In this Issue. The Consumer Financial Protection Bureau (CFPB) affirmed that lenders using artificial intelligence (AI) must provide accurate and specific reasons for adverse action, issued an FAQ on its small business lending rule and issued a final rule announcing the annual adjustments to Truth in Lending Act (TILA) thresholds for 2024; and the Securities and Exchange Commission (SEC) announced that it has settled with nine advisors over alleged violations of the Marketing Rule. These and other developments are discussed in more detail below.
CFPB Affirms Lenders Using AI Must Provide Accurate and Specific Reasons For Adverse Action
On September 19, the CFPB issued a Consumer Financial Protection Circular
affirming that adverse action notices provided by creditors to
consumers must disclose accurate and specific reasons for the
adverse action – even if the creditor uses AI, complex
algorithms, or black-box credit models in making its decision
– and even if consumers may be surprised, upset, or angered
to learn their credit applications were graded on data that may not
intuitively relate to their finances. CFPB sample adverse action
forms and checklists provided in Regulation B, implementing the
Equal Credit Opportunity Act (ECOA), should not be considered
exhaustive and do not automatically satisfy a creditor's
obligations under ECOA if those sample forms or checklists do not
reflect the principal reason(s) for the adverse action. Similarly,
providing broad-bucket or vague reasons would violate Regulation B.
This circular echoes a 2022 circular by the CFPB confirming that ECOA
requires creditors to explain the specific reasons for taking
adverse actions and a 2022 advisory opinion that consumer financial
protection law requires creditors to provide adverse action notices
to consumers when changes are made to existing credit.
"Technology marketed as artificial intelligence is expanding the data used for lending decisions, and also growing the list of potential reasons for why credit is denied...Creditors must be able to specifically explain their reasons for denial. There is no special exemption for artificial intelligence."
– Director Rohit Chopra, CFPB
CFPB Updates Small Business Lending Rule FAQ
- The meanings of the terms "refinancing" and "merchant cash advance";
- Circumstances under which a letter of credit may be a covered credit transaction;
- Application of the trade credit exclusion when proceeds are used to purchase goods or services from a retailer;
- A guarantor's revenue is not considered in determining if an applicant is a small business;
- The meaning of firewalls and related compliance considerations; and
- Record retention requirements.
CFPB Announces Annual Adjustments to TILA Thresholds for 2024 in Final Rule
On September 18, the CFPB issued a final rule, effective January 1, 2024, amending the official interpretations for Regulation Z, which implements TILA, to adjust the dollar amounts of various thresholds that impact open-end consumer credit plans, HOEPA loans, and qualified mortgages.
FinCEN Publishes Notice and Proposed Rule Related to Corporate Transparency Act Beneficial Ownership Information System
Information gathered and maintained by the U.S. Treasury
Department's Financial Crimes Enforcement Network (FinCEN)
under the CTA in the Beneficial Ownership Information System (the
BOI System) will be exempt from notification and record access
requirements (meaning, an individual will not have a right to be
notified in response to a request if FinCEN's BOI System
contains information about the person or obtain access to the
information), and individuals will not be permitted to contest the
contents of the records if, for example, an individual believes
that inaccurate information about him or her has been provided by a
Check out Goodwin's client alert on the topic here.
Upcoming CTA CLE Program: Goodwin is pleased to offer a CLE webinar in connection with this update. Join partners Samantha Kirby, Bill Stern, and Alex Callen on September 27 at 4 pm EST (1 pm PST) as they share necessary information around compliance with FinCEN's Beneficial Ownership Reporting Rule under the Corporate Transparency Act (CTA).
To register, please click here.
Fintech Flash: Why Your Consumer Complaint Response Function Is Vital to Your Business
If you're offering a financial product or service to consumers, such as a deposit account, loan, credit card, or payment service, you need a strong consumer complaint response function. This is true whether you're an established financial institution or just starting out.
A consumer complaint response function — often aptly described as the proverbial canary in the coal mine — is a foundational piece of your compliance management system (CMS) that controls how you receive, respond to, and otherwise use complaints to enhance your business's compliance. Learn more about this topic in a Goodwin's latest Fintech Flash.
Litigation and Enforcement Updates
SEC Marketing Rule Enforcement Actions Emphasize Need for Policies and Procedures Regarding the Use of Hypothetical Performance
On September 11, the SEC announced that it has settled with nine SEC-registered investment advisers (Advisers) with over alleged violations of Rule 206(4)-1 under the Investment Advisers Act (the Marketing Rule) and the corresponding provisions of the books and records requirements in Rule 204-2(a)(11) under the Act as a result of their use of hypothetical model or backtested performance returns on their public websites in the absence of required policies and procedures. These enforcement actions follow the first SEC enforcement action under the Marketing Rule on August 24, 2023 that also focused on the lack of required policies and procedures regarding the use of hypothetical performance.
The Marketing Rule requires that advisers have policies and procedures reasonably designed to ensure that hypothetical performance, among other things, is relevant to the likely financial situation and investment objectives of the intended audience. The SEC alleged that the Advisers violated this requirement by not having such policies and procedures in place. Additionally, Rule 202-4(a)(11) under the Investment Advisers Act requires, among other things, that advisers maintain a copy of all advertisements that they disseminate directly or indirectly. The SEC charged two Advisers with violating Rule 202(a)(11) because the Advisers were unable to produce all advertisements that they published on their websites upon request from the SEC.
Read more about this development in a recent client alert.
U.S. Chamber of Commerce Wins Summary Judgment in Challenge to CFPB's Update to Its Examination Manual
On September 8, the United States District Court of the Eastern
District of Texas granted plaintiff U.S. Chamber of Commerce's
(the Chamber) motion for summary judgment invalidating the CFPB
Exam Manual changes from March 2022 that stated that discriminatory
conduct may be a UDAAP violation.
As discussed by Goodwin previously, the Chamber sued the CFPB in September 2022 challenging the CFPB's update to its Examination Manual as outside the scope of its statutory authority. The Chamber moved for summary judgment on November 29, 2022. The CFPB likewise moved to dismiss or, in the alternative, for partial summary judgment, on December 23, 2022, arguing that the Chamber lacked standing and also that the update to the Examination Manual was not a final agency action such that review under the Administrative Procedures Act was not appropriate, among other things. Read more about this update in Goodwin's Consumer Finance Insights blog post.
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On October 24, Goodwin's Fintech group and co-host J.P. Morgan will be hosting a luncheon reception at TAO Asian Bistro during the Money 20/20 conference. If you would like to attend, please reach out to email@example.com.
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2022 Consumer Financial Services Year in
This in-depth report summarizes major regulatory, litigation, and enforcement activity that impacted the consumer financial industry in 2022, and identifies the key trends for 2023.
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