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FTC issues report to Congress on use of AI
On June 16, the FTC issued a report to Congress regarding the use of artificial intelligence (AI), warning that policymakers should use caution when relying on AI to combat the spread of harmful online conduct. In the 2021 Appropriations Act, Congress directed the FTC to study and report on whether and how AI “may be used to identify, remove, or take any other appropriate action necessary to address” a wide variety of specified “online harms,” referring specifically to content that is deceptive, fraudulent, manipulated, or illegal. The report suggests that adoption of AI could be problematic, as AI tools can be biased, discriminatory, or inaccurate, and could rely on invasive forms of surveillance. To avoid introducing these additional harms, the report suggests lawmakers instead focus on developing legal frameworks to ensure no additional harm is caused by AI tools used by major technology platforms and others. The report further suggests that Congress, regulators, platforms, scientists, and others focus their attention on creating frameworks to address the following related considerations, among others: (i) the need for human intervention in connection with monitoring the use and decisions of AI tools intended to address harmful content; (ii) the need for meaningful transparency, “which includes the need for it to be explainable and contestable, especially when people’s rights are involved or when personal data is being collected or used”; and (iii) the need for accountability with respect to the data practices and results of the use of AI tools by platforms and other companies. Other recommendations include use of authentication tools, responsible use of inputs and outputs by data scientist, and using interventions, such as tools that slow the viral spread or otherwise limit the impact of certain harmful content.
The Commission voted 4-1 at an open meeting to send the report to Congress. Commissioner Noah Joshua Phillips issued a dissenting statement, finding that the report provides “short shrift to how and why AI is being used to combat the online harms identified by Congress,” and instead “reads as a general indictment of the technology itself.”
FDIC updates Consumer Compliance Examination Manual’s UDAAP provisions
On June 17, the FDIC announced updates to its Consumer Compliance Examination Manual (CEM). The CEM includes supervisory policies and examination procedures for FDIC examination staff when evaluating financial institutions’ compliance with federal consumer protection laws and regulations. The June update modifies Section VII Unfair, Deceptive, or Abusive Acts or Practices to reflect the FDIC’s existing supervisory authority regarding UDAP and UDAAP under Section 5 of the FTC Act, and Sections 1031 and 1036 of the Dodd-Frank Act, respectively. Among other updates, the new Section VII changes language related to the Equal Credit Opportunity Act and Fair Housing Act to add a reference to Dodd-Frank UDAAP provisions. The updated section provides the following:
ECOA prohibits discrimination in any aspect of a credit transaction against persons on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to contract), the fact that an applicant’s income derives from any public assistance program, and the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The FHA prohibits creditors involved in residential real estate transactions from discriminating against any person on the basis of race, color, religion, sex, handicap, familial status, or national origin. FTC UDAPs and Dodd-Frank UDAAPs that target or have a disparate impact on consumers in one of these prohibited basis groups may violate the ECOA or the FHA, as well as the FTC Act or the Dodd-Frank Act. Moreover, some state and local laws address discrimination against additional protected classes, e.g., handicap in non-housing transactions, or sexual orientation. Such conduct may also violate the FTC Act or the Dodd-Frank Act.
With respect to the legal standards for “unfair” and “deceptive” under the FTC Act and Dodd-Frank, Section VII notes that these standards are “substantially similar.”
OCC announces disaster relief guidance
On June 15, the OCC issued a proclamation permitting OCC-regulated institutions, at their discretion, to close offices affected by flooding in Montana “for as long as deemed necessary for bank operation or public safety.” The proclamation directs institutions to OCC Bulletin 2012-28 for further guidance on actions they should take in response to natural disasters and other emergency conditions. According to the 2012 Bulletin, only bank offices directly affected by potentially unsafe conditions should close, and institutions should make every effort to reopen as quickly as possible to address customers’ banking needs.
CFPB revising its rulemaking approach
On June 17, CFPB Director Rohit Chopra announced in a blog post that the agency plans to move away from overly complicated and tailored rules. “Complexity creates unintended loopholes, but it also gives companies the ability to claim there is a loophole with creative lawyering,” Chopra said. The Bureau’s plan to implement simple, durable bright-line guidance and rules will better communicate the agency’s expectations and will provide numerous other benefits, he added.
With regards to traditional rulemaking, the Bureau outlined several priorities, which include focusing on implementing longstanding Congressional directives related to consumer access to financial records, increased transparency in the small business lending marketplace, and quality control standards for automated valuation models under Sections 1033, 1071, and 1473(q) of the Dodd-Frank Act. Additionally, the Bureau stated it will assess whether it should use Congressional authority to register certain nonbank financial companies to identify potential violators of federal consumer financial laws.
Chopra also announced that the Bureau is reviewing a “host of rules” that it inherited from other agencies such as the FTC and the Federal Reserve. “Many of these rules have now been tested in the marketplace for many years and are in need of a fresh look,” Chopra said. Specifically, the Bureau will (i) review rules originated by the Fed under the 2009 Credit CARD Act (including areas related to “enforcement immunity and inflation provisions when imposing penalties on customers”); (ii) review rules inherited from the FTC for implementing the FCRA to identify possible enhancements and changes in business practices; and (iii) review its own Qualified Mortgage Rules to assess aspects of the “seasoning provisions” (covered by a Buckley Special Alert) and explore ways “to spur streamlined modification and refinancing in the mortgage market.”
The Bureau noted that it also plans to increase its interpretation of existing laws through its Advisory Opinion program and will continue to issue Consumer Financial Protection Circulars to provide additional clarity and encourage consistent enforcement of consumer financial laws among government agencies (covered by InfoBytes here and here).
CFPB examining impact of overdraft programs
On June 16, the CFPB published a blog post outlining recent efforts taken by the agency to collect key metrics concerning the consumer impact of certain supervised institutions’ overdraft and non-sufficient fund (NSF) practices. The Bureau asked more than 20 institutions to provide data on several “consumer-impact metrics,” including: (i) the “[t]otal annual dollar amount consumers receive in overdraft coverage compared to the amount of fees charged”; (ii) the annual amount of overdraft fees charged for each active checking account; (iii) the annual amount of NSF fees charged per active checking account; (iv) “the share of active checking accounts with more than 6 and more than 12 overdraft and/or NSF fees per year”; and (v) the “[s]hare of active checking accounts that are opted into overdraft programs for ATM and one-time debit transactions.” The Bureau stated that it plans to “use this information for further examination and review” and to provide feedback to each institution. The Bureau also plans to “share this information with other regulators,” but will not make the supervisory information public. Additionally, the Bureau noted that while it is “encouraged that some banks and credit unions are competing for consumers’ business by changing their overdraft and NSF programs,” many banks still need to improve their practices.
FFIEC releases 2021 HMDA data
On June 16, the Federal Financial Institutions Examinations Council (FFIEC) released the 2021 HMDA data on mortgage lending transactions at 4,338 covered institutions (a decline from the 4,475 reporting institutions in 2020). Available data products include: (i) the Snapshot National Loan-Level Dataset, which contains national HMDA datasets as of May 1, 2022; (ii) the HMDA Dynamic National Loan-Level Dataset, which is updated on a weekly basis to reflect late submissions and resubmissions; (iii) the Aggregate and Disclosure Reports, which provide summaries on individual institutions and geographies; (vi) the HMDA Data Browser where users can customize tables and download datasets for further analysis; and (v) the Modified Loan/Application Register for filers of 2021 HMDA data.
The 2021 data includes information on 23.3 million home loan applications, of which 21.1 million were closed-end and 1.8 million were open-end. The Snapshot revealed that an additional 350,000 records were from financial institutions making use of the Economic Growth, Regulatory Relief, and Consumer Protection Act’s partial exemptions that did not designate whether the records were closed-end or open-end. Observations from the data relative to the prior year include: (i) the percentage of mortgages originated by non-depository, independent mortgage companies increased, accounting for “63.9 percent of first lien, one- to four-family, site-built, owner-occupied home-purchase loans, up from 60.7 percent in 2020”; (ii) the percentage of closed-end home purchase loans for first lien, one- to four-family, site-built, owner-occupied properties made to Black or African American borrowers increased from 7.3 percent in 2020 to 7.9 percent in 2021, while the share of these loans made to Hispanic-White borrowers increased slightly from 9.1 percent to 9.2 percent and the share made to Asian borrowers jumped from 5.5 percent to 7.1 percent; and (iii) “Black or African American and Hispanic-White applicants experienced denial rates for first lien, one- to four-family, site-built, owner-occupied conventional, closed-end home purchase loans of 15.7 percent and 9.8 percent respectively, while the denial rates for Asian and non-Hispanic-White applicants were 7.5 percent and 5.6 percent respectively.”
Special Alert: DOJ settles claims of algorithmic bias
On June 21, the United States Department of Justice announced that it had secured a “groundbreaking” settlement resolving claims brought against a large social media platform for allegedly engaging in discriminatory advertising in violation of the Fair Housing Act. The settlement is one of the first significant federal actions involving claims of algorithmic bias and may indicate the complexity of applying “disparate impact” analysis under the anti-discrimination laws to complex algorithms in this area of increasingly intense regulatory focus.
CFTC Commissioner Romero discusses crypto regulation
On June 14, CFTC Commissioner Christy Goldsmith Romero discussed cryptocurrency regulation in an interview. According to sources, Romero rejected suggestions that the agency would be laissez-faire on cryptocurrency regulation, saying that the CFTC is positioned to protect consumers if provided with more authority. Throughout the interview, Romero noted some similarities between the present market and the 2008 market, stating that there is a “pretty sizeable market that’s largely unregulated.” Noting that a “regulatory gap” exists because the CFTC does not have any regulatory authority over the cash spot market, Romero said that Congress should close that gap. She mentioned her support for a bill similar to the Responsible Financial Innovation Act that she expects will give the CFTC more authority and will be introduced by Senators Stabenow and Bozeman. When asked about the possibility of regulation slowing the crypto market, Romero responded that “companies can’t scale up the way they need to without a lot of the financial institutions investments,” and that “regulation is needed.” She further noted that “bringing credibility [and] bring[ing] customer protections [] are going to be really important for scaling up.” She also referred to the case-by-case philosophy of CFTC enforcement actions, explaining that the agency looks at “where the evidence lies" and that part of this approach is "send[ing] a message to deter future violations of the law.” She further expanded on that point by saying that “since the CFTC doesn’t have regulatory authority, it has to rely on victims and whistleblowers," among other things.
Romero also mentioned that a difference between now and 2008 is that there are not a lot of financial institutions invested in cryptocurrency, as many are “waiting for a regulatory framework" and more regulation. As more financial institutions become invested in cryptocurrency, she said that she expects there to be “more interconnections” and more customer protections. She also noted that her biggest concern is that “if regulation fails to keep pace with technology, the most vulnerable people are going to be hurt.” In terms of areas needing more customer protections, Romero identified the need for segregation of accounts, settlement, custody, and reducing cybersecurity risk. She also expressed her support for customer education, calling it “very important.”
FinCEN issues warning on elder financial exploitation
On June 15, FinCEN issued an advisory alerting financial institutions about the increase of elder financial exploitation (EFE). EFE involves the illegal or improper use of an older adult’s funds, among other things, and is often perpetrated either through theft or scams. According to the advisory, financial institutions filed 72,000 suspicious activity reports in 2021 related to EFE—an increase of 10,000 reports from 2020. The advisory provides updated typologies since FinCEN issued its first advisory on the issue in 2011, and highlights behavioral and financial red flags to aid financial institutions with identifying, preventing, and reporting suspected EFE. The announcement also refers to the risk-based approach to compliance under the Bank Secrecy Act, which provides that “[f]inancial institutions should perform additional due diligence where appropriate and remain alert to any suspicious activity that could indicate that their customers are perpetrators, facilitators, or victims of EFE.”
OCC seeks comments on BSA/AML risk assessment
On June 8, the OCC issued a notice in the Federal Register seeking comments concerning its information collection titled, ‘‘Bank Secrecy Act/Money Laundering Risk Assessment,’’ also known as the Money Laundering Risk (MLR) System. According to the notice, the MLR System “enhances the ability of examiners and bank management to identify and evaluate Bank Secrecy Act/Money Laundering and Office of Foreign Asset Control (OFAC) sanctions risks associated with banks’ products, services, customers, and locations.” The notice stated that the agency will collect MLR information for OCC supervised community and trust banks, and explained that the annual Risk Summary Form (RSF), which collects data about different products, services, customers, and geographies (PSCs), will include three significant changes in 2022. The changes in the 2022 RSF are: (i) the addition of six new PSCs; (ii) the addition of three new customer types under the money transmitters category; and (iii) the deletion of four existing PSCs. Comments close on August 8.