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  • Democratic Senators Commission GAO to Study Fintech Industry

    Fintech

    On April 18, Senators Sherrod Brown (D-OH), Jeffrey Merkley (D-OR), and Jeanne Shaheen (D-NH) sent a letter to the Government Accountability Office (GAO) requesting that it complete a study on the fintech industry. Under the Dodd-Frank Act, the GAO is required to examine the regulatory structure of person-to-person (P2P) lending. While the letter recognizes that the GAO issued a report on P2P lending in 2011, the senators urged the GAO to recognize that the lending platforms of financial technology firms (often called fintech) “has changed dramatically and evolved beyond consumer lending,” and that “P2P lending, now generally called marketplace lending, is not the only form of fintech that has developed over the last several years.” The letter further cautions that, “gaps in understanding and regulation of emerging financial products may result in predatory lending, consumer abuse, or systemic issues.” Finally, Senators Brown, Merkley, and Shaheen urged the GAO to provide responses to questions relating to, among other things, (i) the size and structure of the loan portfolios maintained by privately owned fintech lenders; (ii) how fintech lenders’ relationships with financial institutions impact both the financial system at large and regulatory framework; (ii) whether the risks that may arise from the investor base shifting from individual investor to institutional investor have grown since this issue was first noted in the GAO’s 2011 report; and (iii) the anti-money laundering, data security, and privacy requirements fintech companies are subject to.

    Anti-Money Laundering U.S. Senate Online Lending GAO Fintech Privacy/Cyber Risk & Data Security Marketplace Lending Peer-to-Peer Predatory Lending

  • GAO Report: Regulatory Oversight of Nonbank Servicers Could Be Stronger

    Lending

    On April 11, the Government Accountability Office (GAO) released a report titled, “Nonbank Mortgage Servicers: Existing Regulatory Oversight Could Be Strengthened.” The report analyzes data on the mortgage servicing market from June 2006 through June 2015 from Fannie Mae and Freddie Mac (collectively, the Enterprises), the Federal Reserve, and Ginnie Mae, as well as academic studies and research conducted by industry organizations, federal agencies, and others since the financial crisis. The report focuses in particular on the role of nonbank servicers in servicing privately securitized nonprime loans. According to the report, the percentage of mortgage loans serviced by nonbank servicers – which, according to market participants, tend to service more delinquent loans than banks – increased significantly from the first quarter of 2012 through the second quarter of 2015, but still account for less than a quarter of the overall mortgage servicing market. Concerns regarding the regulatory oversight of nonbank servicers are highlighted in the report, which comments on (i) the CFPB’s direct role in overseeing nonbank servicers’ compliance with federal consumer financial laws; (ii) state regulators’ various prudential and operational requirements for nonbank servicers; and (iii) Ginnie Mae and the Enterprises’ monitoring of nonbank servicer activities to manage risk exposure. According to the report, issues related to nonbank servicers’ “aggressive growth and insufficient infrastructure have resulted in harm to consumers, have exposed counterparties to operational and reputational risks and ... complicated servicing transfers between institutions.” Based on the findings summarized in the report, the GAO recommends that (i) Congress consider giving FHFA the authority to examine third parties doing business with the Enterprises; and (ii) the CFPB collect additional data regarding the identity and number of nonbank servicers.

    CFPB Freddie Mac Fannie Mae Mortgage Servicing GAO Ginnie Mae

  • GAO Report Examines Effectiveness of the Financial Regulatory System

    Consumer Finance

    Recently, the Government Accountability Office (GAO) released a report on the effectiveness of the U.S. financial system’s existing regulatory structure. In examining the financial regulatory system, the GAO conducted a performance audit from April 2014 to February 2016, dividing the regulatory system into the following sectors based on the various agencies’ missions: (i) safety and soundness oversight of depository institutions; (ii) consumer protection oversight; (iii) securities and derivatives markets oversight; (iv) insurance oversight; and (v) systemic risk oversight. The GAO found that “[f]ragmentation and overlap have created inefficiencies in regulatory processes, inconsistencies in how regulators oversee similar types of institutions, and differences in the levels of protection afforded to consumers.” Based on its audit, the GAO concluded that the regulatory structure as it stands does not always guarantee (i) efficient and effective oversight; (ii) consistent financial oversight; and (iii) consistent consumer protections. The report further identified problems with the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR), which are regulatory groups created out of the Dodd-Frank Act to address gaps in systemic risk oversight. Specific problems highlighted in the GAO’s findings include: (i) potential missed opportunities and duplicative analyses as a result of the Federal Reserve’s and the OFR’s similar systemic risk monitoring goals but lack of key collaboration; (ii) a lack of reliance by FSOC on the Federal Reserve’s and the OFR’s systemic risk monitoring efforts; and (iii) limitations on FSOC’s authority to address broader systemic risks that are not specific to a particular entity. The GAO emphasized that, “[w]ithout congressional action it is unlikely that remaining fragmentation and overlap in the U.S. financial regulatory system can be reduced or that more effective and efficient oversight of financial institutions can be achieved.”

    Dodd-Frank Systemic Risk FSOC GAO

  • GAO Publishes Report Regarding the Impact of Dodd-Frank Regulations on Community Banks, Credit Unions, and Systemically Important Institutions

    Lending

    On December 30, the United States Government Accountability Office (GAO) released its fifth report mandated by Section 1573(a) of the Department of Defense and Full-Year Continuing Appropriations Act of 2011 (Act), which amended  Dodd-Frank, and requires the GAO to annually review financial services regulations, including those of the CFPB. The report reviews 26 Dodd-Frank rules that became effective from July 23, 2014 through July 22, 2015 to examine whether the agencies conducted the required regulatory analyses and coordination. In addition, it examines nine Dodd-Frank rules that were effective as of October 2015 to determine their impact on community banks and credit unions. Finally, the report assesses Dodd-Frank’s impact on large bank holding companies. The GAO found that the agencies conducted the required regulatory analyses for rules issued under Dodd-Frank and reported required coordination. In addition, surveys of community banks and credit unions suggest that the Dodd-Frank rules under review have resulted in an increased compliance burden, a decline in certain business activities in some cases (e.g., loans that are not qualified mortgages), and moderate to minimal initial reductions in the availability of credit. Although “regulatory data to date have not confirmed a negative impact on mortgage lending,” “these results do not necessarily rule out significant effects or the possibility that effects may arise in the future.” Finally, the GAO concluded that the full impact of Dodd-Frank on large bank holding companies remains uncertain, but summarized the results of certain analyses in the report.

    CFPB Dodd-Frank Bank Compliance Community Banks GAO

  • GAO Publishes Report Regarding Proposed Changes To The Single-Family Housing Finance System

    Lending

    On October 7, the GAO published a report to help policymakers assess proposals for changing the single-family housing finance system and consider ways to make it more effective and efficient. To this end, the report first describes the market developments since 2000 that have led to changes in the federal government’s role in single-family housing finance. Most notably, the GAO found that as the market share of nonprime mortgages grew before the 2007-2009 financial crisis, the share of new mortgage originations insured by federal entities (including Fannie Mae and Freddie Mac) fell dramatically before rising sharply again during and after the crisis. Second, the report analyzed whether and how these market developments created challenges for the housing finance system. The GAO concluded that mortgage markets since 2000 have challenged the housing finance system, revealing the following weaknesses: (i) misaligned incentives between originators and securitizers on the one hand, and borrowers and investors on the other, as the former did not share the risks of the latter; (ii) a lack of reliable information and transparency for borrowers because originators were not required to share certain information; (iii) excessive risk taking due to a loosening of underwriting standards prior to the financial crisis; and (iv) a lack of federal oversight (since addressed by Congress through the FHFA and CFPB). Finally, the report presents a nine-pronged evaluation framework for assessing potential changes to the housing finance system designed to help policymakers understand the strengths and weaknesses of competing goals and policies, to craft new proposals, and to understand the risks of transitioning to a new housing finance system.

    CFPB Freddie Mac Fannie Mae Fair Housing FHFA GAO Mortgage Origination

  • GAO Recommends Better Data Analysis to Improve TARP Housing Programs

    Lending

    On October 6, the GAO released a report recommending that the Treasury Department improve its analysis of data it collects on HAMP. As of June, Treasury has disbursed only about one-third of the $38.5 billion in TARP funds allocated to housing programs and fewer borrowers have received first-lien modifications under HAMP than Treasury originally estimated. Treasury does collect data on HAMP denial and redefault rates, but its evaluation of data to help explain differences in these rates between servicers is limited. For example, some variations may be caused by differences in servicer practices that would not necessarily be caught by Treasury’s compliance reviews or analyses of reporting errors. The GAO report recommends more sophisticated analysis of the data in order to identify the reasons for variations in denial rates and redefaults among servicers. The GAO hopes more robust data analysis will help Treasury increase oversight and transparency, improve its policies and guidance, and ensure that HAMP reaches the greatest number of eligible borrowers.

    Department of Treasury HAMP TARP GAO

  • GAO Report On CFPB Data Collection And Privacy Practices Finds Room For Improvement

    Privacy, Cyber Risk & Data Security

    On September 22, the GAO issued a report regarding the privacy and data security implications of the CFPB’s data collection practices. The report, performed in part based on a request by Senator Crapo, notes the CFPB’s data includes three one-time collections of data that contain information that directly identifies individuals: arbitration case records, deposit account data regarding deposit advance products, and borrower-level activity regarding storefront payday loans. The report highlights several areas for improvement: (i) development of written procedures and documentation regarding data intake and information security risk assessments; (ii) implementation of privacy control steps and information security practices; and (iii) Paperwork Reduction Act compliance regarding credit card data. In a comment appended to the report, the CFPB outlines the reasons for its data collection efforts and concurs with the GAO’s recommendations addressed to the CFPB.

    CFPB Data Collection / Aggregation GAO Privacy/Cyber Risk & Data Security

  • GAO Urges CFPB Participation In Virtual Currency Working Groups

    Fintech

    On June 26, the GAO released a May 2014 report regarding virtual currency. The leaders of the Senate Homeland Security and Governmental Affairs Committee asked the GAO to examine potential policy issues related to virtual currencies and the status of federal agency collaboration in this area. The report summarizes virtual currency policy developments to date, and provides an overview of various interagency working groups and the ways each has so far addressed virtual currencies. The GAO concludes that consumer protection issues have largely not been addressed by the working groups, and recommends that the CFPB identify and join existing interagency working groups to ensure that consumer protection issues are considered as those groups develop virtual currency policies. In response to the report, the CFPB stated that it has been doing its own work on virtual currency, and has collaborated informally, but agreed that it should participate formally in interagency working groups.

    CFPB Virtual Currency GAO

  • GAO Recommends Enhanced Oversight Of Independent Foreclosure Review Settlements

    Lending

    On April 29, the GAO published a report on its examination of the 2013 amended consent orders that ended the Independent Foreclosure Review process. After testing the regulators' major assumptions, the GAO concludes “that the final negotiated amount generally fell within a reasonable range.” However, the GAO criticizes the regulators for not defining specific objectives for the $6 billion in foreclosure prevention actions required by the settlements, for not analyzing available data, such as servicers' recent volume of foreclosure prevention actions, and for not analyzing approaches by which servicers' actions could be credited toward the total of $6 billion. In addition, the GAO found that while the OCC and the Federal Reserve are verifying servicers' foreclosure prevention policies, they are not testing policy implementation. The GAO believes that without specific procedures, regulators cannot assess implementation of the principles and may miss opportunities to protect borrowers. The GAO recommends that the OCC and the Federal Reserve Board “should define testing activities to oversee foreclosure prevention principles and include information on processes in public documents.”  The GAO also believes the regulators should release publicly information on the processes used, such as how decisions about borrower payments were made, and that “[i]n the absence of information on the processes, regulators face risks to public confidence in the mortgage market, the restoration of which was one of the goals of the file review process.”

    Foreclosure Federal Reserve Mortgage Servicing OCC GAO

  • CFPB Student Loan Ombudsman Questions Marketing Of Student Financial Products; GAO Recommends More Transparency

    Consumer Finance

    On February 13, CFPB Student Loan Ombudsman Rohit Chopra published on the CFPB's blog an update on the CFPB’s review of student financial products and raised concerns about certain marketing arrangements between financial institutions and colleges and universities, and the level of transparency associated with those agreements and the products marketed under them. He specifically questioned financial institutions that “generate a significant amount of their revenue on these products while students are currently in school.” On the same day, the GAO published a report on student debit and prepaid cards and marketing agreements, which recommends that Congress take steps to increase transparency.

    CFPB Student Financial Products Update

    In December, CFPB Director Richard Cordray urged financial institutions to voluntarily disclose on their websites agreements with colleges and universities to market bank accounts, prepaid and debit cards, and other products to students. Mr. Chopra states that the CFPB also collected agreements available in the public domain by checking state open records databases and other websites where such agreements are disclosed.

    Although it is unclear whether this collection produced a representative sample, Mr. Chopra states that the CFPB identified “several agreements” pursuant to which financial institutions provide direct payments to schools in exchange for use of the schools’ logos. Other agreements, the CFPB claims, provide bonus payments to schools based on whether students sign up for a checking account marketed on campus. A third category of agreements provide colleges discounted or free services in exchange for allowing a financial company to market products to students.

    Mr. Chopra acknowledges that many financial institutions offer good products at competitive prices, but he reinforced the CFPB’s belief that voluntarily disclosing marketing agreements “is a sign of a financial institution’s commitment to transparency” and added that “[r]esponsible financial institutions also want students to know they don’t have to choose their product if they don’t want to.”

    Mr. Chopra encouraged students, schools, financial institutions, or other who wants to share information about the availability of these agreements to email the CFPB. He also encouraged students to submit complaints about student loans, checking accounts, or credit cards.

    GAO Report On Student Financial Product Transparency

    GAO examined the functions of college cards and the characteristics of the schools and card providers offering them, and assessed the benefits and concerns associated with student debit and credit cards. The GAO reported that as of July 2013, 11 percent of U.S. institutes of higher education are party to an agreement to provide debit or prepaid card services to students. Those schools tend to be larger than institutions that do not offer such services, and most offered students the ability to receive federal aid on a card.

    The GAO identifies concerns about fees, ATM access, and neutrality. Specifically, the GAO stated that two large card providers charge a fee for card purchases that use a PIN versus a signature, and that total fees paid by students is unknown. With regard to ATM access, the GAO found that Education Department regulations regarding access to free ATMs or branches for students who receive federal aid is insufficient and should be more specific to ensure free access to federal funds on cards. Finally, the GAO believes that marketing agreements may create incentives for schools to influence student choice of financial service provider, and that increased transparency could help ensure that terms of such marketing agreements are fair and reasonable for students and do not create conflicts of interest for schools.

    To achieve this increased transparency, the GAO recommends that Congress require financial firms providing debit and prepaid card services to colleges to publicly file their marketing agreements. In addition, the GAO would like the Education Department to (i) specify what constitutes convenient access to ATMs or bank branch offices for students receiving federal student aid funds and (ii) develop requirements for schools and card providers to present neutral information to students about their options for receiving federal student aid funds.

    CFPB Prepaid Cards Student Lending Debit Cards Deposit Products GAO

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