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House committee report urges large banks to release diversity data
On February 12, Maxine Waters, Chairwoman of the House Financial Services Committee, and Joyce Beatty, Chair of the Subcommittee on Diversity and Inclusion, released a majority staff report titled “Diversity and Inclusion: Holding America’s Large Banks Accountable,” which details diversity and inclusion data and policies collected from 44 of the nation’s largest banks. The information requested from the banks included, among other things, (i) “[e]mployee compensation by gender, race, and ethnicity”; (ii) demographic information about the banks’ boards; (iii) data regarding “staff and budget dedicated to diversity initiatives”; and (iv) “diversity policies and practices.” The committee staff found that boards of directors and senior employees at banks are not diverse, and that “[b]anks have limited spending and investments with diverse firms.” Additionally, it was found that “workforce diversity is more visible in entry level rather than executive and senior level positions.” The report recommended a number of avenues for banks to improve diversity and inclusion such as disclosing diversity data to the public and to regulators including bank board diversity. The report also suggested “[i]ncreased spending and investment with diverse” firms and vendors. According to the press release, Congressional legislative actions in these areas would “improve diversity and inclusion at America’s largest banks.”
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.”
CFPB, South Carolina, and Arkansas file charges in pension-advance scheme
On February 20, the CFPB, the South Carolina Department of Consumer Affairs, and the Arkansas attorney general filed a complaint in the U.S. District Court for the District of South Carolina against a South Carolina-based company and two of its managing partners (defendants) for allegedly violating the Consumer Financial Protection Act and the South Carolina Consumer Protection Code by working with a series of broker companies that brokered contracts offering high-interest credit to disabled veterans and other consumers in exchange for the assignment of some of the consumers’ unpaid earnings, monthly pensions, or disability payments. Under federal law, agreements under which a person acquires the right to receive a veteran’s pension or disability payment are void, and South Carolina law—which governs these contracts—“prohibits sales of unpaid earnings and prohibits assignments of pensions as security on payment of a debt.”
The complaint alleges that the defendants substantially assisted broker companies that allegedly engaged in deceptive and unfair acts or practices through the marketing and administration of high-interest credit. (Covered by InfoBytes here.) The defendants’ alleged actions include: (i) “developing a pre-approval or risk-assessment process for the contracts and conducting underwriting”; (ii) “approving or denying consumers’ applications to enter into the transactions”; (iii) “directing and administering the execution of the contracts”; (iv) “serving as the payment processor for the initial lump-sum payment and fees”; and (v) “continuing to serve as the transactions’ payment processor, tracking and controlling the collection and distribution of consumers’ payments on the contracts.” In addition, the Bureau alleges, among other things, that the defendants provided substantial assistance to the broker companies’ deceptive misrepresentations that consumers could be subjected to criminal prosecution if they breached their contracts. In addition, the defendants also allegedly collected on contracts brokered by the broker companies that were void from inception “by initiating ACH debts to take payments from consumers’ bank accounts,” demanding payments through letters and other communications, and filing suit against consumers who failed to make payments.
The complaint seeks injunctive relief, restitution, damages, disgorgement, and civil money penalties.
FDIC and OCC expand comment period for CRA proposal
On February 19, the FDIC and the OCC jointly released a statement extending the public comment period for the proposed Community Reinvestment Act regulations by 30 days. As previously covered by a Buckley Special Alert, the two agencies initially released the notice of proposed rulemaking—which the agencies assert will provide clarity on what activities are eligible for CRA consideration—on December 12. The new comment deadline is April 8.
CFPB issues Winter 2020 Supervisory Highlights
On February 14, the CFPB released its winter 2020 Supervisory Highlights, which details its supervisory and enforcement actions in the areas of student loan servicing, payday lending, debt collection, and mortgage servicing. The findings of the report, which are published to assist entities in complying with applicable consumer laws, cover examinations that generally were completed between April and August of 2019. Highlights of the examination findings include:
- Debt collection. The Bureau cited violations of the FDCPA’s requirement that debt collectors must, after the initial written communication, disclose that their communications are from a debt collector. The report also included the failure of some debt collectors to provide a written validation notice to consumers within five days after the debt collector initially contacts the consumer regarding the collection of a debt.
- Payday lending. The Bureau found violations of the CFPA, including among other things, lenders failing to apply consumer payments to their loan balances and treating the accounts as delinquent. The Bureau also found weaknesses in employee training that resulted in providing consumers with inaccurate annual percentage rates in violation of Regulation Z.
- Mortgage servicing. The Bureau pointed out that servicers had violated Regulation X by failing to provide written acknowledgement of receipt of consumer loss mitigation applications, including whether the applications were complete or incomplete, within five days of receipt. Servicers also failed to provide in writing a list of loss mitigation options for which the consumer was eligible within 30 days of receiving a complete loss mitigation application.
- Student loan servicing. The Bureau noted that after loans were transferred, some servicers billed incorrect monthly amounts to the consumers.
The report notes that in response to most examination findings, the companies have taken or are taking remedial and corrective actions, including by identifying and compensating impacted consumers and updating their policies and procedures to prevent future violations. Lastly, the report also highlights the Bureau’s recently issued rules and guidance.
CFPB updates FCRA exam procedures
On February 11, the CFPB issued updates to its Supervision and Examination Manual to include requirements of the FCRA created by the Economic Growth, Regulatory Relief, and Consumer Protection Act. The updates apply to the examination procedures covering consumer reporting, larger participants, and education loans, and aim to reduce instances of consumer compliance law violations by companies that provide consumer financial products and services. According to the CFPB, the larger participants examination procedures provide guidance to examiners covering a number of areas including, among other things, (i) “accuracy of information and furnisher relations”; (ii) “contents of consumer reports”; (iii) “consumer inquiries, complaints, and disputes and the reinvestigation process”; (vi) “consumer alerts and identity theft provisions”; and (v) “other products and services and risks to consumers.” The Bureau’s guidance to examiners on education loan exam procedures concentrates on servicing and origination. Some of the topics included are: (i) “advertising, marketing, and lead generation”; (ii) “customer application, qualification, loan origination, and disbursement”; (iii) “student loan servicing”; (iv) “borrower inquiries and complaints”; and (v) “information sharing and privacy.”
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.
FDIC introduces deposit insurance application for nonbanks
On February 10, the FDIC issued FIL-8-2020, which incorporates Procedures for Deposit Insurance Applications from Applicants that are Not Traditional Community Banks into its Deposit Insurance Application Procedures Manual (manual). In addition to the updating the manual, the agency also issued a handbook, entitled Applying for Deposit Insurance – A Handbook for Organizers of De Novo Institutions (handbook), advising that the updated manual together with the handbook provide comprehensive instructions for completing deposit insurance applications. According to the letter, the updated manual and the handbook contain mostly “technical edits and clarifications” and are meant to “provide transparency and clarity” for applicants. The letter also supplies the definitions of “non-bank” and “non-community bank.”
FTC seeks injunction against online investment training academy for deceptive claims
On February 12, the FTC filed a complaint in the U.S. District Court for the Central District of California against a California-based investment training operation alleging use of deceptive claims to sell costly “training programs” targeting older consumers. According to the complaint, the operation allegedly violated the FTC Act and the Consumer Review Fairness Act by using false or unfounded claims to market programs that purportedly teach consumers investment strategies designed to generate substantial income from trading in the financial markets “without the need to possess or deploy significant amounts of investable capital.” The FTC also alleges that the operation’s instructors claim to be successful traders who have amassed substantial wealth using the strategies, but are actually salespeople working on commission. However, the FTC asserts, among other things, that the operation fails to track customers’ trading results and that its earnings claims are false or unsubstantiated. Moreover, the FTC alleges the operation requires that dissatisfied customers requesting refunds sign agreements barring them from posting negative comments about the operation or its personnel, and specifically prohibits customers from reporting potential violations to law enforcement agencies. Among other things, the FTC seeks injunctive relief against the operation, as well as “rescission or reformation of contracts, restitution, the refund of monies paid, disgorgement of ill-gotten monies, and other equitable relief.”
CFPB denies debt collector’s request to set aside CID
On February 6, the CFPB released a Decision and Order denying a debt collection company’s (petitioner) request to set aside or modify a third-party Civil Investigative Demand (CID) issued by the Bureau, and directing the petitioner to provide all information required by the CID. The CID in dispute was issued to the petitioner by the CFPB in November and seeks documents and written responses pertaining to the petitioner’s business practices and its relationship with a New York-based debt collection law firm. The CID requests information regarding whether “debt collectors, furnishers, or associated persons” had, among other things, (i) violated the Consumer Financial Protection Act by ignoring warnings regarding debts resulting from identity theft “in a manner that was unfair, deceptive or abusive”; (ii) violated the FDCPA by disregarding cease-and-desist requests or by failing to provide required notices or making false or misleading statements; or (iii) violated the FCRA by “fail[ing] to correct and update furnished information, or fail[ing] to maintain reasonable policies and procedures.”
In its petition to set aside or modify the CID, the petitioner set out four primary arguments: (i) the structure of the CFPB is unconstitutional, and it therefore “lacks authority to proceed with enforcement activity”; (ii) the CID improperly seeks attorney-client privileged information; (iii) the CID is “overly broad,” does not apply to the petitioner, and does not sufficiently provide the “nature of the conduct under investigation and the applicable provisions of law”; and (iv) the CID improperly seeks information beyond the applicable statute of limitations.
The Bureau’s denial of the petitioner’s request addresses each of the petitioner’s arguments. Regarding the constitutionality of the CFPB’s structure, the order asserts that “the administrative process set out in the [B]ureau’s statute and regulations for petitioning to modify or set aside a CID is not the proper forum for raising and adjudicating challenges to the constitutionality of the [B]ureau’s statute.” In response to the petitioner’s attorney-client privilege argument, the order states that the petitioner “does not ask…to modify the CID to avoid seeking privileged information—it only asks that the CID be quashed in its entirety.” The Bureau states that because the petitioner makes a “blanket assertion” of attorney-client privilege rather than providing the required privilege log in order to properly claim privilege over materials requested in the CID before filing its petition, the petitioner’s argument is “procedurally improper” and does not show that the “CID should be set aside on these grounds.” To the petitioner’s lack of specificity argument, the order states that the CID “sets forth in detail both the conduct under investigation and applicable laws,” adding that there is no requirement that the Bureau disclose the targets of its “ongoing and confidential law-enforcement investigations.” The order also rejects the petitioner’s statute of limitations argument, explaining that the Bureau is not limited to the three years preceding the CID, but “instead what matters is whether the information is relevant to conduct for which liability can be lawfully imposed.”