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Financial Services Law Insights and Observations

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  • CFPB files action against mortgage lender for unlawful practices

    Federal Issues

    On January 15, the CFPB announced a complaint filed in the U.S. District Court for the District of Connecticut against a mortgage lender and four executives (collectively, “defendants”) alleging the defendants engaged in unlawful mortgage lending practices in violation of TILA, FCRA, ECOA, the Mortgage Acts and Practices—Advertising Rule (MAP Rule), and the CFPA. According to the complaint, from as early as 2015 until August 2019 (i) unlicensed sales people would take mortgage applications and offer and negotiate mortgage terms, in violation of TILA and Regulation Z; (ii) company policy regularly required consumers to submit documents for verification before receiving a Loan Estimate, in violation of TILA and Regulation Z; (iii) employees would deny consumers credit without issuing an adverse action notice, as required by the FCRA or ECOA; and (iv) defendants regularly made misrepresentations about, among other things, the availability and cost savings of a FHA streamlined refinance loan, in violation of the MAP Rule. The Bureau is seeking an injunction, as well as, damages, redress, disgorgement, and civil money penalties.

    Federal Issues CFPB Enforcement Courts ECOA FCRA CFPA TILA Regulation Z MAP Rule Mortgages

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  • CFPB and NCUA announce supervision MOU

    Federal Issues

    On January 14, the CFPB announced a Memorandum of Understanding (MOU) with the NCUA, which is intended to improve supervision coordination of credit unions with over $10 billion in assets. According to the Bureau’s press release, the MOU covers (i) the sharing of the Covered Reports of Examination and final Reports of Examination for covered institutions, using secure, two-way electronic means; (ii) collaboration in semi-annual strategy planning sessions for examination coordination; (iii) information sharing on training activities and content; and (iv) information sharing related to potential enforcement actions.

    Federal Issues CFPB NCUA MOUs Supervision Credit Union

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  • FTC may seek civil penalties under Covid-19 Consumer Protection Act

    Federal Issues

    Recently President Trump signed the Consolidated Appropriations Act, 2021—a funding measure which extends certain emergency authorities and temporary regulatory relief contained in the CARES Act (covered by InfoBytes here)—that includes a provision under Title XIV Covid-19 Consumer Protection Act, which allows the FTC to seek civil penalties for first-time violations of the FTC Act related to Covid-19 scams and deceptive practices. Specifically, the provision targets conduct “associated with—(1) the treatment, cure, prevention, mitigation, or diagnosis of COVID-19; or (2) a government benefit related to COVID-19.” Such a violation would be “treated as a violation of a rule defining an unfair or deceptive act or practice prescribed under section 18(a)(1)(B) of the Federal Trade Commission Act (15 U.S.C. 57a(a)(1)(B)),” with violators subject to civil penalties. This authority is granted to the FTC for the duration of the Covid-19 pandemic.

    Federal Issues FTC Covid-19 Fraud CARES Act Consolidated Appropriations Act UDAP

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  • CFPB lets QM cure provision expire

    Federal Issues

    January 10 was the sunset date for the QM Rule’s provision allowing creditors to cure loans that exceed the rule’s limitation on points and fees. For transactions consummated prior to January 10, a creditor could cure any loan exceeding the (generally 3 percent) points and fees limit by refunding to the consumer the excess amount plus interest within 210 days of consummation (assuming the borrower had not notified the creditor of the error or become 60 days past due). The cure provision was originally added by the amendments to the ATR/QM Rule published in November 2014 and was always set to expire on January 10, 2021. The new QM rulemakings issued by the CFPB in December 2020 (covered by a Buckley Special Alert) do not extend it or replace the cure provision.

    Federal Issues CFPB Ability To Repay Qualified Mortgage

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  • OCC conditionally approves conversion of digital bank

    Federal Issues

    On January 13, the OCC announced it has conditionally approved a South Dakota non-depository public trust company’s application to convert to a national trust bank. The digital bank—which offers digital asset and cryptocurrency custody services in certain states—has entered into an operating agreement as an enforceable condition of approval, which specifies capital and liquidity requirements and risk management expectations. By receiving a national trust bank charter, the digital bank will be allowed to expand its digital asset custody services nationally and may perform the functions and “activities of a fiduciary, agency, or custodial nature, in the manner authorized by federal and state law” with oversight being conducted by the OCC. According to the OCC, this approval “demonstrates that the national bank charters provided under the National Bank Act are broad and flexible enough to accommodate evolving approaches to financial services in the 21st century.”

    Federal Issues OCC Fintech Cryptocurrency Bank Charter National Bank Act

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  • FHFA extends Covid-19 flexibilities until February 28

    Federal Issues

    On January 14, the FHFA announced the extension of several loan origination guidelines put in place to assist borrowers during the Covid-19 pandemic. Specifically, FHFA extended until February 28 existing guidelines related to: (i) alternative appraisal requirements on purchase and rate term refinance loans; (ii) alternative methods for documenting income and verifying employment before loan closing; and (iii) expanding the use of power of attorney to assist with loan closings. The extensions are implemented in updates to Fannie Mae Lender Letters LL-2020-03, LL 2020-04; and Freddie Mac Guide Bulletin 2021-1 and Selling FAQs.

    Federal Issues Covid-19 FHFA Fannie Mae Freddie Mac GSE

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  • Brainard weighs benefits and risks of using AI in financial services industry

    Federal Issues

    On January 12, Federal Reserve Governor Lael Brainard spoke at the AI Academic Symposium hosted by the Fed’s Board about the increased use of artificial intelligence (AI) in the financial services industry. Brainard reflected that since she first shared early observations on the use of AI in 2018 (covered by InfoBytes here), the Fed has been exploring ways to better understand the use of AI, as well as how banking regulators can best manage risk through supervision while supporting the responsible use of AI and providing equitable outcomes. “Regulators must provide appropriate expectations and adjust those expectations as the use of AI in financial services and our understanding of its potential and risks evolve,” Brainard noted, adding that the Fed is currently collaborating with the other federal banking agencies on a potential request for information on the risk management of AI applications in financial services.

    Emphasizing the “wide ranging” scope of AI applications, Brainard commented that financial services firms have been using AI for operational risk management, customer-facing applications, and fraud prevention and detection. Brainard also suggested that machine learning-based fraud detection tools could also have the potential to increase the detection of suspicious activity “with greater accuracy and speed,” while potentially enabling firms to respond in real time. Brainard also acknowledged the potential of AI to improve accuracy and fairness of credit decisions and improve overall credit availability.

    However, Brainard also discussed AI challenges, including the “black box problem” that can arise with complex machine learning models that “operate at a level of complexity” which is difficult to fully understand. This lack of model transparency is a central challenge she noted, stressing that financial services firms must understand the basis on which a machine learning model determines creditworthiness, as well as the potential for AI models to “reflect or amplify bias.” With respect to safety and soundness, Brainard stated that “bank management needs to be able to rely on models’ predictions and classifications to manage risk. They need to have confidence that a model used for crucial tasks such as anticipating liquidity needs or trading opportunities is robust and will not suddenly become erratic.” She added that “regulators must provide appropriate expectations and adjust those expectations as the use of AI in financial services and our understanding of its potential and risks evolve.”

    Federal Issues Federal Reserve Artificial Intelligence Fintech

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  • PPP portal to re-open to all lenders on January 19

    Federal Issues

    On January 13, the Small Business Administration (SBA) announced that the Paycheck Protection Program (PPP) loan portal will open to all eligible lenders with $1 billion or less in assets for First and Second Draw applications on January 15, with the portal fully opening on January 19 to all participating lenders. As previously covered by InfoBytes, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) provides an additional $284 billion for the PPP, extending the authority to make PPP loans through March 31, amending certain aspects of the program, and allowing for certain businesses to take second loans. The PPP portal initially reopened on January 11 to community financial institutions only in order to reach underserved and minority small businesses.

    Federal Issues Covid-19 SBA CARES Act Economic Aid Act

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  • FTC comments on application of ECOA, Regulation B in response to CFPB RFI

    Federal Issues

    Recently, FTC staff submitted a comment letter in response to the CFPB’s request for information (RFI) seeking input on ways to provide additional clarity under the Equal Credit Opportunity Act (ECOA) and implementing Regulation B. As previously covered by InfoBytes, the CFPB issued the RFI last July requesting comments on ways to create a regulatory environment that expands credit access and ensures consumers and communities are protected from discrimination with respect to any aspect of a credit transaction. Included in the RFI was a request for input on whether “the Bureau should provide additional clarity regarding its approach to disparate impact analysis under ECOA and/or Regulation B.” Citing to legislative history, the FTC noted that Regulation B explicitly incorporates disparate impact, and stressed that “[a]rticulating a single approach to disparate impact analysis that covers diverse sets of present and future facts and circumstances of discrimination could be difficult and could risk being both over and under inclusive.” The FTC suggested that if the Bureau chooses to provide additional detail regarding its approach to disparate impact analysis, a disclaimer should be included that such information is not intended to “bless” any violations of ECOA and Regulation B, but is rather “intended to provide examples of how the agency might approach a fair lending matter.”

    In response to the Bureau’s request for information about ways it might support efforts to meet the credit needs of small businesses, the FTC highlighted recent enforcement actions involving small businesses, including actions involving deceptively advertised financial products and unfair billing and collection practices, particularly with respect to merchant cash advances. The FTC also urged the Bureau to remind entities offering credit to small businesses that ECOA and Regulation B apply and that entities cannot avoid application of these statutes based solely on how they characterize a transaction or the benefits they claim to provide. The FTC further stressed that collecting small business lending demographic data could aid in enforcement efforts, as would encouraging small businesses to report misconduct and refer complaints to the FTC and the states. In addition, the FTC highlighted the importance of educating small businesses about different products and terms, as well as potential law violations, which could assist small businesses in comparing products resulting in less expensive financing options.

    Federal Issues CFPB FTC ECOA Regulation B Disparate Impact Small Business Lending Merchant Cash Advance

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  • CFPB denies guaranty agency’s petition to set aside CID

    Federal Issues

    On December 16, the CFPB denied a petition by a non-profit guaranty agency that serves as a guarantor of federal student loans to set aside a civil investigative demand (CID) issued by the Bureau last September. The CID requested information from the company to determine, among other things, whether “debt collectors, guaranty agencies, or associated persons” violated the CFPA’s UDAAP provisions by improperly causing borrowers to incur costs or fees in connection with the collection of student loans. The company petitioned the Bureau to set aside the CID. Among other things, the company argued that the Bureau lacked jurisdiction, because it does not provide a consumer financial product or service, but rather a commercial service to the Department of Education (Department). The company also argued that the Bureau lacked jurisdiction due to the company’s fiduciary relationship with the Department, citing a Memorandum of Understanding (MOU) between the Bureau and the Department related to their respective responsibilities for handling student borrower complaints. Additionally, the company claimed that any potential allegations are time-barred, and that, in the alternative, the CID should be stayed until the U.S. District Court for the District of Columbia issues a decision in a pending lawsuit challenging the validity of the Department’s Guaranty Agency Collections Fee Rule.

    The Bureau rejected the company’s request to set aside or modify the CID, finding that (i) it has a “reasonable basis to investigate” whether guaranty agencies, like the company, fall within its jurisdiction; (ii) the CID is proper because it seeks information “relevant to a violation” of consumer financial protection laws, as well as information related to the company’s relationships with private collection agencies and loan servicers; (iii) the Bureau’s MOU with the Department has “no relevance” to the Bureau’s exercise of its investigative or enforcement authority; (iv) its investigation is not time-barred because the CFPA’s statute of limitations begins to run upon the Bureau’s discovery of the violation, and, moreover, the Bureau is not limited to gathering information from only within the limitations period; and (v) the company “fail[ed] to establish any basis for an indefinite stay of the CID.”

    Federal Issues CFPB Enforcement CIDs Guaranty Agency CFPA UDAAP

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