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Financial Services Law Insights and Observations


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  • FSB’s Liang speaks on AI in finance


    On June 4, the U.S. Under Secretary for Domestic Finance, Nellie Liang, delivered a speech at the OECD-FSB Roundtable on Artificial Intelligence (AI) in Paris. Liang noted that while AI has been around for many years, the recent advances of generative AI will be evolving and will have the potential to transform the financial sector even more. The latest advancements in AI models can process vast amounts of data, generate content, and automate decision-making, welcoming new opportunities and challenges for financial institutions and regulators. The biggest takeaway was that AI holds transformative potential for the financial sector by enhancing efficiency and innovation, yet it also posed challenges such as model risk and privacy issues, necessitating vigilant evolution of regulatory frameworks to ensure safety and fairness.

    On AI uses, Liang highlighted that financial institutions have explored AI applications to reduce costs, increase productivity, and develop new products. For instance, AI can be used to automate back-office functions, enhance customer service through chatbots, and inform trading strategies. AI’s expertise will be its abilities to process large volumes and types of information that would be otherwise impractical or impossible to analyze. Concerning risks, Liang pinpointed model risk as a prime issue, contending that robust data governance and careful design can counteract potential pitfalls. AI may also introduce or amplify interconnections among financial firms, leading to potential financial stability risks. Furthermore, Liang focused on the increased use of AI in financial services and the concerns it raised about data privacy, surveillance, and potential biases in AI-driven decision-making.

    Liang noted how addressing these AI risks through existing regulatory frameworks, such as principles of model risk management, third-party risk management, and consumer protection laws would be possible. However, she noted, regulators need to assess whether AI will introduce new risks that require adjustments to the regulatory framework. Additionally, policymakers will be exploring the use of AI for identifying data anomalies, countering illicit finance and fraud, and improving fraud detection through comprehensive databases. 

    Fintech Artificial Intelligence Department of Treasury Risk Management Big Data

  • 5th Circuit vacates SEC private fund adviser rule


    On June 5, the U.S. Court of Appeals for the Fifth Circuit vacated an SEC rule that represented a significant change in how private funds and their fund advisers are regulated. As it stands, the decision will spare private funds and their advisers from what would have been a material increase in regulatory burden. Prior to the 5th Circuit’s ruling, the rule expanded the scope of disclosure, reporting, and other obligations for private funds and their advisers.

    You can read more about the court’s decision here as an Orrick Insight.  

    Courts Securities Appellate Securities Exchange Commission Hedge Fund

  • Connecticut amends provisions of its Emergency Mortgage Assistance Payment program

    State Issues

    On May 28, the Governor of Connecticut signed SB 283 (the “Act”) into law, introducing amendments to the Connecticut Housing Finance Authority’s (CHFA) Emergency Mortgage Assistance Payment (EMAP) program. This law will extend benefits to homeowners who are in foreclosure and forbearance. Under the new legislation, homeowners must enter into a repayment agreement directly with the CHFA, which will now receive the monthly payments previously made to the loan originator.

    The Act will modify the criteria for financial hardship eligibility, remove utility and heating expenses from the total housing expense calculation, and grant the CHFA authority to factor in equity in determining a homeowner’s ability to repay timely. Additionally, the CHFA will provide greater flexibility regarding the repayment agreement terms, along with several other amendments. The Act’s provisions will go into effect on October 1.

    State Issues State Legislation Mortgages Connecticut

  • Georgia bans CBDCs for government use

    State Issues

    Recently, Georgia enacted HB 1053 (the “Act”) which will prohibit government agencies from engaging with central bank digital currencies (CBDCs). Specifically, the legislation will prevent state government agencies from accepting CBDCs as a form of payment or from participating in any pilot programs involving CBDCs. Georgia representatives banned CBDCs within government operations citing potential “privacy and security concerns” for individuals and businesses, called them an “unacceptable expansion” of federal authority, and were concerned that a CBDC could disrupt the current banking systems and “diminish” community bank and credit unions’ roles in the financial system. The ban will go into effect on July 1.

    State Issues State Legislation Georgia CBDC Privacy Digital Currency Central Bank Digital Currency

  • SEC ordered to pay $1.8 mil. to defendants for misrepresentations


    On May 28, the U.S. District Court for the District of Utah ordered the SEC to cover all attorney fees and related costs as part of sanctions imposed following the court’s earlier emergency ex parte relief it entered into “improvidently.” The SEC originally filed a complaint against the defendants for allegedly violating federal securities law. Concurrently, the SEC sought a temporary restraining order (TRO), a freeze on assets, and appointed a receiver, all of which were granted by the court.

    However, in September 2023, the defendants filed a motion to dissolve the TRO and argued the SEC made misrepresentations to the court. The following month, the court agreed with the defendants, dissolving the TRO and receivership. The SEC moved to dismiss the case without prejudice in January. In March, the court imposed sanctions against the SEC for “bad faith conduct” regarding the TRO. Additionally, in a separate dismissal order, the court issued an order to dismiss the case without prejudice.

    Siding with the defendants, the court determined the proper method for calculating costs was straight fee recovery, allowing the defendants to submit their specific legal fees rather than using a lodestar method. The court granted most defendants’ fee petitions and the receiver’s application for fees and costs, ordering the SEC to pay over $1.8 million. 

    Courts Securities Exchange Commission Attorney Fees

  • OCC releases May CRA evaluations for 19 institutions

    On June 3, the OCC released its Community Reinvestment Act (CRA) performance evaluations for May. The OCC evaluated 19 entities including national banks, federal savings associations, and insured federal branches of foreign banks. The assessment framework incorporated four possible ratings: Outstanding, Satisfactory, Needs to Improve, and Substantial Noncompliance. Of the 19 evaluations reported by the OCC, eleven entities were rated “Satisfactory,” and eight entities were rated “Outstanding.” There were no institutions that received a rating of “Needs to Improve.” A full list of the bank evaluations is available here. In the FAQ section regarding the implementation of the CRA, the OCC detailed how it evaluated and rated financial institutions both on an institutional level and a community level. This explanation included an examination of institutional factors such as capacity, constraints, business strategies, competitors, and peers, as well as an analysis of the characteristics of the communities served by these institutions, which covered demographic particulars, economic data, and the availability of lending, investment, and service opportunities.

    Bank Regulatory OCC CRA Bank Supervision Supervision FAQs

  • Ginnie Mae updates its guide to streamline processes for eMortgages

    Agency Rule-Making & Guidance

    On May 31, Ginnie Mae published its APM 24-09: Updates To Digital Collateral Program Guide to clarify, update, remove and expand policies on digital products, such as notes, closing systems, vaults, applicants and registries. The program may help streamline processes for digital mortgages known as “eMortgages.”

    The guide clarified eligibility requirements for issuers and custodians, aligning technology standards with industry best practices, and expanding the types of mortgage pools that can include digital loans. Additionally, Ginnie Mae clarified various requirements related to eMortgages, such as handling defects, transfers, and assumptions. This followed other efforts to promote eMortgages, including Ginnie’s efforts to securitize digital collateral in the same pools as traditional paper collateral (as covered by InfoBytes here). The Digital Collateral Program Guide can be found here, and the changes will go into effect on June 1.

    Agency Rule-Making & Guidance Digital Collateral Electronic Mortgages Mortgages Digital Platform

  • CFPB proposes final rule for registering nonbanks for supervision

    Agency Rule-Making & Guidance

    On June 3, the CFPB issued a final rule to require the registration and reporting of nonbank financial institutions that have been subject to public orders resulting from regulatory actions.  The Bureau’s stated goal in establishing the registry was to assist the public and enforcement agencies in identifying repeat offenders. The registry will compile and maintain all public orders issued by an agency or court, involving certain nonbank entities that were issued at least in part by an action or proceeding by any federal, state or local agency. The final rule mandated those nonbank covered entities—excluding depository institutions and credit unions—must register with the Bureau when they are subject to a public order. Under the CFPA, Section 1022(b)(1) authorized the Bureau to create rules “as may be necessary or appropriate to enable the Bureau to… carry out the purposes and objectives of the Federal consumer financial laws.” Section 1024(b) authorized the Bureau to exercise supervisory authority over certain nonbank entities. The final rule will also require nonbank entities to submit an annual written statement confirming compliance with each public order.

    This rule will apply to all covered entities, specifically nonbanks, which have entered into an order with an effective date on or later than January 1, 2017, and which remain in effect following the effective date of the final rule. Every nonbank that was named in an order and was covered under the rule must register, submitting all information required including the executed order. However, nonbanks that were subject to an order published on the NMLS’s Consumer Access website (other than an order in which the CFPB was involved) can elect for a simplified option.

    This action will be the latest step in the Bureau’s efforts to expand its nonbank supervision program. As previously covered by InfoBytes, the CFPB released a supervisory designation over a nonbank company in March since that company’s conduct posed an alleged risk to consumers (here), and in April the Bureau released its procedural rule to change how it will supervise nonbanks (here). In a prepared statement, the Director of the CFPB, Rohit Chopra, expressed that the final rule was designed to aid the CFPB and other law enforcement agencies to “monitor and track repeat offenders in order to better hold them accountable” regardless of companies reoffending. The director emphasized that court or enforcement orders are not a “tipsheet or set of suggestions.” This rule will go into effect on September 16. 

    Agency Rule-Making & Guidance Federal Issues CFPB Supervision Nonbank Nonbank Supervision

  • CFPB finalizes standards setting body component of open banking rule

    Agency Rule-Making & Guidance

    On June 5, the CFPB announced it finalized in part its proposed Personal Financial Data Rights rule, thus establishing the minimum qualifications necessary for the Bureau to become a recognized industry standard setting body when the full rule becomes final. Last October, the CFPB proposed the Personal Financial Data Rights rule to implement Section 1033 of the CFPA (covered by InfoBytes here) which was intended to offer consumers more control over their financial data and more consumer protections for misused data.

    After considering relevant public comments, the CFPB made several changes to the sections concerning standard setters and the standards they issue. Commenters asked for clarity regarding changes in standards, such as when a consensus standard ceases to have consensus status, and how it could potentially cause market uncertainty. In response, the Bureau replaced the term “qualified industry standard” with “consensus standard” and added a newly defined “recognized standard setter” term. The final rule defined “consensus standard” to clarify when a given standard will be a consensus standard, and also added that a “consensus standard” must be one that will be adopted and maintained by a recognized standard setter. In response to concerns about market uncertainty, the CFPB responded that they expect revocation of recognition for a standard setter to be a rare occurrence.

    Regarding periodic review, the final rule extended the maximum duration of the CFPB’s recognition of a standard-setting body from the proposed duration of three years to five years. The Bureau expects this change will incentivize standard-setting bodies to obtain recognition. The final rule included “data recipients” as an interested party in response to commenter concern that certain fintech sectors may be excluded. Additionally, meeting the criteria in the final rule is just the starting point for approval, as the CFPB may also assess whether the standard-setting body will be committed to developing and upholding open banking standards.

    The final rule also included a guide that detailed how standard setters can apply for CFPB recognition, how the Bureau will evaluate applications, and what standard setters can expect once recognized. The final rule will go into effect 30 days after publication in the Federal Register. 

    Agency Rule-Making & Guidance Federal Issues Privacy CFPB Open Banking Consumer Protection

  • CFPB releases semi-annual report on mid-year 2023

    Federal Issues

    On June 4, the CFPB released its semi-annual report to Congress, for the period beginning April 1, 2023, and ending September 30, 2023. The report highlighted rules and orders, complaints, supervisory and enforcement actions, and fair lending initiatives from the Bureau. The Bureau provided an overview of three final rules: a final rule on its authority over nonbanks in determining their risk, a final rule on small business lending under the ECOA, and an interim final rule in helping transition the LIBOR changes to reflect the LIBOR Act. Additionally, the report included a compilation of reports, guidance and spotlights on different consumer finance issues. Looking ahead, the Bureau noted its upcoming rules following September 2023 with four proposed rules. One on personal financial data rights, another on defining the participants for digital consumer payment applications, another on overdraft lending, one on fees for instantaneously declined transactions, and a final rule on credit card penalty fees.

    During the period from October 2022 to September 2023, the Bureau received 1.55 million consumer complaints. Of these, around 1.2 million complaints were sent to the relevant companies for review. When broken out by category, 79 percent of all consumer complaints were related to credit or other consumer reporting, with 7 percent on debt collection, 4 percent on credit cards, 4 percent on checking or savings, and 2 percent on mortgages; the remaining 4 percent was spread among a variety of consumer finance products.

    During the semi-annual reporting period, the CFPB executed a total of 55 public supervisory and enforcement actions. On state consumer financial law, the Bureau noted its ongoing complaint against an education firm accused of engaging in deceptive marketing and unfair debt collection practices with ten state attorneys general (as covered by InfoBytes here). Additionally, there were three lawsuits submitted along with the New York State Attorney General. Finally, for fair lending, the Bureau discussed its enforcement and rulemaking, with the issuance of a proposed rule on quality for Automated Valuation Models for real estate collateral securing mortgage loans. 

    Federal Issues CFPB Fair Lending Enforcement Rulemaking Agenda


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