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FDIC seeks input on modernization
On February 19, the FDIC issued a notice and request for comment regarding modernizing “its signage and advertising requirements to better reflect how banks and savings associations currently operate and how consumers use banking services.” The Request for Information (RFI) solicits input on how the agency “can revise and clarify its sign and advertising rules related to FDIC deposit insurance.” Major changes to these rules have not been made since 2006, and the agency states that “the rules do not reflect evolving banking channels and operation.” Accordingly, the RFI also requests suggestions about how the FDIC can use technology or other solutions to help consumers distinguish FDIC-insured entities from nonbanks, and to prevent consumers from being harmed by non-insured entities’ potentially misleading or fraudulent representations. The RFI lists 21 questions to focus the public input. Comments must be received by March 19.
U.S., EU discuss financial regulatory developments
On February 19, the U.S. Treasury Department issued a joint statement on the U.S. – EU Financial Regulatory Forum held February 11-12 in Washington, D.C. U.S. participants included officials from the Federal Reserve Board, CFTC, FDIC, SEC, OCC, and Treasury. Forum topics focused on five key themes: “(1) supervision and regulation of cross-border activities, particularly in the areas of derivatives and central clearing; (2) the importance of monitoring market developments, both in relation to financial assets classes, like leveraged loans and collateralized loan obligations, and reference rates, like the London Interbank Offered Rate; (3) implementation of international standards in banking and insurance; (4) regulatory issues presented by fintech/digital finance; and (5) EU regulations related to sustainable finance.”
Among other topics, participants discussed U.S. banking developments concerning prudential requirements for foreign banks, including tailoring standards based on risk; proposed amendments to the Volcker Rule; EU data protection rules; cross-border supervision and data flow in financial services; the transition period following the U.K.’s departure from the EU; and European Commission priorities such as preventing and combating money laundering and the financing of terrorism. Participants acknowledged the importance of fostering continued dialogue between the U.S. and the EU noting that, “[r]egular communication on supervisory and regulatory issues of mutual concern should foster financial stability, supervisory cooperation, investor protection, market integrity, and a level playing field.”
CSBS technology platform will modernize state examinations
On February 19, the Conference of State Bank Supervisors announced the launch of a technology platform called the State Examination System (SES) to increase transparency and collaboration with regulated entities. State regulators, who are the primary regulators of non-bank and fintech firms, can use the system for investigations, enforcement actions and complaints. According to the press release, “state regulators will be able to enhance supervisory oversight of nonbanks while making the process more efficient for regulators and companies alike.” Among other things, SES is designed to: (i) “[s]upport networked supervision among state regulators”; (ii) “[s]tandardize workflow, business rules and technology across states”; (iii) [f]acilitate secure collaboration between licensees and their regulators”; (iv) allow examiners to “focus…on higher risk cases”; and (v) promote efficiency by “[m]ov[ing] state supervision towards more multistate exams and fewer single-state efforts.” SES will be managed by the State Regulatory Registry, which also manages the Nationwide Multistate Licensing System.
House task force holds hearing on AI bias
On February 12, the House Financial Services Committee’s Task Force on Artificial Intelligence (AI) held a hearing entitled “Equitable Algorithms: Examining Ways to Reduce AI Bias in Financial Services.” As previously covered by InfoBytes, the Committee created the task force to determine how to use AI in the financial services industry and examine issues surrounding algorithms, digital identities, and combating fraud. According to the Committee’s memorandum regarding the hearing, AI’s key technology is machine learning (ML)—“a process that may rely on pre-set rules to solve problems (also known as algorithms) without” or with only limited involvement of humans. Witnesses largely from the fields of computer science and AI delved into AI and ML at the hearing, discussing how human biases can be perpetuated in algorithms using historical data as input and how to best ensure fairness and accuracy. It was agreed that fairness has many different definitions that must be considered when creating algorithms. Witnesses provided testimony that when striving for fairness for one protected class, there may necessarily be tradeoffs resulting in less fairness to another protected class. Among other things, committee members questioned whether it is possible to formulate an algorithm that guarantees fairness and were urged not to focus too much on algorithms, but to also consider the data—where it came from, its quality and appropriateness—as potentially flawed data that could likely result in flawed outputs.
NYDFS: Financial innovation and inclusion symposium set for April 2
On February 7, NYDFS announced it will hold its first “Symposium on Financial Innovation and Inclusion” on April 2 during New York Fintech Week. The symposium seeks to connect stakeholders—including policymakers, regulators, innovators, established financial institutions, investors, and consumer representatives—to explore innovation and inclusion, while also exploring opportunities to benefit consumers and mitigate potential risks.
Fed governor identifies community banks' fintech challenges
On February 10, Federal Reserve (Fed) Governor Michelle W. Bowman spoke before the Conference for Community Bankers on the interaction between innovation and regulation for community banks. In discussing her “vision for creating pathways to responsible community bank innovation,” Bowman identified particular challenges facing smaller banks when identifying and integrating new technologies and offered suggestions for ways the Fed can assist these banks in managing relationships with third-party service providers. Acknowledging that responsible innovation requires community banks to identify goals and pinpoint products and services to implement their strategies, Bowman recognized that compliance costs can create an outsized and undue burden on smaller banks and stated that federal regulations should be tailored to bank size, risk, and complexity. Among other things, Bowman stated that the Fed could align its third-party service provider guidance with the OCC and other banking agencies to provide uniform standards to banks. “It is incredibly inefficient to have banks and their potential fintech partners and other vendors try to navigate unnecessary differences and inconsistencies in guidance across agencies,” Bowman noted. Regulators and supervisors have a role in easing the burden for community banks, she added, noting that third-party guidance should allow banks to conduct shared due diligence on potential partners and pool resources to avoid duplicating work. In addition, Bowman commented that the Fed could help banks make this choice by publishing a list of service providers subject to regulatory supervision and increasing transparency around “who and what” the Fed evaluates. Bowman further stated that any guidance should also explain what due diligence looks like for potential fintech partners, since standards applied to other third parties may not be universally applicable. Giving community banks a better vision of what success in due diligence looks like, Bowman stated, will require releasing more information on its necessary elements.
Bowman also highlighted the Fed’s upcoming fintech innovation office hours, as well as the Fed’s recently launched fintech website section, (both covered by InfoBytes here), which are designed to help provide access to Fed staff, highlight supervisory observations regarding fintech, provide a hub of information for interested stakeholders on innovation-related matters, and deliver practical tips for banks and other companies interested in engaging in fintech activity.
SEC commissioner proposes cryptocurrency safe harbor
On February 6, SEC Commissioner Hester M. Pierce announced her proposal for a three-year safe harbor rule applicable to companies developing digital assets and networks. 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. Proposed Securities Act Rule 195 would allow companies to sell or offer tokens without being subject to the Securities Act of 1933, and without the tokens being subject to the registration requirements of the Securities Act of 1934. In order to qualify for these exemptions, the proposed rule requires that a company developing a network must, among other things, (i) “intend for the network on which the token functions to reach network maturity…within three years of the date of the first token sale”; (ii) disclose key information on a freely accessible public website,” including applicable source code and descriptions of how to search and verify transactions on the network; (iii) offer and sell its tokens in order to allow access to or development of its network; (iv) make “good faith and reasonable efforts to create liquidity for users”; and (v) “file a notice of reliance” with the SEC’s EDGAR system within 15 days of the company’s first token sale made in reliance on the safe harbor. Pierce suggested that the three-year grace period for qualifying companies would allow time for the development of decentralized or functional networks, and, at the end of the three years, a successful network’s tokens would not be regulated as securities.
Brainard addresses FedNow and other payment issues
On February 5, Federal Reserve Governor Lael Brainard spoke at the “Symposium on the Future of Payments” to discuss benefits and risks associated with the digitalization of payments and currency. Noting that some of the new players in this space are outside financial regulatory guardrails and offer new currencies that “could pose challenges in areas such as illicit finance, privacy, financial stability, and monetary policy transmission,” Brainard stressed the importance of assessing new approaches and redrawing existing parameters. Emphasizing, however, that no federal agency has broad authority over the payments systems, Brainard stated that Congress should review how retail payments are regulated in the U.S., given the growth in ways that money is able to move around without the need for a financial intermediary. Banking agencies may oversee nonbank payments “to the extent there is a bank nexus” or bank affiliation, Brainard noted, however, she cautioned that “this oversight will be quite limited to the extent that nonbank players reduce or eliminate the nexus to banks, such as when technology firms develop payments services connected to digital wallets rather than bank accounts and rely on digital currencies rather than sovereign currencies as the means of exchange.” According to Brainard, “a review of the nation’s oversight framework for retail payment systems could be helpful to identify important gaps.”
Among other topics, Brainard stated that the Fed is currently reviewing nearly 200 comment letters concerning the proposed FedNow Service announced last summer, which would “facilitate end-to-end faster payment services, increase competition, and ensure equitable and ubiquitous access to banks of all sizes nationwide.” (Covered by InfoBytes here.) Brainard also discussed the possibility of creating a central bank digital currency (CBDC). While noting that the “prospect for rapid adoption of global stablecoin payment systems has intensified calls for central banks to issue digital currencies in order to maintain the sovereign currency as the anchor of the nation’s payment systems,” Brainard stressed the importance of taking into account private sector innovations and considering whether adding a new form of central bank liability would improve the payment system and reduce operational vulnerabilities from a safety and resilience perspective. She noted that the Fed is “conducting research and experimentation related to distributed ledger technologies and their potential use case for digital currencies, including the potential for a CBDC.”
CFPB issues semi-annual report to Congress
On February 3, the CFPB issued its semi-annual report to Congress covering the Bureau’s work from April 1, 2019, through September 30, 2019. The report, which is required by the Dodd-Frank Act, addresses, among other things, problems faced by consumers with regard to consumer financial products or services; significant rules and orders adopted by the Bureau; and various supervisory and enforcement actions taken by the Bureau. In her opening letter, Director Kathy Kraninger reported that she has focused, “whenever appropriate and possible” on two areas: (i) encouraging saving, by establishing a program called “Start Small, Save Up”; and (ii) unleashing innovation by reducing regulatory constraints and revising innovation policies and promoting cooperation between state and federal regulators, as demonstrated with the launch of the American Consumer Financial Innovation Network last year.
Among other things, the report highlights credit scores, credit reporting, and the consumer credit card market as areas in which consumers face significant problems. The report notes that credit reports and credit scores greatly affect credit available to consumers. With respect to the availability of general purpose credit cards the report cites Bureau findings that in 2018, consumers with high credit scores had an 83 percent approval rate, whereas consumers with subprime credit scores had only a 17 percent approval rate. In addition to these areas of focus, the report notes the issuance of one significant final rule—Payday, Vehicle Title, and Certain High-Cost Installment Loans; Delay of Compliance Date; Correction Amendments—last year. (Covered by InfoBytes here.) Several less significant rules were also finalized, including (i) Technical Specifications for Submissions to the Prepaid Account Agreements Database; (ii) Availability of Funds and Collection of Checks (Regulation CC); and (iii) Home Mortgage Disclosure (Regulation C)–2019 Final Rule.
Payday lender settles with North Carolina AG for $825,000
On January 27, the North Carolina attorney general announced that a Florida-based payday lender (lender) agreed to pay $825,000 to settle allegations of usury, lending without a license, unlawful debt collection and unfair and deceptive practices in violation of state consumer protection laws. According to the announcement, though the lender was not licensed in the state, it advanced “more than 400 loans online to financially distressed North Carolina consumers at interest rates between 78 to 252 percent,” which is markedly higher than the state interest rate limit of 30 percent. The AG claimed that the lender tried to skirt North Carolina laws by requiring some borrowers to collect their loan funds outside of the state. The AG also alleged that the lender required borrowers to secure the loans with their vehicle titles, which enabled the lender to repossess and sell the borrowers’ vehicles when they defaulted or were late on payments. In the settlement, without admitting to the AG’s allegations, the lender agreed to return to North Carolina borrowers (i) all fees and interest paid on the loans by the borrowers; (ii) all the auction proceeds exceeding the loan principal to borrowers whose vehicles were repossessed and sold at auction; and (iii) cars owned by borrowers that were repossessed but not sold at auction. Among other things, the lender will also be permanently barred from making loans to, and collecting payments from, North Carolina borrowers, and is prohibited from putting liens on and repossessing vehicles owned by borrowers.