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Chopra discusses open banking and standard-setting
On March 13, the Director of the CFPB, Rohit Chopra, delivered prepared remarks at the Financial Data Exchange Global Summit and discussed advancing the U.S. towards open banking. Chopra outlined the current efforts and considerations surrounding the development of industry standards that would help transition consumers with switching financial products. The CFPB had been finalizing rules on Section 1033 of the CFPA which would grant consumers the right to access their financial data and would aim to protect sensitive personal financial information while promoting open banking (covered by InfoBytes here).
Chopra highlighted the importance of creating industry standards for data sharing and communication protocols, drawing parallels with existing standards in electronics and financial services. While the CFPB's proposal acknowledged the role of standards, Chopra noted that it intentionally avoided being overly “prescriptive” to avoid stifling innovation, among other things.
The speech also addressed the potential for anticompetitive behavior in the standard-setting process. Chopra noted historical instances of anticompetitive behavior, a concern that the CFPB had been monitoring closely. The Bureau will be working with the DOJ to prevent such practices.
The Bureau sought to codify what standard-setting organizations must demonstrate to be recognized under the proposed rule, then invite those organizations to begin the process of receiving formal recognition from the CFPB. Based on the comments received on the proposed rule, Chopra expects that by this fall, the final rule will “identify the areas where standards are relevant to the requirements of the final rule.” Chopra also noted the CFPB considered whether standard-setting organizations should be balanced so no entity or group of entities can “dominate[] decision making.” He noted that the Bureau will investigate the makeup of entities’ standard-setting/modification groups and funding structure, warning if an entity’s composition or funding suggests favoritism, then “that will be a problem.” Chopra noted that if the CFPB cannot identify standard-setting organizations, it is prepared to implement more detailed guidance.
FDIC Vice Chair delivers remarks on tokenization
On March 11, FDIC Vice Chairman Travis Hill delivered prepared remarks on “Banking’s Next Chapter? Remarks on Tokenization and Other Issues.” The speech addressed the evolution of money and payment systems, focusing on the recent innovation of tokenizing commercial bank deposits and other assets and liabilities. Hill distinguished tokenization from assets like Bitcoin and Ether: “tokenization involves a representation of ‘real-world assets’ on a distributed ledger, including… commercial bank deposits, government and corporate bonds, money market fund shares, gold and other commodities, and real estate.” Hill highlighted the potential benefits of tokenization, such as improved efficiency in payments and settlements, 24/7/365 operations, programmability, atomic settlement (the settlement, or the act of transferring ownership of an asset from seller to buyer, combining instant and simultaneous settlements) and the creation of an immutable audit trail. He also mentioned that these innovations could streamline complex processes like cross-border transactions and bond issuances, offering notable advantages over traditional banking systems.
The speech also acknowledged challenges and risks associated with tokenization, including technical, operational, and legal uncertainties. Questions remain about the structure of the future financial system, interoperability between different blockchains, and the legal implications of transferring ownership via tokens, Hill added.
Regarding the regulatory approach to digital assets and tokenization, Hill expressed the need for as much clarity as possible, even in areas whether the technology is evolving quickly. For example, Hill noted that “it would be helpful to provide certainty that deposits are deposits, regardless of the technology or recordkeeping deployed, and if there are reasons to distinguish some or all tokenized deposits from traditional deposits for any regulatory, reporting, or other purpose, the FDIC should… explain how and why.”
HUD sued for allegedly failing to refund mortgage insurance premiums for early-terminated FHA-insured mortgages
On March 12, a putative class action complaint was filed against the Department of Housing and Urban Development (HUD) for allegedly denying homeowners their Mortgage Insurance Premium (MIP) refunds upon the early termination of their FHA-insured mortgages. According to the complaint, HUD must refund unearned MIPs, but has refused to refund homeowners by creating “unnecessary bureaucratic hurdles.” The plaintiffs alleged that the OIG had confirmed “the validity of complaints regarding HUD’s handling of MIP refunds.”
Citing HUD regulations, the plaintiffs alleged that when an FHA mortgage is terminated early, within seven years of the purchase of the refinancing of the property, there is an overpayment of the MIP which should be refunded by HUD. According to the plaintiffs it is a “widespread practice” for HUD not to automatically refund MIPs, but instead require a burdensome, lengthy process which hindered the prompt refund of fees in multiple ways. The 2022 OIG report cited by plaintiffs allegedly found, among other things, that HUD did not have adequate controls in place to ensure that refunds were appropriately tracked, monitored, and issued. The plaintiffs alleged that Floridians are owed over $21.7 million in refunds.
The plaintiffs are seeking injunctive and declaratory relief and a return of all unfairly retained refunds “together with damages in the amount of the total earned interest and other investment monies accrued by Defendant with Plaintiff’s and Class Members’ monies.”
CFPB releases consumer advisory for student borrowers notifying them of April deadline to cancel
On March 11, the CFPB published a consumer advisory notifying student loan borrowers that they may have an opportunity to cancel or receive credits toward the cancellation of their student loans but some borrowers will need to consolidate their loans by April 30 in order to obtain the benefit. The Department of Education has implemented a “one-time adjustment” to help borrowers receive credit toward federal student loan cancellation. This adjustment is designed to enable the counting of more payments, including all payments made on federally managed loans since July 1, 1994, as well as certain periods of deferment, economic hardship, and forbearance. Generally, federal student loans are eligible for Income Driven Repayment (IDR) plans, which offer loan cancellation after 10, 20, or 25 years of qualifying payments, or after 10 years for those pursuing Public Service Loan Forgiveness (PSLF), provided other eligibility criteria are met. The Bureau also noted that consolidation is free, warning against scammers who would charge for that service.
Business groups sue the CFPB over credit card late fee rule
On March 7, several business groups (plaintiffs) sued the CFPB rule in the U.S. District Court for the Northern District of Texas over its announced credit card late fee rule. As previously covered by InfoBytes, the Bureau’s new final rule limited most credit card late fees to $8, among other actions, and was met immediately with criticism from banks and legislators.
The plaintiffs’ complaint claimed the CFPB completed the rule hastily to implement a pledge made by President Biden around his State of the Union Address to reduce credit card late fees by 75 percent. The complaint further asserted the CFPB skipped necessary steps, made economic miscalculations, and otherwise breached the Administrative Procedure Act. As alleged, the Bureau likely understated “the volatility of card issuers’ cost-to-fee ratios pertaining to late fees” and improperly relied on data which does not allow for the recovery of a “reasonable and proportional” penalty fee. On the Bureau’s use of the Y-14M data, the complaint alleged the new rule ignored peer-reviewed studies and instead opted to base the rule on an internal study using confidential data that was not available for examination during the period allocated for public comment. The plaintiffs argued the final rule would incur “substantial compliance costs” by amending printed disclosures, using the cost-analysis provisions, and notifying consumers of changes in interest rates to recoup costs, among other problems. The complaint also cited TILA’s effective-date provisions and the Bureau’s embattled funding structure to support the argument that the final rule would cause irreparable harm.
GAO report calls for FDIC, Fed to fix bank supervision issues
On March 6, the U.S. Government Accountability Office (GAO) released a report to congressional requesters, including Senator Sherrod Brown (D-OH), Chairman of the U.S. Senate’s Committee on Banking, Housing, and Urban Affairs, regarding the Fed and FDIC’s communication of supervisory concerns related to the 2023 banking issues and the agencies’ procedures for escalating concerns. The report found that while both regulators generally met their requirements for communicating concerns, the Fed’s escalation procedures lacked clarity and specificity, which could have contributed to delayed enforcement last year.
The GAO recommended that the Fed revise its escalation procedures to be more precise and include measurable criteria. The Fed agreed with the recommendation and acknowledged that clearer examination procedures could help in addressing supervisory concerns more promptly. For the FDIC, the GAO recognized that the FDIC already updated its escalation procedures in August 2023 and will intend to implement further revisions to respond promptly. The GAO report also suggested that Congress amend the FDI Act to incorporate noncapital triggers related to unsafe banking practices before they affect capital.
VA proposes rule changes to VA-Guaranteed, IRRRLoans
On March 7, the VA published a supplemental notice of proposed rulemaking in the Federal Register titled “Loan Guaranty: Revisions to VA-Guaranteed or Insured Interest Rate Reduction Refinancing Loans” which sought comment on whether the “date of loan issuance” should be defined as date of the note (as originally suggested) or as the date “the first payment is due.” The notice explained the VA did not receive any comments on this aspect of the proposed rule and enumerated several concerns with the initial proposed definition. The comment period for this proposed rule will close on May 6.
Fed issues final rule for FMUs to update risk management requirements, noting cyber and climate risks
On March 8, the Federal Reserve Board announced a final rule that will update risk management requirements for financial market utilities (FMUs) supervised by the Fed. FMUs provide the financial infrastructure to clear and settle payments and transactions. The rule will go into effect 30 days after publication in the Federal Register, and FMUs are expected to comply with certain updates by 90 days and all updates by 180 days after publication. The Fed reported the final rule is “substantially similar” to the proposed rule and provided additional details to the exiting requirements for the following: (i) review and testing; (ii) incident management; (iii) business continuity management; and (iv) third-party risk management.
OCC’s Hsu speaks on operational resilience framework as regulators consider non-financial disruptions
On March 12, the Acting Director for the OCC, Michael J. Hsu, delivered a speech at a banking conference in Washington, D.C. on “operational resilience,” which he defined as a bank’s ability to “prepare for, and adapt to, and withstand or recover from disruptions.” Hsu stressed that the most concerning impacts on financial institutions are not financial, but often arise from natural disasters, pandemics, global conflicts, or weak internal governance management. The acting director noted an increase in the probability of disruptions occurring and the impacts of them. In response, the OCC will expect financial institutions to be operationally resilient, and Hsu stated that the federal banking agencies are considering making changes to their operational resilience framework for large banks and possibly third-party service providers.
These principles were first laid out in a white paper following the September 11, 2001, attack on the World Trade Center whereby the paper promoted geographic diversity and the resiliency of data centers. During the Covid-19 Pandemic, the federal banking agencies issued a paper that integrated existing guidance and common industry practices in October 2020.
FTC confirms two members as its board returns to full strength
On March 8, the FTC announced the confirmation of two new commissioners: Andrew N. Ferguson and Melissa Holyoak. Additionally, current Commissioner Rebecca Kelly Slaughter received a confirmation vote for a second term. Newcomers Ferguson and Holyoak were nominated by President Biden and will serve until September 25, 2025; Slaughter will serve until the same date in 2029. Ferguson had previously been working as solicitor general of Virginia, and before that he was chief counsel to U.S. Sen. Mitch McConnell of Kentucky and as Republican counsel on the U.S. Senate Judiciary Committee. Holyoak was most recently solicitor general with the Utah Attorney General’s Office. Before that, she served as president and general counsel of a D.C.-based public interest law firm.