How Adverse Is This?
As detailed in our new in-depth report, the CFPB has issued another sweeping rule by way of a seemingly innocuous circular not subject to public notice and comment. Under it, lenders that use third-party underwriting are responsible for ensuring that borrowers receive thorough adverse action notices even if the lender has no authority over the AI or other complex models determining credit outcome.
AI Adverse-Action Requirements
Continuing its use of novel rulings that preclude public notice and comment, the CFPB has issued a landmark ruling on artificial intelligence (AI) and other forms of algorithmic underwriting stipulating lender responsibility for sending out the adverse action notices required under the Equal Credit Opportunity Act (ECOA). The CFPB recently added a broader range of credit decisions on outstanding loans (e.g., granting or reducing lines), to these notice requirements, making the reach of this new policy still broader. Lenders are responsible for adherence to these requirements even if their underwriting models are provided by third parties or credit decisions are made by third parties such as fintechs or auto dealers. However, when these nonbanks are the lender, they are then subject to CFPB enforcement even if the Bureau does not have formal supervisory power over them under another recent CFPB ruling. The press release accompanying the circular also includes more sweeping statements about broader fair-lending compliance obligations when using these underwriting systems.
CFPB Demands Adverse-Action Notices No Matter AI Opacity
Targeting AI’s fair-lending implications, the CFPB today issued its third circular laying out new policy without public notice or comment. As with the previous circular (see FSM Report DEPOSITINSURANCE113), the new one expressly establishes CFPB enforcement policy and, by inference, thereby sets new standards. The Bureau now lays out lender fair-lending obligations for any “black-box” models used for credit underwriting and a requirement for adverse-action notices stipulating the reason for credit denial.
Numeric Scores Join Credit Scores on Hot Seat
The GAO today released a report calling on Congress to give consumers protections for numerical scores affecting business decisions similar to those mandated for credit scores. Although the thrust of GAO’s study is targeted marketing that leads to discounts or other advantageous product offerings, the scores banks used to evaluate depositor risk might well fall under this new framework, as more clearly would any cross-selling decisions. Risks of concern to GAO include bias, unduly high costs, restricted product offerings, and opacity that puts consumers at greater risk in light of difficulties correcting any problematic conclusions.
CFPB Tackles Core-Service Providers
Late yesterday, CFPB director Chopra told community banks and credit unions that he wants to be sure that entities that he described as focused on relationship banking are included in CFPB decision-making, in contrast to the large banks that had previously influenced its actions.
Hsu Supports Special-Purpose Stablecoin Charter
Picking up on both Secretary Yellen’s comments yesterday and the PWG’s stablecoin report (see Client Report CRYPTO21), Acting Comptroller Hsu today went farther to conclude that cryptocurrency in general poses systemic risk that warrants immediate attention to stablecoin regulation.
FSOC Worries About Commodity-Market Risk
The FSOC readout from its closed meeting today was as inscrutable as usual. However, we infer that the Council convened principally to assess commodity-market volatility in the wake of the Ukraine invasion.
Anti-Discrimination Enforcement
Reflecting one of its new director’s top priorities as well as that of the Biden Administration, the Bureau of Consumer Financial Protection has significantly revised its examination manual when it comes to behavior that might be viewed as discriminatory in a wide range of consumer-financial products, services, underwriting, advertising, marketing, governance, and other arenas. Because the new approach is both sweeping and imprecise, different examiners and/or different CFPB offices may reach different interpretations of data and company attributes as indications of discrimination. The Bureau has thus put the entire sector on notice that anything that might have even the appearance of overt discrimination, discriminatory treatment, or disparate impact could result in CFPB sanction.
FSB Cites Growing FinTech/BigTech Concerns, Policy Solutions Await
The FSB today published its latest assessment of fintech, now adding bigtech to the picture and elaborating on the array of policy concerns it and BIS have previously sketched out. We will shortly provide clients with an in-depth analysis of a report which concludes that the pandemic has significantly accelerated digital transformation. This improves financial inclusion, but raises growing risk of structural change by way of dominant players outside the regulatory perimeter.
SEC Sets Out Sweeping U.S. Climate-Risk Disclosure Construct
On unsurprising party lines (3-1), the SEC today released proposed climate-risk disclosures for public registrants. Although Congressional Democrats pressed for express materiality standards, the proposal relies on current interpretations of what must be disclosed. Although Congressional Republicans derided the proposal as far outside the Commission’s mandate, it would require not only Scope 1 and 2 disclosures, but also an initial construct designed to lead gradually, but indisputably, to Scope 3 disclosures from larger companies.
Responding to continuing FSOC complaints about nonbank servicers, FHFA has proposed new seller-servicer eligibility standards that crack down hard on any nonbank servicer whose size evokes systemic qualms. Although all nonbanks and perhaps a few small bank seller-servicers will come under tougher net-worth requirements that hive off Ginnie servicing, FHFA targets its wrath at large nonbanks. These must not only comply with new capital and liquidity planning standards along with stringent liquidity standards, but are apparently viewed so dubiously by the agency that nonbanks also must get a third party to vouch for their viability under standards that get tougher as the servicer gets bigger.
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Servicer 2.0 Strikes
Responding to continuing FSOC complaints about nonbank servicers, FHFA has proposed new seller-servicer eligibility standards that crack down hard on any nonbank servicer whose size evokes systemic qualms. Although all nonbanks and perhaps a few small bank seller-servicers will come under tougher net-worth requirements that hive off Ginnie servicing, FHFA targets its wrath at large nonbanks. These must not only comply with new capital and liquidity planning standards along with stringent liquidity standards, but are apparently viewed so dubiously by the agency that nonbanks also must get a third party to vouch for their viability under standards that get tougher as the servicer gets bigger.
FDIC Exempts Some Custody Funding from Brokered Deposits
As promised in its brokered-deposit rule (see FSM Report DEPOSIT INSURANCE111), the FDIC today published a notice expanding deposit-making exceptions to funds received from third-party custodians without discretion over the IDIs into which funds are placed.
FSB Turns to Insurance Resolutions
The FSB today expanded on longstanding efforts to ensure successful insurance-company resolution, issuing papers on resolution funding, and resolution planning.
Warren Stands Firm Against Powell
As anticipated in our in-depth report earlier today (see Client Report FEDERALRESERVE22), Sen. Warren (D-MA) is not letting upon Chairman Powell. Today, she sent a tough letter reiterating demands for an array of information on Fed-officer trading, reiterating also that she wants an SEC investigation.
Basel Proposes Global Climate-risk Management, Supervision Principles
As anticipated, the Basel Committee today proposed climate-risk management and supervision principles sure to guide both the Fed and OCC, even in just proposed form, as the U.S. agencies finalize near-term U.S. guidance in this high-priority arena.
FRB-NY Staff: U.S. Banks Now Even More Resilient
A new post from the Federal Reserve Bank of New York’s blog assesses bank resilience through the pandemic, concluding that large banks are even more resilient now than before thanks to post-2008 rules and post-2020 market backstops.
HFSC Republicans Condition CBDC on Stablecoin, Private Sector
HFSC Republicans have now laid out their principles for any U.S. CBDC, demanding that any Fed-issued CBDC maintain the U.S. Dollar’s reserve currency status and the U.S. payment system’s preeminence.
Senate GOP Tackles USPS Banking Pilot Program
Senate Banking Ranking Member Toomey (R-PA) today described postal banking as about the worst possible idea. Joined by other Republicans, Mr. Toomey wrote to the Postmaster General, questioning USPS authority to offer its recent pilot and challenging its mission-relevance.
CFPB Plans HMDA-Data Do-Over
Reflecting the President’s executive order on racial equity, the CFPB has now accelerated its fair-lending efforts with a request for views on how best to retool HMDA to better prevent mortgage discrimination.
FRB Presidents: Fund-Access, Financial-Literacy Improvements Needed
At today’s racism and the economy virtual event hosted by the Minneapolis Fed, FRB Atlanta President Bostic highlighted work by his Reserve Bank’s Special Committee on Payments Inclusion to show the Fed’s dedication in this …