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DFPI issues fourth round of draft regulations for commercial financing disclosures
On November 5, the California Department of Financial Protection and Innovation (DFPI) issued a fourth draft of proposed regulations implementing the requirements of the commercial financing disclosures required by SB 1235 (Chapter 1011, Statutes of 2018). As previously covered by InfoBytes, in 2018, California enacted SB 1235, which requires non-bank lenders and other finance companies to provide written, consumer-style disclosures for certain commercial transactions, including small business loans and merchant cash advances. California released the first draft of the proposed regulations in July 2019, initiated the formal rulemaking process with the Office of Administrative Law in September 2020, and subsequently released second and third rounds of modifications in August and October of this year (covered by InfoBytes here, here, here, and here). The fourth modifications to the proposed regulations follow a consideration of public comments received on the various iterations of the proposed text. Among other things, the proposed modifications amend the term “average monthly cost” to mean the average total amount paid by the recipient (for periodic and irregular payments) over a contract’s term divided by the number of months specified in the contract. Providers may divide the number of days in the contract term by 30.4 to determine the number of months in the contract term. This calculation may also be used to determine the “estimated monthly cost.” Comments on the fourth modifications must be received by November 22.
CFPB seeks comments on recent orders to U.S. tech companies
On November 5, the CFPB published a notice in the Federal Register seeking public comments on recently issued orders to six large U.S. technology companies requesting information and data on their payment system business practices (covered by InfoBytes here). According to the notice, the Bureau invites comments from “any interested parties, including consumers, small businesses, advocates, financial institutions, investors, and experts in privacy, technology, and national security.” The notice is “one of many efforts within the Federal Reserve System to plan for the future of realtime payments and to ensure a fair and competitive payments system in our country.” Comments are due by December 6.
House fintech task force examines buy now/pay later industry
On November 2, the House Financial Services Committee’s Task Force on Financial Technology held a hearing titled “Buy Now, Pay More Later? Investigating Risks and Benefits of BNPL and Other Emerging Fintech Cash Flow Products,” urging regulators to examine the BNPL industry. The committee memorandum highlighted the rise in consumers products offered by fintechs, such as BNPL, earned wage access, and overdraft avoidance products, and warned that while these products may help consumers manage their personal cash flow, they also have the potential to create unsustainable levels of debt. FSC staff noted that many lending disclosure requirements, including those under TILA, may not apply to several of these products, thus creating concerns regarding consumers’ understanding of the associated risks. Pointing out that payments made on many of these products are not reported to credit bureaus, FSC staff raised the issue of whether consumers are missing out on opportunities to build credit.
The task force heard from several industry witnesses who discussed, among other things, current federal and state consumer protection regulations that apply to BNPL products. One witness stressed the importance of “balanced and thoughtful regulation” that benefits consumers and merchants using these new payment solutions, and noted that the industry is actively working with credit bureaus on ways to share repayment data. House Financial Services Chair Maxine Waters (D-CA) also urged the CFPB to “look[ ] deeply” at these emerging products to gain a better understanding of how they may impact low- and moderate-income consumers and borrowers of color. Representative Blaine Luetkemeyer (R-MO) noted, however, that these products “allow[] people to purchase products, [and] pay for them in a timely manner as they can afford them.” Representative Warren Davidson (R-OH) agreed, stressing that policymakers need to “avoid punishing new products for not fitting within regulatory buckets that were already built” and “should avoid overly impairing consumer choices on how they spend money.”
OCC says synthetic banking providers require supervision
On November 3, acting Comptroller of the Currency Michael J. Hsu spoke before the American Fintech Council’s Fintech Policy Summit 2021 and warned that “[t]he rebundling of banking services by fintechs and the fragmented supervision of universal crypto firms pose significant medium- to long-term risks to consumers, businesses, and financial stability.” Hsu also noted that large “universal” cryptocurrency firms interested in offering a wide range of financial services should “embrace comprehensive, consolidated supervision” like that given to banks. “Crypto firms today are regulated at most only partially and selectively, with no single regulator having a comprehensive view of the firm as a whole,” Hsu stated, adding “[t]his warrants greater attention as crypto firms, especially the universals, get bigger, engage in a wider range of activities and risk-taking, and deepen their interconnectedness within the crypto ecosystem and with traditional finance.” Warning that these “synthetic banking providers” (SBPs) could create a “run risk” and regulatory arbitrage, Hsu stressed the importance of removing “the disparity between the rights and obligations of banks and the rights and obligations of synthetic banking providers by holding SBPs to banking standards.” He further warned that customers’ needs must be met in a way that is reliable, consistently safe, sound, and fair, and discussed several reasons why more SBPs have not sought to become banks, including that “regulators have been unpredictable with regards to chartering new banks and approving fintech acquisitions of banks.” Establishing a clear, shared approach to the bank regulatory perimeter related to emerging technologies can address this challenge, he advised.
Hsu also announced that the OCC concluded its review of recent bank charter applications and cryptocurrency-related interpretive letters and stated that the agency will communicate its determinations and feedback to bank charter applicants in the coming weeks. Findings from a “crypto sprint” done in conjunction with the FDIC and Federal Reserve will also be communicated shortly. “The content of these communications—on the chartering decisions, interpretive letters, and the crypto sprint—will be broadly aligned with the vision for the bank regulatory perimeter laid out here today,” Hsu stated.CSBS urges early NMLS licensing renewal
On October 28, the Conference of State Bank Supervisors (CSBS) issued a reminder to individuals and businesses operating in the mortgage, money transmission, debt collection and consumer financial services industry that they should begin renewing their licenses in the Nationwide Multistate Licensing System (NMLS) on November 1 to avoid licensing delays. According to CSBS, early renewal is critical due to an increase in the number of licensees eligible for renewal. Renewal periods in most states run from November 1 to December 31, and licensees are encouraged to review state-specific renewal requirements early. State regulators may employ operational efficiencies to streamline the renewal process, CSBS stated, adding that it also plans to implement an online request process on November 1 for licensees to resolve and check in on NMLS access issues, including password reset/unlocking, changes in email addresses, and confirming renewal status. The online request process is available on the NMLS Call Center Information webpage, available here. As a reminder federally-registered mortgage loan originators and institutions are also required to renew their registrations through NMLS by December 31.
FTC issues warning regarding false money-making claims
On October 26, the FTC announced that it is putting businesses on notice that pitch money-making ventures that deceive or mislead consumers regarding potential earnings. According to the announcement, the FTC utilized its Penalty Offense Authority to remind businesses of the law and deter them from breaking it by sending a Notice of Penalty Offenses to over 1,100 companies. The notice puts these businesses on notice that they may incur significant civil penalties if they or their representatives make claims regarding money-making opportunities that run counter to FTC administrative cases. The Notice of Penalty Offenses permits the FTC to seek civil penalties against a company that engages in conduct it knows is unlawful and has been determined to be unlawful in an FTC administrative order, other than a consent order. The FTC added that the Notice highlighted a number of practices that the FTC determined to be unfair or deceptive in prior administrative actions. In general, the cases determined that it was unlawful to make false, misleading, or deceptive representations regarding the profits or earnings that may be anticipated by a participant in a money-making opportunity, including representations that participants will make a profit. The Notice also outlined other practices that the FTC has decided to be unfair or deceptive, such as falsely telling consumers they do not need experience to earn income or that they must act immediately to participate. Companies receiving the Notice also received a copy of the recently issued Notice of Penalty Offenses concerning endorsements and testimonials, as companies frequently use testimonials to advertise money-making opportunities. The FTC also pointed out that “[a] recipient’s presence on this list does not in any way suggest that it has engaged in deceptive or unfair conduct.”
CFPB releases report on consumer credit disputes
On November 2, the CFPB released a report on credit report disputes that outlined the demographic characteristics of disputers and the outcomes for accounts with dispute flags. The report highlighted that consumers in majority Black and Hispanic neighborhoods, as well as younger consumers and those with low credit scores, are far more likely to have disputes on their credit reports. The post—part of a series documenting trends in consumer credit outcomes during the Covid-19 pandemic (the first covered by InfoBytes here)—used data on auto loan, student loan, and credit card accounts opened between 2012 and 2019. Among other things, the report found that majority Black and Hispanic neighborhoods continue to face significant challenges with credit records; for example, in almost every credit category outlined in the report, consumers residing in majority Black areas were more than twice as likely to have disputes on their credit reports compared to consumers residing in majority white areas. For auto loans, consumers in majority Black areas were more than three times as likely to have disputes appear on their credit reports compared to majority white areas. The report also noted that approximately 40 percent of student loans with dispute flags are deleted within four years of the dispute, although this represents less than 0.2 percent of all student loans opened between 2012 and 2019.
According to Director Rohit Chopra, “[e]rror-ridden credit reports are far too prevalent and may be undermining an equitable recovery.” The report noted that “an important subject for future research is whether these patterns are driven by differences across groups and credit types in the type or frequency of the underlying issues that result in a dispute flag, or whether they are driven by furnishers’ practices for reporting dispute flags or responding to disputes.” Additionally, the Bureau said in its press release that it “is committed to further researching the root causes of credit information disputes, as well as investigating the reasons for the demographic disparities found in the report.” As previously covered by InfoBytes, the CFPB, along with the FTC and the North Carolina Department of Justice, filed an amicus brief in support of the consumer plaintiffs in Henderson v. The Source for Public Data, L.P., arguing that a public records website, its founder, and two affiliated entities cannot use Section 230 liability protections to shield themselves from credit reporting violations.
Chopra testifies on CFPB direction
On October 27, newly sworn in CFPB Director Rohit Chopra appeared for the first time before the House Financial Services Committee to offer some of the first insights into his priorities at the Bureau. Chopra’s opening remarks focused on concerns regarding “Big Tech” and its control over the flow of money in the economy (these comments followed the issuance of information requests to six technology companies, covered by InfoBytes here). Chopra also focused on a need to ensure robust competition in financial markets and listen to local financial institutions and nascent players about obstacles they face when seeking to challenge dominant incumbents. Chopra also stressed the importance of holding “repeat offenders” accountable, highlighted an intent to coordinate efforts with federal and state regulators, and indicated a preference for scrutinizing larger market participants over smaller entities. He noted, however, potential leniency for companies that self-identify their own issues and violations. Additional highlights of the hearing include the following:
Enforcement. Chopra noted that “markets work well when rules are easy to follow and easy to enforce.” He also expressed his view that the CFPB should focus its resources on larger industry participants and “repeat offenders” rather than “strong-arming” small businesses into settlements to create law. Chopra also expressed a preference for setting regulatory guidelines through enforcement, indicating that “markets work well when rules are easy to follow, and easy to enforce.”
Section 1033 of Dodd-Frank. With respect to implementing this set of requirements, which deals with consumers’ rights to access information about their financial accounts, Chopra indicated a desire to “unlock more competition,” but warned that there also needs to be assurance that “banks and nonbanks are operating under the same set of rules” and that there is “not regulatory arbitrage.” While Chopra did not specify a timeline for promulgating the final rule implementing this section, he noted that the process is underway and that the Bureau is consulting with various experts. (Issuance of the ANPR was covered by InfoBytes here.)
Abusive acts and practices. Chopra said that he agreed with former acting Director Dave Uejio’s decision to rescind a policy statement on “abusive” conduct issued by former Director Kathy Kraninger. Chopra stated he has “huge aspirations to create durable jurisprudence” regarding the definition of “abusive” in Dodd-Frank. He noted that “it could be a mix” of judicial decisions and “how the CFPB may use rules and guidance to help articulate those standards.”
Cryptocurrency and stablecoins. Chopra expressed concerns about the potential for big payment platforms to process stablecoins—cryptocurrencies pegged to stable commodities or currencies like the dollar. However, Chopra clarified that it is not his intention to use his regulatory authority to ban or limit the use of cryptocurrency or blockchain technology. Regarding the CFPB’s role in cryptocurrency, Chopra claimed that depending on the laws implicated, there is a “fact-based determination as to any sort of law that cryptocurrencies or digital currencies have to comply with.” He further described that this is “something that the CFPB is working with the other regulators on,” and emphasized that “where digital payments [are] involved, the Electronic Fund Transfer Act is a key law with key consumer protections.”
QM Rule. When asked about the postponement of the mandatory compliance date of the General Qualified Mortgage final rule to October 2022 (covered by InfoBytes here), Chopra said he is eager “to hear of places where it needs to be changed” but emphasized that the postponement was before his time and that the rule has gone into effect. He also stated that “QM is a key part of the mortgage market and the mortgage regulatory guidelines.” Therefore, he wants to ensure that the CFPB is always looking at it to make sure the objectives that Congress laid forward in Dodd-Frank are being carried out. When asked about his support of the proposed change in the QM rule, Chopra said he did not know but wants “to make sure he understands the full basis of it.”
Chopra echoed such sentiments in his October 28 testimony before the Senate Banking Committee.
FHA proposes changes to defect taxonomy for loan servicing
On October 28, FHA requested stakeholder review and feedback on a draft update to Appendix 8.0 – FHA Defect Taxonomy for its Single Family Housing Policy Handbook 4000.1. The updated draft appendix includes, among other things, (i) six new defect areas to incorporate loan-level servicing reviews (servicer operations, account administration, delinquent and default servicing, loss mitigation processing, home retention, and home disposition); (ii) severity tier descriptions explaining the process used for determining whether defects require corrective servicing action or a different response “based on the impact of non-compliance on FHA, the property, or both”; and (iii) and expanded, servicing-specific remedies for violations. As previously covered by InfoBytes, FHA issued an update to Section III of the handbook, which streamlined many standard mortgage servicing operational requirements and incorporated FHA actions taken to support borrowers experiencing Covid-19-related financial hardships. The proposed defect taxonomy updates are intended to increase transparency into FHA’s servicing loan review process and provide clarity on how FHA will hold servicers accountable for loan-level compliance. Comments are due December 27.
DOJ, CFPB, and OCC announce aggressive redlining initiative; take action against national bank for alleged lending discrimination
On October 22, the DOJ, in collaboration with the CFPB and the OCC, announced a new initiative to combat redlining and lending discrimination. The Combatting Redlining Initiative will be led by the DOJ’s Civil Rights Division’s Housing and Civil Enforcement Section in partnership with U.S. Attorney’s offices, and will, among other things, (i) “ensure that fair lending enforcement is informed by local expertise on housing markets and the credit needs of local communities of color”; (ii) “[e]xpand the department’s analyses of potential redlining to both depository and non-depository institutions” (the DOJ noted that non-depository lenders now make the majority of mortgages in the U.S.); (iii) strengthen financial regulator partnerships to ensure fair lending violations are identified and referred to the DOJ; and (iv) increase fair lending coordination with state attorneys general to identify potential violations. Attorney General Merrick Garland stated that the initiative will “address[] modern-day redlining by making far more robust use of our fair lending authorities,” and marks the DOJ’s “most aggressive, coordinated effort to address redlining.” Garland noted that several redlining investigations are currently ongoing and more are expected to be opened in the upcoming months.
In his remarks, CFPB Director Rohit Chopra also warned that the Bureau will be “closely watching for digital redlining, disguised through so-called ‘neutral algorithms, that may reinforce the biases that have long existed.’” He added that “the speed with which banks and lenders are turning lending and advertising decisions over to algorithms is concerning,” and cautioned against assuming that algorithms will be bias free.
In conjunction with the announcement of the multi-agency initiative, the DOJ, CFPB, and OCC, took action against a national bank for alleged redlining practices. According to the complaint, the bank violated the Fair Housing Act, ECOA, and the CFPA by deliberately engaging in conduct that discouraged consumers in majority-Black and Hispanic neighborhoods in the Memphis metropolitan area from seeking credit. The bank also allegedly established a limited number of branches in majority-Black and Hispanic communities, and did not provide mortgage-lending services to walk-in customers in these neighborhoods. The complaint further alleged, among other things, that the bank’s fair lending policies and procedures did not adequately ensure equal access to credit to majority-Black and Hispanic neighborhoods, and that internal governance and oversight committees to oversee fair lending were not established until after the OCC initiated a fair lending examination of the bank.
Under the terms of the proposed settlement, the bank will be required to pay a $5 million civil money penalty. The bank will also have to invest $3.85 million through a loan subsidy program to increase access to credit, and provide $400,000 to develop community partnerships to increase access to residential mortgage credit. The loan subsidy program will go towards closing cost assistance, down payment assistance, and payment of mortgage insurance premiums. Additionally, the bank must increase branches and outreach efforts in majority-Black and Hispanic neighborhoods, devote at least $200,000 in targeted advertising annually to generate applications for mortgages in these neighborhoods, and take remedial efforts to improve its fair lending compliance.