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CFPB issues Summer ’23 supervisory highlights
On July 26, the CFPB released its Summer 2023 issue of Supervisory Highlights, which covers enforcement actions in areas such as auto origination, auto servicing, consumer reporting, debt collection, deposits, fair lending, information technology, mortgage origination, mortgage servicing, payday lending and remittances from June 2022 through March 2023. The Bureau noted significant findings regarding unfair, deceptive, and abusive acts or practices and findings across many consumer financial products, as well as new examinations on nonbanks.
- Auto Origination: The CFPB examined auto finance origination practices of several institutions and found deceptive marketing of auto loans. For example, loan advertisements showcased cars larger and newer than the products for which actual loan offers were available, which misled consumers.
- Auto Servicing: The Bureau’s examiners identified unfair and abusive practices at auto servicers related to charging interest on inflated loan balances resulting from fraudulent inclusion of non-existent options. It also found that servicers collected interest on the artificially inflated amounts without refunding consumers for the excess interest paid. Examiners further reported that auto servicers engaged in unfair and abusive practices by canceling automatic payments without sufficient notice, leading to missed payments and late fee assessments. Additionally, some servicers allegedly engaged in cross-collateralization, requiring consumers to pay other unrelated debts to redeem their repossessed vehicles.
- Consumer Reporting: The Bureau’s examiners found that consumer reporting companies failed to maintain proper procedures to limit furnishing reports to individuals with permissible purposes. They also found that furnishers violated regulations by not reviewing and updating policies, neglecting reasonable investigations of direct disputes, and failing to notify consumers of frivolous disputes or provide accurate address disclosures for consumer notices.
- Debt Collection: The CFPB's examinations of debt collectors (large depository institutions, nonbanks that are larger participants in the consumer debt collection market, and nonbanks that are service providers to certain covered persons) uncovered violations of the FDCPA and CFPA, such as unlawful attempts to collect medical debt and deceptive representations about interest payments.
- Deposits: The CFPB's examinations of financial institutions revealed unfair acts or practices related to the assessment of both nonsufficient funds and line of credit transfer fees on the same transaction. The Bureau reported that this practice resulted in double fees being charged for denied transactions.
- Fair Lending: Recent examinations through the CFPB's fair lending supervision program found violations of ECOA and Regulation B, including pricing discrimination in granting pricing exceptions based on competitive offers and discriminatory lending restrictions related to criminal history and public assistance income.
- Information Technology: Bureau examiners found that certain institutions engaged in unfair acts by lacking adequate information technology security controls, leading to cyberattacks and fraudulent withdrawals from thousands of consumer accounts, causing substantial harm to consumers.
- Mortgage Origination: Examiners found that certain institutions violated Regulation Z by differentiating loan originator compensation based on product types and failing to accurately reflect the terms of the legal obligation on loan disclosures.
- Mortgage Servicing: Examiners identified UDAAP and regulatory violations at mortgage servicers, including violations related to loss mitigation timing, misrepresenting loss mitigation application response times, continuity of contact procedures, Spanish-language acknowledgment notices, and failure to provide critical loss mitigation information. Additionally, some servicers reportedly failed to credit payments sent to prior servicers after a transfer and did not maintain policies to identify missing information after a transfer.
- Payday Lending: The CFPB identified unfair, deceptive, and abusive acts or practices, including unreasonable limitations on collection communications, false collection threats, unauthorized wage deductions, misrepresentations regarding debt payment impact, and failure to comply with the Military Lending Act. The report also highlighted that lenders reportedly failed to retain evidence of compliance with disclosure requirements under Regulation Z. In response, the Bureau directed lenders to cease deceptive practices, revise contract language, and update compliance procedures to ensure regulatory compliance.
- Remittances: The CFPB evaluated both depository and non-depository institutions for compliance with the EFTA and its Regulation E, including the Remittance Rule. Examiners found that some institutions failed to develop written policies and procedures to ensure compliance with the Remittance Rule's error resolution requirements, using inadequate substitutes or policies without proper implementation.
CFPB, FTC to conduct inquiry into high housing costs for renters
On July 25, CFPB Director Rohit Chopra shared prepared remarks for the Community Table on a White House Blueprint for a Renters Bill of Rights to address high housing costs for renters. Chopra raised concerns about corporate investors imposing high rents and charging renters with what the director described as “junk fees and other aggressive tactics.” He mentioned that corporate investor owners, including private equity firms, are more likely to evict tenants, even when controlling for other factors, and that corporate investor ownership of rental units has risen to over 45 percent. Chopra also emphasized the growing use of artificial intelligence and social scoring in the rental process, stating that such changes can lead to rent hikes and denials of housing due to an algorithm's definition of "high-quality tenants." The remarks suggested that tenants are not being given appropriate opportunity to correct inaccurate information in their background checks, despite the legal requirement for companies to inform consumers when using such information for adverse rental decisions. The speech also stressed the CFPB's commitment to identifying inaccurate AI and illegal practices that lead to misleading data and clarified that name-only matching, a common but illegal practice in screening, can result in inaccurate information, disproportionately affecting individuals with common last names. To address these issues, Chopra announced a joint inquiry with the FTC, to collect feedback from the public about their experiences with tenant screening.
Agencies propose new capital requirements for biggest banks
On July 27, the FDIC’s Board of Directors unveiled proposed interagency amendments to the regulatory capital requirements for the largest and most complex banks in the United States. The notice of proposed rulemaking (NPRM), issued jointly by the FDIC, OCC, and the Federal Reserve Board (and passed by an FDIC Board vote of 3-2 and a Fed vote of 4-2), would revise capital requirements for large banking organizations with at least $100 billion in assets, as well as certain banking organizations with significant trading activity. (See also FDIC fact sheet here.) The proposed changes would implement the final components of the Basel III agreement—recent changes made to international capital standards issued by the Basel Committee on Banking Supervision—as well as modifications made in response to recent bank failures in March, the agencies said.
Specifically, the NPRM would implement standardized approaches for market risk and credit valuation adjustment risk by amending the way banks calculate their risk-weighted assets. According to FDIC FIL-38-2023, the new “expanded risk-based approach” would incorporate a standardized approach for credit risk and operational risk, a revised internal models-based approach, a new standardized measure for market risk, and a new revised approach for credit valuation adjustment. Banks subject to Category III and IV standards would also be required “to calculate their regulatory capital in the same manner as banking organizations subject to Category I and II standards, including the treatment of accumulated other comprehensive income, capital deductions, and rules for minority interest.” Additionally, the supplementary leverage ratio and the countercyclical capital buffer would be applied to banks subject to Category IV standards.
The agencies said the proposed modifications are intended to:
- Better reflect banks’ underlying risks;
- Increase transparency and consistency by revising the capital framework in four main areas: credit, market, operational, and credit valuation adjustment risk;
- Strengthen the banking system, by applying consistent capital requirements across large banks by requiring institutions to (i) include unrealized gains and losses from certain securities in capital ratios; (ii) comply with the supplementary leverage ratio requirement; and (iii) comply with the countercyclical capital buffer, if activated.
The agencies predict that these changes will “result in an aggregate 16 percent increase in common equity tier 1 capital requirements for affected bank holding companies, with the increase principally affecting the largest and most complex banks.” The impact would vary by bank based on activities and risk profiles, the agencies stated, noting that most banks currently have enough capital to meet the proposed requirements. The NPRM would not amend capital requirements for smaller, less complex banks or for community banks. The agencies propose a three-year phased-in transition process beginning July 1, 2025, to provide banks sufficient time to accommodate the changes and minimize potentially adverse impacts. The changes would be fully phased in on July 1, 2028.
Separately, the Fed also issued an NPRM on a proposal that would modify certain provisions relating to the calculation of the capital surcharge for the largest and most complex banks in order to “better align the surcharge to each bank’s systemic risk profile. . .by measuring a bank’s systemic importance averaged over the entire year, instead of only at the year-end value.”
Comments on both NPRMs are due November 30.
FDIC Chairman Martin Gruenberg stressed that “[e]nhanced resilience of the banking sector supports more stable lending through the economic cycle and diminishes the likelihood of financial crises and their associated costs.” Also voting in favor of the NPRM was CFPB Chairman and FDIC Board Member Rohit Chopra who expressed interest in feedback from the public on ways to simplify the methodologies used to calculate the requirements. Acting Comptroller of the Currency Michael also voted in favor and encouraged commenters “to include assumptions about capital distributions and competition from banks and other financial institutions in their analyses of the impacts of the proposal on lending and economic growth.”
Voting against the new standards, FDIC Vice Chairman Travis Hill argued that while he supports strong capital requirements, he has several “concerns with the impact of excessive gold plating of international standards.” He stressed that the “proposal rejects the notion of capital neutrality and takes a starkly different path, ‘gold plating’ the new Basel standard in a number of ways and dramatically increasing capital requirements for banks with certain business models.”
OCC releases recent enforcement actions
On July 20, the OCC released a list of recent enforcement actions taken against national banks, federal savings associations, and individuals currently and formerly affiliated with such entities. Among the enforcement actions is a formal agreement with a California-based bank to update its BSA/AML compliance program. According to the agreement, the OCC identified deficiencies and violations relating to the bank’s compliance with BSA/AML laws and regulations. Among other things, the bank agreed to establish a compliance committee and revise its adherence to appropriate policies and procedures for collecting customer due diligence “when opening new accounts, when renewing or modifying existing accounts for customers, and when the [b]ank obtains event-driven information indicating that it needs to obtain updated customer due diligence information.” The bank also agreed to institute an “enhanced written risk-based program of internal controls and processes” to ensure an appropriate review of BSA/AML suspicious activity.
EU-U.S. release statement on Joint Financial Regulatory Forum
On July 20, participants in the U.S.-EU Joint Financial Regulatory Forum, including officials from the Treasury Department, Federal Reserve Board, CFTC, FDIC, SEC, and OCC, issued a joint statement regarding the ongoing dialogue that took place from June 27-28, noting that the matters discussed during the forum focused on six themes: “(1) market developments and financial stability risks; (2) regulatory developments in banking and insurance; (3) anti-money laundering and countering the financing of terrorism (AML/CFT); (4) sustainable finance and climate-related financial risks; (5) regulatory and supervisory cooperation in capital markets; and (6) operational resilience and digital finance.”
Participants acknowledged that the financial sector in both the EU and the U.S. is exposed to risk due to ongoing inflationary pressures, uncertainties in the global economic outlook, and geopolitical tensions as a result of Russia’s war on Ukraine. During discussions, participants emphasized the significance of strong bank prudential standards, effective resolution frameworks, and robust supervision practices. They also stressed the importance of international cooperation and continued dialogue to monitor vulnerabilities and strengthen the resilience of the financial system. Participants took note of recent developments relating to, among other things, recent bank failures, digital finance, the crypto-asset market, and the potential adoption of central bank digital currencies.
FDIC highlights inaccurate reporting of uninsured deposits by IDIs
On July 24, the FDIC released a letter reporting that some insured depository institutions (IDIs) are not accurately reporting their estimated uninsured deposits as per the instructions on the Call Report. According to the letter, some IDIs are wrongly decreasing the reported amount based on the collateralization of uninsured deposits, even though the presence of collateral does not affect the portion covered by federal deposit insurance. The FDIC also noted that by excluding intercompany deposit balances of their subsidiaries, some IDIs are incorrectly reducing the reported amount of deposits on Schedule RC-O. The FDIC stated that “in reporting uninsured deposits, if an IDI has deposit accounts with balances in excess of the federal deposit insurance limit that it has collateralized by pledging assets…the IDI should make a reasonable estimate of the portion of these deposits that is uninsured using the data available from its information systems.” IDIs should refer to the general instructions for Call Reports on how to accurately submit data. The FDIC recommended that IDIs that have incorrectly reported uninsured deposits make appropriate changes to the data and submit a revised data file to the Central Data Repository.
Fed officially launches FedNow instant payment service
On July 20, the Federal Reserve Board launched its FedNow service for instant payments. Banks and credit unions of any size can sign up and use the tool to instantly transfer money for their customers at any time of day on any day of the year, the Fed said. As previously covered by InfoBytes, the Fed began formally certifying participants to use the service in April. Early adopters completed a customer testing and certification program in preparation for sending live transactions through the system. In addition to these early adopting banks and credit unions (and the Treasury Department’s Bureau of Fiscal Service), 16 service providers are also ready to support payment processing for participants. Once fully available, “instant payments will provide substantial benefits for consumers and businesses, such as when rapid access to funds is useful, or when just-in-time payments help manage cash flows in bank accounts,” the Fed explained. The Fed expects that customers of FedNow participants will eventually be able to use a financial institution’s mobile app, website, and other interfaces to send instant payments quickly and securely. As an interbank payment system, FedNow will operate alongside other Fed payment services, including Fedwire and FedACH.
FTC, HHS say tracking technology may impermissibly disclose personal health data
On July 20, the FTC and U.S. Department of Health and Human Services for Civil Rights issued a joint letter cautioning hospitals and telehealth providers of the risks related to the use of online tracking technologies within their systems that may impermissibly disclose consumers’ personal data to third parties. Samuel Levine, Director of the FTC’s Bureau of Consumer Protection, said “when consumers visit a hospital’s website or seek telehealth services, they should not have to worry that their most private and sensitive health information may be disclosed to advertisers and other unnamed, hidden third parties.” According to the letter, recent research has highlighted concerns about the use of technology to track users’ online activities and sensitive data including, health conditions, diagnoses, medications, medical treatments, frequency of visits to health care professionals, and where an individual seeks medical treatment. The FTC warned that the impermissible disclosures of personal data can result in identity theft, financial loss, discrimination, and more. The letter included a reminder that under the FTC Act and the FTC Health Breach Notification Rule, even if they are not covered by HIPAA, hospitals and telehealth providers remain obligated to protect against impermissible disclosures of personal health information.
Biden administration, HUD tackle rental-housing fees
On July 19, the White House released a Fact Sheet announcing that the Biden-Harris administration is cracking down on junk fees in rental housing to lower costs for renters. The administration explained how rental housing fees can be burdensome for renters, with application fees often exceeding the actual cost of background checks, accumulating to hundreds of dollars as prospective renters apply for multiple units. Additionally, mandatory fees, such as convenience fees for online rent payment, mail sorting, trash collection, and obscure charges like "January fees," further strain renters' finances and hinder comparison shopping, as the true cost of renting may be higher than expected or affordable, the announcement states. The Fact Sheet outlines the president’s steps for taking action: (i) major rental housing platforms will disclose total upfront costs in addition to the advertised rent; (ii) legislative efforts to regulate rental housing fees and safeguard consumer interests are underway in several states; and (iii) HUD presented new research outlining a blueprint for a nationwide initiative to tackle rental housing fees. HUD’s new research presents an extensive review of rental fees, emphasizing strategies adopted by state, local, and private sectors to promote transparency and equity in the rental market. These strategies encompass measures like capping or abolishing rental application fees, enabling renters to submit their own screening reports, utilizing a single application fee for multiple applications, and ensuring clear disclosure of total move-in and monthly rent costs. HUD's research serves as a guide for local authorities and landlords alike to enhance conditions for renters.
Fed’s Barr raises concerns about AI redlining
On July 18, Federal Reserve Vice Chair for Supervision Michael Barr delivered a speech on adjusting the Fair Housing Act and ECOA in response to the increasing relevance of artificial intelligence. Barr explained how the digital economy offers many great utilizations, such as accessing the creditworthiness of individuals without credit history and facilitating wider access to credit for those who may otherwise be excluded. Along with a digital economy, Barr cautioned, comes negative implications where technologies can potentially violate the fair lending laws and may perpetuate existing disparities and inaccuracies, among other things. Barr highlighted Special Purpose Credit Programs as a tool to address discrimination and bias in mortgage credit transactions. In addition, Barr highlighted two recent initiatives taken by the Fed to tackle appraisal discrimination and bias in housing mortgage credit transactions—one involved inviting public feedback on a proposed rule to uphold credibility and integrity in automated valuation models, and the other sought input on guidance addressing risks related to deficient home appraisals, emphasizing "reconsiderations of value" in the process. (Covered by InfoBytes here and here.) Barr also commented that through the Fed’s supervisory process, it is evaluating whether firms have proper risk management and controls, including with respect to these new technologies.