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GAO calls for the FDIC to address outstanding recommendations
On April 30, GAO sent a letter to the FDIC on its outstanding recommendations, emphasizing the importance of two priority recommendations, which pertained to blockchain technology and fintech. Regarding blockchain technology, the letter stressed the need for the FDIC and other financial regulators to establish a formal mechanism to identify and address blockchain-related risks. Despite the regulator's coordination, the response to crypto-asset risks had been criticized as untimely. With respect to fintech, this recommendation would have the FDIC and relevant agencies clarify the appropriate use of alternative data in loan underwriting for banks that partner with fintech lenders. The letter also called for the FDIC's attention to additional high-risk areas, including IT management, human capital, federal real property, cybersecurity, and the personnel security clearance process.
Fed releases April SLOOS on bank lending practices from Q1 2024
On May 6, the Fed released its quarterly survey of the Senior Loan Officer Opinion Survey (SLOOS) on bank lending practices for the first quarter of the year which revealed tightened lending standards and a decrease in demand across loans. Regarding business lending, the survey asked banks about commercial and industrial lending (C&I) and commercial real estate lending (CRE). For C&I loans, banks reported stricter standards and a decline in demand from firms of all sizes. Banks reported tightening due to a less favorable economic outlook, reduced tolerance for risk, and a worsening of industry-specific problems. For CRE loans, banks reported a tightening of standards for all types of loans. A significant share of banks reported weaker demand for nonfarm nonresidential and multifamily residential lending. For household lending, banks also tightened residential real estate (RRE) loan standards, while demand for all RRE loan types declined. Home equity lines of credit also faced stricter standards. Banks also tightened consumer lending standards for credit card, auto, and other consumer loans. Demand for these loans decreased as well, with a significant drop in auto loan inquiries.
Student loan servicer and trust could pay more than $5M in enforcement action with CFPB
On May 6, the CFPB filed a complaint against a Pennsylvania-based student loan servicer and 15 student loan trusts for alleged failure to properly respond to various borrower requests in violation of the CFPA. The complaint alleged thousands of borrower requests went unanswered from 2015 to 2021. Many of these requests allegedly sought forms of payment relief including: (i) co-signer release; (ii) extension of forbearance or deferment; (iii) loan settlement or forgiveness; (iv) Servicemember Civil Relief Act benefits; and (v) other forms of payment or interest rate reduction.
The CFPB also released two proposed stipulated final judgment orders for the trusts and the servicer to resolve the claims. If agreed upon by the court, the trusts and servicer will have to pay civil money penalties of $400,000 and $1.75 million, respectively, in addition to providing close to $3 million in compensation to impacted consumers. Additionally, the orders required non-monetary relief, such as the approval of outstanding borrower applications, the rectification of credit reports, the suspension of debt collection efforts, and the implementation of a functional process.
FHFA shares ‘lessons learned’ from evaluating exposure to climate-related risks
On May 1, the FHFA released a report covering the “lessons learned” from its review of the Climate Scenario Analysis (CSA) which was used by financial institutions and regulators to evaluate exposure to climate-related risk. Climate-related risk can be categorized in two ways: (i) physical risk which is damage to property, land, and infrastructure due to severe weather and environmental changes; and (ii) transition risk that results from policy and technological shifts towards a low-carbon economy.
In its preliminary CSA exercises, the FHFA made the following key observations:
- Data and Methodology Limitations: There were data limitations and methodological shortcomings as current tools depend on incomplete data.
- Modeling Assumptions: Results were significantly impacted by modeling assumptions.
- Challenges with Existing Credit Models: Current credit loss models were constrained while incorporating climate risks.
- Predictive Inaccuracy: The tools used to estimate the historical relationship between climate-related events and financial impacts may not be representative of future financial impacts.
The FHFA concluded that these findings indicated the CSA a complex process with room for enhancement and that no single risk assessment can fully capture the breadth of potential impacts from climate-related physical and transition risks.
HUD guidance on AI to prevent housing discrimination
On April 29, the Office of Fair Housing and Equal Opportunity of HUD issued two guidance documents concerning the use of artificial intelligence (AI) in housing-related practices, specifically in tenant screening and housing advertising. The guidance came in response to Biden's Executive Order to address potential biases in automated systems within the housing sector (covered by InfoBytes here).
HUD emphasizes the need for transparency and fairness when housing providers and screening companies use AI-assisted tenant screening processes. The tenant screening guidance recommended best practices for housing providers and screening companies to prevent discrimination based on race, color, national origin, religion, sex, disability, and familial status. The HUD guidance provided the following six “Guiding Principles for Non-Discriminatory Screenings”: (i) choose relevant screen criteria; (ii) use only accurate records; (iii) follow the applicable screening policy; (iv) be transparent with applicants; (v) allow applicants to challenge negative information; and (vi) design and test complex models for Fair Housing compliance.
Regarding housing advertising, HUD’s guidance warned advertisers and online platforms about the risks of using targeted advertising tools that could violate the Fair Housing Act by denying consumers information about housing opportunities or targeting individuals based on their protected characteristics. To reduce the risk of violating the Fair Housing Act, HUD recommended that advertisers should: (i) utilize advertising platforms that are taking steps to manage the risk of discriminatory delivery of housing-related ads; (ii) ensure the advertisements related to housing are accurately identified to the platform; (iii) analyze the composition of audience datasets; and (iv) monitor outcomes of advertising campaigns to identify and mitigate discriminatory outcomes. Advertising platforms are recommended to: (i) ensure that housing-related ads are run in a separate process designed to avoid discrimination; (ii) avoid providing targeting options for housing-related ads that describe or are related to FHA-protected characteristics; (iii) conduct regular end-to-end testing of advertising systems; (iv) proactively identify and adopt less discriminatory alternatives for AI models and algorithmic systems; (v) ensure that algorithms are similarly predictive; (vi) ensure that ad delivery systems are not resulting in differential charges on the basis of protected characteristic; and (vii) document, retain, or publicly release in-depth information about ad targeting functions and internal auditing.
CFPB reports that complex pricing leads to higher consumer costs
On April 30, the CFPB published a report titled Price Complexity in Laboratory Markets indicating that consumers may pay higher prices for products with complex pricing structures. The report drew on experiments conducted in “simple markets,” where participants engaged in transactions as buyers and sellers. According to the report, these experiments revealed that when product prices were divided into several sub-parts, making them more complicated, participants generally paid more compared to products with a single, comprehensive price.
The study involved participants acting in the roles of buyers and sellers, with transactions involving products priced either as a lump sum or split into eight or 16 separate charges. According to the report, the results showed that in situations with more fragmented pricing, the average selling price increased and buyers found it more challenging to compare prices between sellers. For products with 16 separate charges, the Bureau reported that sellers’ total asking price was typically 60 percent higher than products with one price. In a second experiment, the CFPB investigated the effects of increased competition on market outcomes, finding that increased competition “generally improved, but did not eliminate, the negative effects of price complexity.” The Bureau noted that the findings of this research align with existing studies and evidence suggesting that alleged "junk fees" can lead to higher overall prices than those typically found in a fair and competitive market.
HUD announces FFRMS final rule
Recently, HUD announced a final rule to implement the Federal Flood Risk Management Standard to “protect communities from flood risk, heavy storms, increased frequency of severe weather events and disasters, changes in development patterns, and erosion.” The final rule will enact the FFRMS as mandated by Executive Order 13690 by amending two HUD regulations: (i) Part 55, Floodplain Management and Protection of Wetlands; and (ii) Part 200, Minimum Property Standards. Among other things, the final rule will raise the elevations and flood proofing requirements of properties in flood-prone areas that use federal funds for new construction or are financed through HUD’s grant or subsidy programs. The revisions to Minimum Property Standards specifically target Federal Housing Administration-insured new constructions located within the 100-year floodplain. The final rule becomes effective on May 23.
Department of Commerce announces new actions related to Executive Order on AI
On April 29, the National Institute of Standards and Technology (NIST) at the U.S. Department of Commerce released several announcements regarding the progress on President Biden's Executive Order on AI (covered by InfoBytes here). NIST released four draft publications aimed at enhancing AI systems' safety, security, and trustworthiness.
The four draft publications include: (i) NIST AI 600-1 that offers a Generative AI Profile to help organizations identify and manage risks associated with generative AI; (ii) NIST SP 800-218A to expand on the Secure Software Development Framework (SSDF) and address concerns about malicious training data affecting AI systems, as well as provide potential risks and strategies for handling training data, including recommendations for analyzing data for signs of poisoning, bias, homogeneity, and tampering; (iii) NIST AI 100-4 that proposes technical methods to improve the transparency of AI-created or “synthetic” content; and (iv) NIST AI 100-5 which will outline a plan to encourage the global development of AI-related technical standards and seek feedback on areas for AI standardization, including methods for tracking the origin of digital content and shared practices for AI system testing and evaluation. Additionally, NIST is launching challenges to create methods for distinguishing between human and AI-generated content. Public comments on these initial drafts will be due by June 2.
Biden announces student debt cancellation for borrowers who attended “predatory” institutions
On May 1, the Biden Administration announced the approval of $6.1 billion in student debt cancellation for 317,000 borrowers who attended a system of art schools, which the Administration accused of engaging in deceptive practices and leaving students with significant debt and poor job prospects.
The U.S. Department of Education found the system of art schools and its parent company guilty of significant misrepresentations about the educational value and career prospects following graduation on websites, in print material, and through misleading information from school personnel to prospective students. The school advertised an employment rate of 82 percent within six months of graduation within the field of study; however, a review of the school's records by the Department of Education alleged that graduates were inaccurately counted as employed in their study fields, inflating the figures by as much as 25 percent. Additionally, the school advertised inflated average salaries based on the same incorrect data, with testimonies indicating that school officials fabricated graduates’ earnings. All campuses of the school system closed under separate ownership in September 2023.
CFPB report finds 15 million Americans with medical debt on their credit reports
On April 29, the CFPB released a report entitled “Recent Changes in Medical Collections on Consumer Credit Records” that showed that as of June 2023 some 15 million Americans (approximately five percent) still have medical bills on their credit reports. However, credit rating agencies’ changes have resulted in a decrease of approximately nine percentage points in the number of Americans that have medical debt on their credit report. Further, the report indicated that the CFPB’s efforts to combat medical debt collection issues (including, and as previously covered by InfoBytes, holding a hearing in July 2023 on medical billing and collections, highlighting the issue in their 2023 FDCPA report, and having its general counsel discuss the issue in April 2024) resulted in a greater expected decline in those with medical billing on their credit report. The CFPB attributed the difference between the forecasted decrease and the actual decrease to two factors: first, that the CFPB’s first report did not include the original date of delinquency; and second, there has been a trend towards reporting fewer medical collections, independent of collection reporting changes.
This year’s report showed that some states saw much larger reductions than others, but indicated a 38 percent nationwide drop in the total balances of medical collections on credit reports, continuing the trend shown in last year’s report that found a 37 percent decline in medical collection tradelines on credit reports (covered by InfoBytes here). Of the 15 million Americans that continue to have medical bills on their credit reports, this year’s report also showed the average reported balance increased from $2,000 to over $3,100, most medical collections tradelines that were removed were below $500, and those living in lower-income communities in the South have the most medical bills in collections for the largest amounts. The CFPB stated that fixing the credit reporting market, including issues that involve the reporting of medical bills, will continue to be a priority.