFS requires flood insurance and diversity and inclusion training for insurance producers and public adjusters
On October 13, NYDFS announced that property/casualty insurance producers are required to take continuing education in flood insurance and diversity and inclusion. NYDFS is the first state regulator to mandate such requirements, which have been added to the state’s insurance regulations. “Requiring education on flood insurance and diversity and inclusion is not only timely, it is in the best interest of consumers,” acting Superintendent Adrienne A. Harris said. In addition, property/casualty insurance producers who sell flood insurance through the National Flood Insurance Program (NFIP) will be required to comply with the continuing education requirement, which according to the NYDFS announcement, is intended to ensure consumers receive accurate NFIP quotes and are not accidentally underinsured for flood damage. The requirement will assist “producers and adjusters to better service a diverse population of consumers and be culturally sensitive and aware when interacting with consumers and members of the public,” NYDFS stated.
- John R. Coleman to discuss “CFPB update” at the MBA Legal Issues and Regulatory Compliance Conference
- Kathryn L. Ryan to discuss "State licensing and NMLS challenges" at MBA’s Legal Issues and Regulatory Compliance Conference
- Jonice Gray Tucker to discuss “Fair lending and equal opportunity laws” at the MBA Legal Issues and Regulatory Compliance Conference
- Jeffrey P. Naimon to discuss “Contemplating the boundaries of UDAAP” at the MBA Legal Issues and Regulatory Compliance Conference
- Steven vonBerg to speak at closing “super session“ on compliance topics at MBA Legal Issues and Regulatory Compliance Conference
- Jeffrey P. Naimon to discuss “Understanding the ESG impact on compliance” at the ABA’s Regulatory Compliance Conference