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CFPB sues payday lender over debt collection practices
On July 12, the CFPB filed a complaint against a Texas-based payday lender (defendant) for allegedly engaging in illegal debt-collection practices and allegedly generating $240 million in reborrowing fees from borrowers who were eligible for free repayment plans in violation of the CFPA. As previously covered by InfoBytes, in 2014, the Bureau ordered the defendant to, among other things, pay $10 million for allegedly using false claims and threats to coerce delinquent payday loan borrowers into taking out an additional payday loan to cover their debt. The Bureau stated that after the CFPB’s 2014 enforcement action, the defendant “used different tactics to make consumers re-borrow.” The complaint alleges that the defendant “engaged in unfair, deceptive, and abusive acts or practices by concealing the option of a free repayment plan to consumers who indicated that they could not repay their short term, high-cost loans originated by the defendant.” The Bureau also alleges that the defendant attempted to collect payments by unfairly making unauthorized electronic withdrawals from over 3,000 consumers’ bank accounts. The Bureau seeks permanent injunctive relief, restitution, disgorgement, damages, civil money penalties, and other relief.
Treasury solicits comments on digital assets
On July 12, the U.S. Treasury Department released a notice seeking public comment regarding potential opportunities and risks presented by digital assets. According to the announcement, Treasury is requesting input that will inform its work in carrying out its mandate under Executive Order 14067, Ensuring Responsible Development of Digital Assets, which directs Treasury, in consultation with the Secretary of Labor and other relevant agencies, to report to President Biden on the implications of development and adoption of digital assets and changes in financial market and payment infrastructures. The notice also seeks feedback from the public on potential risks associated with digital asset markets and how digital assets may benefit or pose risk to vulnerable populations. Comments must be received by August 8.
ARRC recommends transition steps for legacy USD LIBOR cash product contracts
On July 11, the Alternative Reference Rates Committee (ARRC) released the LIBOR Legacy Playbook to help support the transition away from legacy LIBOR cash products. ARRC estimated that approximately $74 trillion in legacy USD LIBOR exposures will mature after June 30, 2023, when the remaining USD LIBOR panels will cease. Of this amount, roughly $5 trillion are in cash products, which do not carry the benefit of a protocol process that will allow market participants to adopt a uniform set of robust fallbacks or a simple mechanism to determine which contracts are covered by those fallbacks. Rather, cash products have a range of fallbacks, the ARRC said, explaining that “currently there is no simple way, other than in many cases manual effort, to determine what the fallback for each contract is. Careful work will be needed to communicate the associated rate changes to counterparties to these contracts.”
The Playbook includes a compilation of publications by the ARRC and other available reference material to assist market participants in ensuring that the transition from LIBOR is operationally successful. The Playbook also recommends steps for market participants to take to successfully implement fallbacks for cash products, including: (i) thoroughly assessing the fallbacks that are embedded (either contractually or through legislation) in every USD LIBOR contract; (ii) remediating these contracts where feasible to reference the Secured Overnight Financing Rate prior to June 30, 2023; and (iii) adopting plans to communicate each contract’s fallback with affected parties for remaining LIBOR contracts, and making sure sufficient resources are allocated to ensure that rate changes are successfully implemented. The ARRC stressed that its recommendations are voluntary and that market participants must make independent decisions about how best to transition existing contracts to an alternative rate upon the cessation of USD LIBOR.
Find continuing LIBOR InfoBytes coverage here.
District Court orders CFPB to issue Section 1071 rulemaking by March 31
On July 11, the U.S. District Court for the Northern District of California issued an order setting March 31, 2023 as the deadline for the CFPB to issue a notice of proposed rulemaking (NPRM) on small business lending data. As previously covered by InfoBytes, the Bureau is obligated to issue an NPRM for implementing Section 1071 of the Dodd-Frank Act, which requires the agency to collect and disclose data on lending to women and minority-owned small businesses. The requirement was established as part of a stipulated settlement reached in 2020 with a group of plaintiffs, including the California Reinvestment Coalition (CRC), who argued that the Bureau’s failure to implement Section 1071 violated two provisions of the Administrative Procedures Act, and harmed the CRC’s ability to advocate for access to credit, advise organizations working with women and minority-owned small businesses, and work with lenders to arrange investment in low-income and communities of color (covered by InfoBytes here).
Find continuing Section 1071 coverage here.
FSB releases statement on crypto-asset activities
On July 11, the Financial Stability Board (FSB) released a statement regarding international regulation and supervision of crypto-asset activities following the “recent turmoil in crypto-asset markets.” The FSB called for “an effective regulatory framework” to “ensure that crypto-asset activities posing risks similar to traditional financial activities are subject to the same regulatory outcomes, while taking account of novel features of crypto-assets and harnessing potential benefits of the technology behind them.” The statement also called for, among other things: (i) crypto-assets and markets to be subjected to effective regulation and oversight relative to their domestic and international risks; (ii) cryptocurrency service providers to ensure compliance with existing legal obligations in the jurisdictions where they operate; and (iii) stablecoins to be subject to “robust” regulations and supervision if they are to be adopted as a widely used means of payment or play an important role in the financial system. The FSB noted the “ongoing work of the FSB and the international standard-setting bodies to address the potential financial stability risks posed by crypto-assets,” and highlighted that member authorities will implement applicable international standards into national regulatory and supervisory frameworks “to the extent not already reflected and will adopt guidance, recommendations and best practices of international standard-setting bodies.”
Fed discusses cybersecurity risk management and emerging threats
On July 7, the Federal Reserve Board published its 2022 Cybersecurity and Financial System Resilience Report. Issued pursuant to the Consolidated Appropriations Act, the Fed’s report described measures it has taken to strengthen cybersecurity in the financial services sector. The report identified cybersecurity as a high priority for the Federal Reserve System and Board-supervised institutions and recognized the increasing and evolving nature of cybersecurity threats to the financial system. It delivered an overview of the Fed’s supervisory policies and procedures, which, among other things, require supervised institutions to implement internal controls and information systems appropriate to the size of the institution and to the nature, scope, and risk of its activities. The report explained that examiners’ cybersecurity evaluations consider “the business model and activities conducted by supervised institutions as part of a principles-based supervision program.” According to the Fed, an examination’s scope “is set as part of a multiyear supervisory plan that considers key cybersecurity risks, the industry landscape, and other factors such as emerging technologies.” The Fed explained that as part of these evaluations, “examiners consider business-line controls, risk-management practices, assurance functions, and governance activities performed by the firm’s senior management and board of directors.”
The report also outlined intergovernmental, international, and public and private sector coordination activities, and included a list of recent actions taken by the Fed and other agencies to promote cybersecurity. Additionally, the report discussed current or emerging threats to financial institutions’ ability to operate and protect customer data, including ransomware, sophisticated distributed denial of service threats, increasing geopolitical tensions, and attacks to supply chains or third parties. Other emerging technology-related cybersecurity threats are also discussed including “[p]otential cybersecurity vulnerabilities in fintech applications,” such as cryptocurrency exchanges, banking applications, and other platforms that provide “threat actors an opportunity to steal funds or data by compromising victims’ computer systems or technology infrastructure used to interact with the products or services.”
Ohio AG, FCC take action against robocall operation
On July 7, the Ohio attorney general filed a complaint against multiple companies for participating in an alleged unwanted car warranty call operation. The complaint, filed in the U.S. District Court for Southern District of Ohio, alleged that the 22 named defendants “participated in an unlawful robocall operation that bombarded American consumers with billions of robocalls.” Specifically, the complaint alleged that the defendants “initiated over 77 million robocalls per day for the purpose of generating sales leads, many times in relation to the sale of Vehicle Service Contracts (‘VSCs’) that are deceptively marketed as ‘car warranty’ plans,” totaling at least 800 million call attempts. The defendants allegedly violated the TSR, the Ohio Consumer Sales Practices Act, and the Ohio Telephone Solicitation Sales Act by, among other things: (i) deceptively representing the subject of the call; (ii) misrepresenting caller IDs, or “spoofing”; and (iii) acting as telephone solicitors without having registered as telephone solicitors with the Ohio AG’s Office, as required by law, and without having obtained and filed the required surety bond. The lawsuit coincided with the FCC’s announcement of actions taken to decrease robocalls, including sending cease and desist letters to several carriers in an attempt “to cut off a flood of possibly illegal robocalls marketing auto warranties targeting billions of consumers.” The announcement also noted that the FCC has authorized “all U.S.-based voice service providers to cease carrying any traffic originating from the [named] operation consistent with FCC regulations,” as detailed in a public notice to all U.S.-based voice service providers.
Brainard stresses need for crypto regulation
On July 8, Fed Vice Chair Lael Brainard warned that “[r]ecent volatility has exposed serious vulnerabilities in the crypto financial system.” Speaking before a Bank of England conference, Brainard explained that while crypto-assets are presented as a “fundamental break from traditional finance,” they are still susceptible to leverage, settlement, opacity, and maturity and liquidity transformation risks. The recent bankruptcy of a prominent crypto hedge fund and failed projects in the cryptocurrency space demonstrate that the crypto ecosystem faces many of the same challenges that are well known from traditional finance, she said. Brainard acknowledged that a “digital native form of safe central bank money could enhance stability by providing the neutral trusted settlement layer in the future crypto financial system,” but she also stressed that it is important “that the foundations for sound regulation of the crypto financial system be established now before the crypto ecosystem becomes so large or interconnected that it might pose risks to the stability of the broader financial system.” Novel crypto products often come with new risk factors, she said, adding that it may also be difficult “to distinguish between hype and value.” A strong regulatory framework that imposes “guardrails for safety and soundness, market integrity, and investor and consumer protection will help ensure that new digital finance products, platforms and activities are based on genuine economic value and not on regulatory evasion,” Brainard stated. She also noted that strong regulatory guardrails would also help investors and developers build “a resilient digital native financial infrastructure” and help banks, payments providers, and fintech companies “improve the customer experience, make settlement faster, reduce costs, and allow for rapid product improvement and customization.”
Fed takes action against bank for flood insurance violations
On July 7, the Federal Reserve Board announced a civil money penalty against a Massachusetts state bank. In the order, the Fed alleged that the bank violated the National Flood Insurance Act (NFIA) and Regulation H. The order assesses a $17,000 penalty against the bank for an alleged pattern or practice of violations of Regulation H but does not specify the number or the precise nature of the alleged violations. The maximum civil money penalty under the NFIA for a pattern or practice of violations is $2,000 per violation.
FHA expands mortgage eligibility for Covid-affected borrowers
On July 7, FHA announced expanded mortgage eligibility for qualifying borrowers who previously experienced employment gaps or loss of income due to the Covid-19 pandemic. Under Mortgagee Letter (ML) 2022-09, salaried and hourly wage-earners, as well as self-employed individuals impacted by a Covid-19 related economic event (defined “as a temporary loss of employment, temporary reduction of income, or temporary reduction of hours worked during the Presidentially Declared COVID-19 National Emergency”), who now have stable income will have a greater opportunity to purchase a home using affordable FHA-insured mortgage financing. Specifically, ML 2022-09 updates calculation guidelines for a borrower’s effective income under certain sections in the Single-Family Housing Policy Handbook 4000.1. While ML 2022-09’s provisions are effective for all case numbers assigned on or after September 5, 2022, lenders may begin using the policies immediately. According to FHA Commissioner Julia Gordon, the changes further agency efforts “to facilitate recovery from COVID-19 and support access to homeownership, particularly for populations most deeply impacted by the pandemic.” Gordon noted that the pandemic impacted “the livelihoods of tens of millions of workers in this country, particularly workers of color and those at the lower end of the wage scale.”