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FDIC announces FDItech virtual ‘Office Hours’
On April 29, the FDIC’s technology lab, FDiTech, announced that it will host a series of virtual “office hours” to hear from a variety of stakeholders in the business of banking concerning current and evolving technological innovations. The office hours will be hour-long, one-on-one sessions that will provide insight into the contributions that innovation has made in reshaping banks and enabling regulators to manage their oversight efficiently. According to the FDIC, “FDiTech seeks to evaluate and promote the adoption of innovative and transformative technologies in the financial services sector and to improve the efficiency, effectiveness, and stability of U.S. banking operations, services, and products; to support access to financial institutions, products, and services; and to better serve consumers.” FDiTech’s goal is to contribute to the transformation of banking by supporting “the adoption of technological innovations through increased collaboration with market participants.” In the first series of office hour sessions, the FDIC and FDiTech are seeking participants’ outlook on artificial intelligence and machine learning related to: (i) automation of back office processes; (ii) Bank Secrecy Act/Anti-Money Laundering compliance; (iii) credit underwriting decisions; and (iv) cybersecurity.
FDiTech anticipates hosting approximately 15 one-hour sessions each quarter. Interested parties seeking to participate in these sessions must contact the FDIC by May 24.
CFPB releases tech sprints presentations
On April 26, the CFPB announced presentations from the Bureau’s first two tech sprints—forums that gather “regulators, technologists, financial institutions, and subject matter experts from key stakeholders for several days to work together to develop innovative solutions to clearly-identified challenges”—as a means to encourage regulatory innovation and collaborate with stakeholders on solutions to regulatory compliance challenges. The first tech sprint, covering Adverse Action Notices, took place in October 2020, and focused on improving electronic distribution of these disclosures to assist consumers in making more informed financial choices. Participants were able to contribute in “developing innovations in the way lenders notify consumers of adverse credit actions.” The second tech sprint, covering the submission and publication of Home Mortgage Disclosure Act (HMDA) data, took place in March 2021 and challenged participants to work with the Bureau on ways to innovate on how the Bureau receives and processes HMDA data. The second forum also focused on how to improve accessibility to the data to increase market transparency and drive better decision making, especially around issues of equity and inclusion.
House Financial Services Committee reauthorizes fintech, AI task forces
On April 30, the House Financial Services Committee announced the reauthorization of the Task Forces on Financial Technology and Artificial Intelligence. According to Chairwoman Maxine Waters (D-CA), the “Task Forces will investigate whether these technologies are serving the needs of consumers, investors, small businesses, and the American public, which is needed especially as we recover from the COVID-19 pandemic.” Representative Stephen Lynch (D-MA) will chair the Task Force on Financial Technology, which will continue to monitor the opportunities and challenges posed by fintech applications for lending, payments, and money management and offer insight on how Congress can ensure Americans’ data and privacy is protected. Representative Bill Foster (D-IL) will chair the Task Force on Artificial Intelligence, which will examine how AI is impacting the way Americans operate in the marketplace, how to think about identity security, and how to interact with financial institutions. The task forces will also examine issues related to algorithms, digital identities, and combatting fraud. As previously covered by InfoBytes, these task forces were set to expire in December 2019.
House GOP members also released a report that highlights efforts of the Task Forces on Financial Technology and on Artificial Intelligence and includes recommendations on how to utilize innovation. According to the report, the two “key takeaways” are that “Congress must (1) promote greater financial inclusion and expanded access to financial services, and (2) ensure that the federal government does not hinder the United States’ role as a global leader in financial services innovation.” The report also includes recommendations for policy regulators and Congress to: (i) decide how to assist innovation, especially in the private sector; (ii) use the power of data and machine learning to fight fraud, streamline compliance, and make better underwriting decisions; and (iii) “keep up with technology to better protect consumers.”
FTC provides AI guidance
On April 19, the FTC’s Bureau of Consumer Protection wrote a blog post identifying lessons learned to manage the consumer protection risks of artificial intelligence (AI) technology and algorithms. According to the FTC, over the years the Commission has addressed the challenges presented by the use of AI and algorithms to make decisions about consumers, and has taken many enforcement actions against companies for allegedly violating laws such as the FTC Act, FCRA, and ECOA when using AI and machine learning technology. The FTC stated that it has used its expertise with these laws to: (i) report on big data analytics and machine learning; (ii) conduct a hearing on algorithms, AI, and predictive analytics; and (iii) issue business guidance on AI and algorithms. To assist companies navigating AI, the FTC has provided the following guidance:
- Start with the right foundation. From the beginning, companies should consider ways to enhance data sets, design models to account for data gaps, and confine where or how models are used. The FTC advised that if a “data set is missing information from particular populations, using that data to build an AI model may yield results that are unfair or inequitable to legally protected groups.”
- Watch out for discriminatory outcomes. It is vital for companies to test algorithms—both prior to use and periodically after that—to prevent discrimination based on race, gender, or other protected classes.
- Embrace transparency and independence. Companies should consider how to embrace transparency and independence, such as “by using transparency frameworks and independent standards, by conducting and publishing the results of independent audits, and by opening. . . data or source code to outside inspection.”
- Don’t exaggerate what your algorithm can do or whether it can deliver fair or unbiased results. Under the FTC Act, company “statements to business customers and consumers alike must be truthful, non-deceptive, and backed up by evidence.”
- Data transparency. In the FTC guidance on AI last year, as previously covered by InfoBytes, an advisory warned companies to be careful about how they get the data that powers their models.
- Do more good than harm. Companies are warned that if their models cause “more harm than good—that is, in Section 5 parlance, if it causes or is likely to cause substantial injury to consumers that is not reasonably avoidable by consumers and not outweighed by countervailing benefits to consumers or to competition—the FTC can challenge the use of that model as unfair.”
- Importance of accountability. The FTC warns of the importance of being transparent and independent and cautions companies to hold themselves accountable or the FTC may do it for them.
SEC commissioner updates cryptocurrency safe harbor proposal
On April 13, SEC Commissioner Hester M. Pierce released an updated version of her proposal for a three-year safe harbor rule applicable to companies developing digital assets and networks. As previously covered by InfoBytes, last year Pierce suggested that not only would the rule provide regulatory flexibility “that allows innovation to flourish,” but it would also protect investors by “requiring disclosures tailored to their needs” while still maintaining anti-fraud safeguards, allowing investors to participate in token networks of their choice. The three-year grace period for qualifying companies, Pierce suggested, would allow time for the development of decentralized or functional networks, adding that at the end of the three years, a successful network’s tokens would not be regulated as securities.
The updates to the proposal reflect feedback from the cryptocurrency community, securities lawyers, and the pubic, and include, among other things:
- A requirement for companies to provide semi-annual updates to the plan of development disclosure and a block explorer;
- An exit report requirement, which would include either (i) an outside counsel analysis explaining why the network is decentralized or functional; or (ii) an announcement that the company will register the tokens under the Securities Exchange Act; and
- Enhancements to the exit report requirement to address what the outside counsel’s analysis should address when explaining why a network is decentralized.
The public is encouraged to provide feedback on the updated proposal.
Texas updates guidance related to regulated lenders, continuing to urge them to work with borrowers and allowing employees to work remotely
On April 15, the Texas Office of the Consumer Credit Commissioner updated its advisory bulletin (previously covered here, here, here, here, here, and here) urging regulated lenders to continue to work with borrowers during the Covid-19 crisis. Among other measures, the regulator asks licensees to increase borrower communication regarding the effects of Covid-19 on the lender’s policies (including communication procedures), work out modifications for payment difficulties, review policies for fees, late charges, delinquency practices, and repossessions, and that certain mortgages may be covered by federal foreclosure moratoriums. The guidance also: (i) reminds licensees of legal requirements for using electronic signatures, and (ii) continues to permit licensees to conduct activity from unlicensed locations, subject to certain conditions. The guidance is in effect through May 31, 2021, unless withdrawn or revised.
Texas updates guidance for motor vehicle sales finance licensees, continuing to urge them to work with consumers and allowing employees to work remotely
On April 15, the Texas Office of the Consumer Credit Commissioner updated its advisory bulletin (previously discussed here, here, here, here, here, here, here, and here) urging motor vehicle sales finance licensees to continue to work with consumers during the Covid-19 crisis. Among other measures, the regulator asks licensees to increase consumer communication regarding the effects of Covid-19 on the lender’s policies (including communication procedures), work out modifications for payment difficulties, review policies for fees, late charges, delinquency practices, and repossessions, and that there may be limits on allowable deferment charges, and refers a consumer to the protections included in advisory bulletin B16-4. The guidance also: (i) reminds licensees of legal requirements for using electronic signatures, and (ii) continues to permit licensees to conduct activity from unlicensed locations, subject to certain conditions. The guidance is in effect through May 31, 2021, unless withdrawn or revised.
Texas updates guidance for tax lenders, continuing to urge them to work with consumers and allowing employees to work remotely
On April 15, the Texas Office of the Consumer Credit Commissioner updated its advisory bulletin (previously discussed here, here, here, here, and here) urging property tax lenders to continue to work with consumers during the Covid-19 crisis. Among other measures, the regulator urges licensees to increase consumer communication regarding the effects of Covid-19 on the licensees’ business, work out modifications for payment difficulties, and review policies for fees, late fees, and delinquency practices, to help support successful repayment. The guidance also: (i) reminds licensees of legal requirements for using electronic signatures, and (ii) continues to permit licensees to conduct activity from unlicensed locations, subject to certain conditions. The guidance is in effect through May 31, 2021, unless withdrawn or revised.
U.S.-EU release statement on Joint Financial Regulatory Forum
On March 24 and 25, EU and U.S. participants, including officials from the Treasury Department, Federal Reserve Board, CFTC, FDIC, SEC, and OCC, participated in the U.S.-EU Joint Financial Regulatory Forum to discuss topics of mutual interest, including those related to (i) “next steps” for Covid-19 recovery and for mitigating financial stability risks; (ii) “sustainable finance”; (iii) banking and insurance multilateral and bilateral engagement; (iv) capital market regulatory and supervisory cooperation; (v) regulatory and supervisory developments pertaining to financial innovation, including the importance of promoting ongoing “responsible innovation and international supervisory cooperation”; and (vi) anti-money laundering and countering the financing of terrorism (AML/CFT) issues, including “the potential for enhanced cooperation to combat money laundering and terrorist financing bilaterally and in the framework of [the Financial Action Task Force].” Participants also discussed possible responses to climate-related financial risks, as well as “the progress in their respective legislative and supervisory efforts to ensure a smooth transition away from LIBOR.”
Prudential regulators exploring how institutions use AI
On March 29, the FDIC, Fed, OCC, CFPB, and NCUA issued a request for information (RFI) seeking input on financial institutions’ use of artificial intelligence (AI), which may include AI-based tools and models used for (i) fraud prevention to identify unusual transactions for Bank Secrecy Act/anti-money laundering investigations; (ii) personalization of customer services; (iii) credit underwriting; (iv) risk management; (v) textual analysis; and (vi) cybersecurity. The RFI also solicits information on challenges financial institutions face in developing, adopting, and managing AI, as well as on appropriate governance, risk management, and controls over AI when providing services to customers. Additionally, the agencies seek input on whether it would be helpful to provide additional clarification on using AI in a safe and sound manner and in compliance with applicable laws and regulations. According to FDIC FIL-20-2021, while the agencies support responsible innovation by financial institutions and believe that new technologies, including AI, have “the potential to augment decision-making and enhance services available to consumers and businesses, . . . identifying and managing risks are key.” Comments on the RFI are due 60 days after publication in the Federal Register.