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All four regulatory agencies have expressed concerns about potentially harmful uses of automated systems and resolved to vigorously enforce their collective authorities and to monitor the development and use of automated systems. Technology marketed as “artificial intelligence” and as taking bias out of decision making has the potential to produce outcomes that result in unlawful discrimination. Potential sources of discrimination in automated systems include the following: 

• Data and Datasets: Automated system outcomes can be skewed by unrepresentative or imbalanced datasets, datasets that incorporate historical bias, or datasets that contain other types of errors. Automated systems also can correlate data with protected classes, which can lead to discriminatory outcomes.   

• Model Opacity and Access: Many automated systems are “black boxes” whose internal workings are not clear to most people and, in some cases, even the developer of the tool. This lack of transparency often makes it all the more difficult for developers, businesses, and individuals to know whether an automated system is fair.    
• Design and Use: Developers do not always understand or account for the contexts in which private or public entities will use their automated systems. Developers may design a system on the basis of flawed assumptions about its users, relevant context, or the underlying practices or procedures it may replace. 

In the joint statement, these four regulatory agencies reiterated their resolve to monitor the development and use of automated systems and promote responsible innovation to protect the rights of American consumers. According to CFPB Director Rohit Chopra, “[t]oday’s joint statement makes it clear that the CFPB will work with its partner enforcement agencies to root out discrimination caused by any tool or system that enables unlawful decision making.” “As social media platforms, banks, landlords, employers, and other businesses that choose to rely on artificial intelligence, algorithms and other data tools to automate decision-making and to conduct business, we stand ready to hold accountable those entities that fail to address the discriminatory outcomes that too often result,” said Assistant Attorney General Kristen Clarke of the Justice Department’s Civil Rights Division. To view the full joint statement, please visit this link. 

ECOA is a civil rights law that prohibits creditors from discriminating against any applicant “with respect to any aspect of a credit transaction” on a prohibited basis, including “race, color, religion, national origin, sex or marital status, or age.” 15 U.S.C. § 1691(a)(1). The CFPB has authority to enforce ECOA and to interpret, and issue rules under, the statute. See 15 U.S.C. §§ 1691b(a), 1691c(a)(9), 1691e(e). The rules implementing ECOA are known as Regulation B. See 12 C.F.R. pt. 1002. One form of discrimination prohibited under ECOA is discriminatory targeting (also called “reverse redlining” or “targeted predatory lending”). Discriminatory targeting is the act of targeting unfair or predatory lending acts or practices to certain groups on a prohibited basis, which may be proven through either intentional targeting or disparate impact. 

In Roberson v. Health Career Institute LLC, plaintiffs represent a putative class of Black students who enrolled at a for-profit nursing school. Plaintiffs allege that the school extended and arranged for students to take out credit to pay for the program in the form of federal and private student loans and adopted new policies, while students were enrolled, that increased the amount of time and money it would take students to complete the program. Thus, plaintiffs allege that the school intentionally targeted its program to individuals on the basis of race, with the understanding that they were highly likely to require an extension of credit to pay for the program. However, in its motion to dismiss, the school argues that “[p]laintiffs fail to specify any aspect of any credit transaction that they allege is discriminatory based on race (or any other protected class under the [ECOA]) and fail to identify any specific loan term that they allege was unfair or predatory, let alone unfair or predatory based on race.” 

In its Statement of Interest, the CFPB argues that ECOA language prohibits discrimination “with respect to any aspect of a credit transaction.” Based on this language, the CFPB argues that “even where loan terms are not themselves unfair or predatory, a plaintiff may still proceed with a discriminatory targeting claim because, contrary to Defendants’ suggestion otherwise, ECOA covers every aspect of a credit transaction, not just the loan terms in the four corners of the contract.”   

The CFPB’s Statement of Interest is part of a recent trend to expand the scope of ECOA language beyond its terms. To view the CFPB’s full Statement of Interest in Roberson v. Health Career Institute LLC, please visit this link. 

The framework is centered around the definition of an abusive act or practice (as defined in 12 U.S.C.A. § 5531). The definition includes an act or practice that (1) Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (2) Takes unreasonable advantage of:

• A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
• The inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or
• The reasonable reliance by the consumer on a covered person to act in the interests of the consumer.

Material Interference:

Material interference can be shown when an act or omission obscures, withholds, de-emphasizes, renders confusing, or hides information that the consumer would need to understand the terms and conditions of a transaction. For example, the Bureau cites buried or withheld disclosures, digital interference with user experience, and user interfaces that make the terms and conditions of a transaction less accessible as potentially material interferences. Notably, the entities intent to interfere is not a required element to finding an act or practice abusive as material interference, so an entity’s act or practice could be found to be abusive even if it was never intended to be.

Lack Of Understanding:

This part focuses on consumer’s “gaps in understanding” regarding material risks, costs, or conditions of the product or service. The Bureau points out that it is not required to find that the entity actually caused the consumers lack of understanding to find the entity was acting abusively in taking unreasonable advantage of such a lack of understanding.

Inability of Consumer to Protect Interests:

This section focuses on entities take advantage of consumers’ unequal bargaining power and inability to protect their interests. This includes both monetary and non-monetary interests such as time or effort necessary to obtain consumer financial products, or time required to remedy problems arising with those products. Additionally, relationships where consumers have little to no choice in providers (for example third party loan servicers) while not per se abusive, are subject to closer scrutiny for potentially taking unfair advantage of consumers inability to protect their own interests.

Reasonable Reliance:

Lastly, this section addresses entities taking unreasonable advantage of reasonable consumer reliance on the entities communications or expected role in a transaction. This can arise in two forms. The first form is consumer reliance based on the communication of the entity that it will act in the consumers best interest through advertising or any other means. The second form of reasonable reliance exists where an entity assumes a role of acting on behalf of consumers or helping them select providers in the market.  In both situations consumers should be able to expect that such relationships are free of manipulation, steering, or self-dealing.

The above is a brief summary of the policy statement, for further information and to view the policy statement in its entirety please visit this link.

California’s Office of Administrative Law (OAL) has approved the California Privacy Protection Agency’s (CPPA) first substantive rulemaking package to further implement the California Consumer Privacy Act (CCPA). The approved regulations update existing CCPA regulations to harmonize them with amendments adopted pursuant to Proposition 24, the California Privacy Rights Act (CPRA); operationalize new rights and concepts introduced by the CPRA to provide clarity and specificity to implement the law; and reorganize and consolidate requirements set forth in the law to make the regulations easier to follow and understand. They place the consumer in a position where they can knowingly and freely negotiate with a business over the business’s use of the consumer’s personal information.

What this Means to You

The approved regulations are effective immediately. These regulations and the CCPA’s statutory requirements are in effect and businesses, including eligible financial institutions, are required to comply. However, civil and administrative enforcement of the provisions of law added or amended by the CPRA will not begin until July 1, 2023, and will only apply to violations occurring on or after that date.

For more information about the final regulations, visit California’s California Consumer Privacy Act Regulations webpage.

Section 1071 amended the Equal Credit Opportunity Act (ECOA) to require covered financial institutions to collect and report data regarding covered credit applications made by women-owned, minority-owned, and small businesses, including but not limited to: the purpose of the loan, amount applied for and approved, actions taken, and the race, sex, and ethnicity of the business owners.¹

Notably, the Final Rule defines a “covered financial institution” as a financial institution that originated at least 100 covered credit transactions (rather than 25, as proposed) for small businesses in each of the two preceding calendar years.² The Final Rule also includes key definitions for what are now considered a covered application,³ credit transaction,⁴ and small business.⁵ 

The CFPB has published a filing instructions guide for financial institutions to use in reporting the collected data. Data collected may be complied, aggregated, and made available to the public by the CFPB.⁶ 

Financial institutions will need to determine if they are a covered financial institution annually by counting their number of covered originations,⁷ and must begin complying with the Final Rule beginning October 1, 2024, April 1, 2025, or January 1, 2026.⁸ 

An executive summary of the Final Rule can be found here. 

Compliance Systems continues to monitor this new regulation for developments and any impact to our solution. 

¹ See 15 U.S.C. § 1691c-2.
² See 12 CFR § 1002.105(b).
³ “Covered application” means an oral or written request for a covered transaction that is made in accordance with procedures used by a financial institution for the type of credit requested with certain exceptions. See 12 CFR § 1002.103(a).
⁴ “Covered credit transaction” generally means an extension of business credit other than trade credit, Home Mortgage Disclosure Act-reportable transactions, insurance premium financing, public utilities credit, securities credit, or incidental credit. See 12 CFR § 1002.104.
⁵ “Small business” means a business, other than a governmental entity or a non-profit business, with gross annual revenue of $5 million or less in its preceding fiscal year. See 12 CFR § 1002.106(b).
⁶ See 12 CFR §1002.110.
⁷ A “covered origination” is a covered credit transaction that the financial institution originated to a small business. See 12 CFR 1002.114(b).
⁸ See 12 CFR § 1002.114(b).

• A credit union’s total assets as of December 31, 2022, exceeded $54 million; 
• The credit union had a home or branch office in a Metropolitan Statistical Area on December 31, 2022; 
• The credit union originated at least one home purchase loan (other than temporary financing such as a construction loan) or refinanced a home purchase loan, secured by a first lien on a one-to-four-unit dwelling during 2022; and 
• The credit union originated at least 25 covered closed-end mortgage loans in each of the two preceding calendar years (2021 and 2022) or at least 200 covered open-end lines of credit in each of the two preceding calendar years (2021 and 2022). 

If the credit union meets all four criteria, it must collect HMDA data during calendar year 2023 and submit the data to the CFPB no later than March 1, 2024. If your credit union does not meet all four criteria, it is exempt from filing HMDA data for mortgage loan applications processed in calendar year 2023. 

Section 1003.3(c) of Regulation C lists excluded (not covered) transactions from HMDA requirements. To view the full NCUA regulatory alert, please visit this link. 

• Promotion of Farmer Mac’s operations of sufficient capital for unexpected losses and continued growth,
• Assurance that Farmer Mac operates under a transparent capital framework,
• Evaluate if and how the FCA should incorporate parts of other regulatory frameworks to enhance the Farmer Mac framework and if modifications are required, and
• Complete a cost benefit analysis of updating the FCA’s capital regulations for Farmer Mac.

The FCA has extended the comment period of this ANPRM until April 26, 2023. Comments may be submitted by any of the following methods:

• Email: Send an email to reg-comm@fca.gov.
• FCA website: http://www.fca.gov. Click inside the ‘‘I want to . . .’’ field near the top of the page; select ‘‘comment on a pending regulation’’ from the dropdown menu; and click ‘‘Go.’’ This takes you to an electronic public comment form.
• Mail: Joseph T. Connor, Acting Director, Office of Secondary Market Oversight, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102–5090.

To view the full details of advanced notice of proposed rulemaking, please visit the following: Federal Register January 24, 2023 and Federal Register March 27, 2023

• In Regulation B, implementing ECOA, the CFPB is amending appendix A, which contains Federal agency contact information that creditors must include in ECOA adverse action notices. The CFPB is correcting the contact information in appendix A for the following agencies: the CFPB; the Office of the Comptroller of the Currency (OCC); the Federal Deposit Insurance Corporation (FDIC); the National Credit Union Administration (NCUA); the Department of Transportation (DOT); the Surface Transportation Board (STB); the United States Department of Agriculture, Agricultural Marketing Service (USDA-AMS); the United States Small Business Administration (SBA); the Securities and Exchange Commission (SEC); and the Federal Trade Commission (FTC). The CFPB is also correcting its own contact information in appendix D, which sets forth the process by which entities may request official CFPB interpretations of Regulation B, and removing an obsolete sentence located in section 1002.9(b)(1). 
• In Regulation E, implementing the Electronic Fund Transfer Act (EFTA), the CFPB is correcting and updating its own contact information in appendix C, which sets forth the process by which entities may request official CFPB interpretations of Regulation E. Appendix C to Regulation E currently designates the “Associate Director and other officials of the Division of Research, Markets, and Regulations” as the officials authorized under the Act to issue official interpretations. Because the Division of Research, Markets, and Regulations no longer exists, the CFPB is updating this language to reflect that fact, and instead indicate more generally that “duly authorized officials of the Bureau” may provide official interpretations of Regulation E. 
• In Regulation F, implementing the Fair Debt Collection Practices Act (FDCPA), the CFPB is correcting its own contact information in appendix A, which sets forth the process by which States may apply to the CFPB to exempt a class of debt collection practices from the requirements of the FDCPA and Regulation F, and in the introduction section of Supplement I, which sets forth the process by which entities can request official interpretations of Regulation F. 
• In Regulation J, implementing the Interstate Land Sales Full Disclosure Act (ILSA), the CFPB is correcting its own contact information in appendix A, which contains model forms and clauses that land developers must provide to prospective land buyers under certain circumstances. 
• In Regulation V, implementing the FCRA, the CFPB is amending the model form in appendix K for the Summary of Consumer Rights. Consumer reporting agencies must provide a Summary of Consumer Rights when making a written disclosure of information from a consumer’s file or providing a credit score to a consumer, and the FCRA also requires certain other persons to provide a Summary of Consumer Rights to consumers under specified circumstances. The CFPB is correcting the contact information in the Summary of Consumer Rights model *16532 form for the following agencies: the OCC, FDIC, NCUA, DOT, STB, USDA-AMS, and SBA. The CFPB is also amending the Summary of Consumer Rights model form to update references to obsolete business types and to make other technical corrections. 
• In Regulation X, implementing the Real Estate Settlement Procedures Act (RESPA), the CFPB is correcting its own contact information in the definition of “Public Guidance Documents” in section 1024.2(b), which contains the procedure by which entities can request copies of public guidance documents from the CFPB, and in the introduction section of Supplement I, which sets forth the process by which entities can request official interpretations of Regulation X. 
• In Regulation Z, implementing the Truth in Lending Act (TILA), the CFPB is correcting its own contact information in appendices A, B, and C. Appendix A sets forth the process by which States may request a determination from the CFPB regarding whether a State law is inconsistent with or substantially the same as TILA and Regulation Z. Appendix B sets forth the process by which States may apply to the CFPB to exempt a class of transactions from the requirements of TILA and Regulation Z. Appendix C sets forth the process by which entities may request official CFPB interpretations of Regulation Z. The CFPB is also correcting its own contact information in the comment for appendix J, located in the Official Interpretations in Supplement I. Appendix J sets forth the actuarial equations and instructions for calculating the annual percentage rate in closed-end credit transactions. The CFPB maintains Annual Percentage Rate Tables to assist in performance of these calculations, and the comment for appendix J in the Official Interpretations describes a process that entities may use to request these tables from the CFPB. In addition to correcting the CFPB’s zip code in its postal address provided there, the CFPB now makes the tables available to the public on its website and is updating the comment to appendix J in the Official Interpretations to add a URL at which the public may access the website. 
• In Regulation DD, implementing the Truth in Savings Act (TISA), the CFPB is correcting its own contact information in appendix C, which sets forth the process by which States may request a determination from the CFPB regarding whether a State law is inconsistent with TISA and Regulation DD. 

The rule is effective April 19, 2023. However, the mandatory compliance date for the amendments to appendix A to Regulation B, appendix A to Regulation J, and appendix K to Regulation V is March 20, 2024. To view the CFPB’s final rule in its entirety, please visit this link.