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  • U.S. government watchdog studies fintech lending trends, recommends need for clarity on use of alternative data

    Federal Issues

    In December, the Government Accountability Office (GAO) issued a report entitled “Financial Technology: Agencies Should Provide Clarification on Lenders’ Use of Alternative Data,” which addresses emerging issues in fintech lending due to rapid growth in loan volume and increasing partnerships between banks and fintech lenders. The report also addresses fintech lenders’ use of alternative data to supplement traditional data used in making credit decisions or to detect fraud. The report notes that many banks and fintech lenders would benefit from additional guidance to ease the regulatory uncertainty surrounding the use of alternative data, including compliance with fair lending and consumer protection laws. The report’s findings cover the following topics:

    • Growth of fintech lending. GAO’s analysis discusses the growth of fintech lending and several possible driving factors, such as financial innovation; consumer and business demand; lower interest rates on outstanding debt; increased investor base; and competitive advantages resulting from differences in regulatory requirements when compared to traditional state- or federally chartered banks.
    • Partnerships with federally regulated banks. The report addresses two broad categories of business models: bank partnership and direct lending. GAO reports that the most common structure is the bank partnership model, where fintech lenders evaluate loan applicants through technology-based credit models, which incorporate partner banks’ underwriting criteria and are originated using the bank’s charter as opposed to state lending licenses. The fintech lender may then purchase the loans from the banks and either hold the loan in portfolio, or sell in the secondary market.
    • Regulatory concerns. GAO reports that the most significant regulatory challenges facing fintech lenders relate to (i) compliance with varying state regulations; (ii) litigation-related concerns including the “valid when made” doctrine and “true lender” issues; (iii) ability to obtain industrial loan company charters; and (iv) emerging federal initiatives such as the Office of the Comptroller of the Currency’s (OCC) special-purpose national bank charter, fragmented coordination among federal regulators, and the Consumer Financial Protection Bureau's (CFPB) “no-action letter” policy.
    • Consumer protection issues. The report identifies several consumer protection concerns related to fintech lending, including issues related to transparency in small business lending; data accuracy and privacy, particularly with respect to the use of alternative data in underwriting; and the potential for high-cost loans due to lack of competitive pressure.
    • Use of alternative data. The report discusses fintech lenders’ practice of using alternative data, such as on-time rent payments or a borrower’s alma mater and degree, to supplement traditional data when making credit decisions. GAO notes that while there are potential benefits to using alternative data—including expansion of credit access, improved pricing of products, faster credit decisions, and fraud prevention—there are also a number of identified risks, such as fair lending issues, transparency, data reliability, performance during economic downturns, and cybersecurity concerns.

    The GAO concludes by recommending that U.S. federal financial regulators, including the CFPB, Federal Reserve Board of Governors, Federal Deposit Insurance Corporation, and the OCC communicate in writing with fintech lenders and their bank partners about the appropriate use of alternative data in the underwriting process. According to the report, all four agencies indicated their intent to take action to address the recommendations and outlined efforts to monitor the use of alternative data.

    Federal Issues GAO Fintech Alternative Data CFPB Federal Reserve FDIC OCC Of Interest to Non-US Persons

  • OCC issues statement on student loan rehabilitation programs

    Federal Issues

    On December 27, the OCC released Bulletin 2018-48, which announces an update to the “Student Lending” booklet of the Comptroller’s Handbook to include information about the rehabilitation programs for private education loans authorized under Section 602 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act), signed into law in May 2018. Section 602 amends the Fair Credit Reporting Act to give student loan borrowers the option to request the removal of student loan default information from their credit report, if, among other things, (i) the lender offers a Section 602 rehabilitation program that has been approved by the bank’s appropriate federal regulator; (ii) the borrower meets the bank’s program criteria, including a demonstrated willingness and ability to repay the loan; and (iii) the borrower has not previously removed a default on the same loan. Although the Act does not require lenders to offer a Section 602 rehabilitation program, those that do are entitled to a safe harbor from claims of inaccurate reporting for removing a default.

    The Bulletin also details the process for obtaining regulatory approval for a Section 602 rehabilitation program. The Bulletin notes that banks intending to establish a Section 602 program must seek written approval from their supervisory office concerning the proposed program, and that the office will review the program to ensure it is consistent with the Act’s minimum requirements, other applicable laws and regulations, and safe and sound banking principles. The OCC will provide feedback or notify the bank of its decision within 120 days of the request.

    Federal Issues OCC Student Lending FCRA Comptroller's Handbook

  • CFPB releases final policy on HMDA data disclosure

    Federal Issues

    On December 21, the CFPB announced final policy guidance covering the loan-level HMDA data the Bureau intends to make publicly available in 2019. The proposed policy was issued in September 2017 (covered by InfoBytes here) and, after reviewing public comments, the Bureau agreed to modify certain data disclosures to address concerns regarding consumers’ privacy. The final policy now excludes from public disclosure (i) the loan identifier; (ii) application and action taken dates; (iii) the property address; (iv) the applicants’ credit scores; (v) the mortgage originator’s NMLS identifier; and (vi) the results generated by the automated underwriting system. The Bureau will also exclude free-form text fields which report data such as the applicant’s race or ethnicity. The Bureau further announced that it will publish data for (i) the applicants’ ages; (ii) the loan amount; and (iii) the number of units in the dwelling as ranges rather than specific values.

    The announcement states that the Bureau intends to initiate in a separate notice-and-comment rulemaking in 2019 to incorporate any modifications of HMDA data into the text of Regulation C and will use the rulemaking to consider what HMDA data will be disclosed in future years. Additionally, the CFPB reiterated its intention to engage in a rulemaking to reconsider aspects of the 2015 HMDA rule, which was originally announced in December 2017 (covered by InfoBytes here).

    Federal Issues CFPB Mortgages HMDA Disclosures

  • CFPB releases annual adjustments to HMDA, TILA, and FCRA; agencies release CRA asset-size threshold adjustments

    Federal Issues

    On December 31, the CFPB published final rules adjusting both the asset-size thresholds under HMDA (Regulation C) and TILA (Regulation Z), and the maximum amount consumer reporting agencies may charge consumers for providing the consumer the consumer’s credit file under FCRA. All rules take effect on January 1, 2019.

    Under HMDA, institutions with assets below certain dollar thresholds are exempt from the collection and reporting requirements. The final rule increases the asset-size exemption threshold for banks, savings associations, and credit unions from $45 million to $46 million, thereby exempting institutions with assets of $46 million or less as of December 31, 2018, from collecting and reporting HMDA data in 2019.

    TILA exempts certain entities from the requirement to establish escrow accounts when originating higher-priced mortgage loans (HPMLs), including entities with assets below the asset-size threshold established by the CFPB. The final rule increases this asset-size exemption threshold from $2.112 billion to $2.167 billion, thereby exempting creditors with assets of $2.167 billion or less as of December 31, 2018, from the requirement to establish escrow accounts for HPMLs in 2019.

    Lastly, the FCRA permits consumer reporting agencies to impose a reasonable charge on a consumer when disclosing the consumer’s credit file in certain circumstances. Where the annual adjustment to this maximum charge had historically been announced via regulatory notice, the Bureau is now codifying the maximum charge in Regulation V. For 2019, the Bureau increased the maximum amount consumer reporting agencies may charge for making a file disclosure to a consumer from $12.00 to $12.50.

    Separately, on December 20, the Federal Reserve Board, the OCC, and the FDIC (collectively, the “Agencies”) jointly announced the adjusted asset-size thresholds used to define “small” and “intermediate small” banks and savings associations under the Community Reinvestment Act (CRA). Effective January 1, 2019, a “small” bank or savings association will be defined as an institution that, as of December 31 of either of the past two calendar years, had assets of less than $1.284 billion. An “intermediate small” bank or savings association will be defined as an institution with assets of at least $321 million as of December 31 of both of the past two calendar years, but less than $1.284 billion in assets as of December 31 of either of the past two calendar years. The Agencies published the annual adjustments in the Federal Register on December 27.

    Federal Issues CFPB TILA HMDA FCRA Federal Reserve OCC FDIC CRA Consumer Reporting Agency

  • UK court convicts former power company executive

    Financial Crimes

    On December 19, a UK Court found former power company Global Sales Director guilty of conspiracy to corrupt in connection with his role in bribing Lithuanian officials to win lucrative power station contracts for the French power and transportation company. He will be sentenced on December 21.

    The conviction follows the guilty pleas of the company and two other individuals in the UK in connection with the company’s Lithuanian bribery scheme. According to the SFO, the companies paid Lithuanian politicians more than €5 million (~$6.3 million in today’s USD) in bribes to secure the contracts, valued at €240 million (~$304 million in today’s USD). The SFO also has charged the company and former executives for alleged corruption spanning Hungary, India, Poland, and Tunisia.

    In late 2014, the company and various subsidiaries agreed to pay a then-record $772 million fine in connection with FCPA violations spanning numerous countries. For prior FCPA Scorecard coverage of the company, please see here.

    Financial Crimes FCPA Bribery Anti-Corruption

  • NY-based financial institution and various individuals charged in Malaysia

    Financial Crimes

    On December 17 and 19, press reports indicate Malaysian prosecutors filed criminal charges against a New York-based financial institution and numerous individuals, including former executives of the financial institution, in connection with their alleged roles in a multi-billion bribery and money laundering scheme involving Malaysia sovereign wealth fund.

    Malaysian prosecutors charged the financial institution with making false and misleading statements when raising money for the fund. Among individuals, a former participating managing director of the financial institution, and a former managing director, also were charged. These charges follow the U.S. government’s investigation and charges related to the same scheme.

    As detailed in prior FCPA Scorecard coverage, the former participating managing director pleaded guilty in November to Conspiracy to Violate the FCPA and Conspiracy to Commit Money Laundering and agreed to forfeit $43.7 million. The DOJ charged the former managing director with similar offenses and, according to press reports, is fighting extradition to the United States.

    According to press reports, in response to the filing of the criminal charges in Malaysia, the financial institution stated: “Under the Malaysian legal process, the firm was not afforded an opportunity to be heard prior to the filing of these charges against certain financial institution entities, which we intend to vigorously contest. These charges do not affect our ability to conduct our current business globally.”

    The DOJ has not charged or reached a resolution with the financial institution, which previously announced that it was cooperating with the DOJ’s and all regulators’ investigations. The announcement of the Malaysian charges suggests that the U.S. DOJ and Malaysian prosecutors may not be coordinating efforts.

    Financial Crimes FCPA DOJ Anti-Money Laundering

  • SEC charges former senior executives of in-flight entertainment company

    Financial Crimes

    On December 18, the former CEO and CFO of U.S.-based in-flight entertainment company settled SEC charges that they knowingly violated books and records and internal accounting controls provisions of the federal securities laws and caused similar violations by the company’s parent company. As detailed in prior FCPA Scorecard coverage, the parent company and the entertainment company settled related FCPA charges in April and agreed to pay a combined $280 million to the DOJ and SEC.

    The company’s former President and CEO and its former CFO consented to the entry of their administrative orders without admitting or denying the findings and agreed to pay penalties of $75,000, and $50,000, respectively.

    The SEC alleged the former CEO authorized the use of a third-party to pay more than $1.76 million to several consultants who provided little to no services. One of these consultants, a Middle East government official, was paid $875,000 to help secure over $700 million in business from a state-owned airline, but the position “required little to no work.” The bribery scheme involving this foreign official was previously described in the DPA with DOJ and the SEC Settlement Order. The former CEO was also charged with making false representations to the company’s auditor regarding internal accounting controls, and books and records.

    The SEC charged the former CFO in connection with a backdating scheme that resulted in the parent company improperly recording $82 million in revenue. The former CFO was charged with making false representations to the company’s auditor regarding the company’s financial statements, internal accounting controls, and books and records. The order against him suspends him from appearing or practicing before the Commission as an accountant for at least five years.

    The former CEO and CFO were previously described in the SEC Settlement Order as the company's Executive 1 and the company's Executive 2, respectively. The DOJ has not brought any criminal charges against any individuals in this matter.

    Financial Crimes SEC DPA

  • Fannie Mae updates foreclosure time frames and compensatory fee requirements

    Federal Issues

    On December 19, Fannie Mae issued SVC 2018-10, which describes policy changes to foreclosure time frames and compensatory fee requirements. Specifically, Fannie Mae has revised the maximum number of allowable days within which routine foreclosure proceedings are to be completed in twenty jurisdictions, with some increasing and some decreasing (a complete list available here). Fannie Mae is also replacing the monthly compensatory fee process with a process that focuses on identifying and resolving root causes of the failure to comply with foreclosure time frames. Under the new process, compensatory fees will be assessed if, after a chronic compliance issue is identified and a performance improvement plan is instituted, the servicer still does not meet the terms of the performance plan. The announcement includes a compensatory fee calculation chart and notes that fees will be applied based on the unpaid principal balance of the mortgage loan, the applicable pass-through rate, the length of the delay, and any additional costs that are directly attributable to the delay. The policy changes are effective January 1, 2019.

    Federal Issues Fannie Mae Servicing Guide Foreclosure Mortgages

  • District Court approves $480 million settlement between national bank and investors over incentive compensation sales program

    Courts

    On December 18, the U.S. District Court for the Northern District of California granted final approval following a fairness hearing to a $480 million settlement with a national bank to resolve a consolidated class action related to the bank’s previous incentive compensation sales program. As previously covered by InfoBytes, an agreement in principle was announced last May. The court’s order resolves class action allegations stemming from the September 2016 consent order between the bank and the CFPB, which resolved allegations related to the opening of deposit and credit card accounts for consumers without consent. (See previously InfoBytes coverage here.)

    Courts Settlement Incentive Compensation Securities CFPB

  • New Jersey appellate court finds arbitration provision ambiguous and unenforceable

    Courts

    On December 18, the Appellate Division of the Superior Court of New Jersey reversed a lower court’s order compelling arbitration, concluding the arbitration provision of the plaintiff’s auto lease agreement did not clearly and unambiguously inform the reader that arbitration was the exclusive dispute remedy. According to the opinion, the plaintiff filed a complaint against an auto dealer after allegedly being charged a $75 dollar fee associated with the loan payoff of his trade-in vehicle for which the plaintiff never received an explanation of its purpose, in violation of the New Jersey Consumer Fraud Act and Truth in Consumer Contract, Warranty and Notice Act. The auto dealer moved to compel arbitration under the lease contract’s arbitration notice, which included the statement, “[e]ither you or Lessor/Finance Company/Holder […] may choose at any time, including after a lawsuit is filed, to have any Claim related to this contract decided by arbitration.” The lower court determined that the arbitration provision was not “ambiguous or vague in any way” and ordered arbitration. The plaintiff appealed, arguing the clause is vague because it states the parties “may” arbitrate. On appeal, the appellate court concluded that the arbitration provision was not clear and unambiguous due to the use of a passive “may” when referring to the ability to opt into arbitration. Moreover, the appellate court determined the arbitration provision to be unenforceable because it lacked language that would affirmatively inform the plaintiff that “he could not pursue his statutory rights in court.”

    Courts State Issues Auto Finance Arbitration Appellate

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