June 2023 Newsletters

Coming Soon: Section 1033 – Open Banking

The 2010 Dodd-Frank Act, an overhaul of the U.S. regulatory system passed in response to the 2008 financial crisis, continues to be a source of regulatory change for financial institutions. Most recently in the spotlight is Section 1033, a section for which the CFPB (Consumer Financial Protection Bureau) has yet to draft regulations but has indicated in a recent blog post that regulations should be coming soon.  The CFPB has set expectations for a proposed rule in a few months and a final rule in 2024.

For a refresher on what Section 1033 covers, it addresses banks making information under their control available to consumers about the financial products or services that the consumer obtained from the bank. In the view of the CFPB’s director, the goal of Section 1033 is a more competitive market where consumers will be able to earn higher rates on savings, pay lower rates on loans, and manage their finances more efficiently.

If this sounds vaguely familiar, this isn’t the first time the CFPB has dealt with Section 1033. In November 2020, the CFPB published an Advanced Notice of Proposed Rulemaking (ANPR), which had a comment period that closed in February 2021. In the ANPR the CFPB asked for comments to help in developing Section 1033 regulations, specifically regarding the possible scope of protected data, security, privacy, effective consumer control over access and accessed data, and accountability for data errors and unauthorized access. Additional areas on which the CFPB sought comment was how Section 1033 might interact with other statutes, such as the Fair Credit Reporting Act. Nearly 100 comments were submitted, which the CFPB is presumably taking into consideration in drafting the Section 1033 proposed rule anticipated later this year.

Section 1033 is comprised of five sections. Section 1033(a) provides that banks shall make available to consumers, upon request, information in the control or possession of the bank concerning the consumer financial product or service that the consumer obtained from the bank, including information relating to any transaction, series of transactions, or to the account including costs, charges and usage data. This information is to be made available in an electronic form usable by consumers.

Section 1033(b) outlines certain exceptions from these general access rights. For example, a bank may not be required to make available to confidential information, such as an algorithm used to derive credit scores or information that the bank could not retrieve in the ordinary course of its business. Section 1033(c) establishes that banks have no duty to maintain or keep any information about a consumer, pursuant to Section 1033.

Section 1033(d) holds that the CFPB must prescribe standards to promote the development and use of standardized formats for information, and Section 1033(e) requires that the federal bank regulators consult together regarding Section 1033 rules, the requirements on banks, the conditions under which banks do business.

Because the rule has not yet been published no timeline is available for implementation, and it’s still not yet clear exactly what will be expected of banks, once the final rules are in place and effective. Feel free to reach out in the meantime with any questions you have about Section 1033, and anticipate that once the proposed rule is issued, Compliance Alliance will once again be prepared to answer questions, publish tools, and provide training guidance.11

CFPB Looks to Streamline Mortgage Servicing Rules

As is typical for the Consumer Financial Protection Bureau (CFPB), they’re constantly working on multiple issues at the same time. Last week the CFPB’s director published a blog post discussion some of the Bureau’s thoughts about the current state of mortgage servicing. As noted in the post, buying a home is one of the largest and most important financial decisions a family makes. Borrowers who go through the home-buying process will often encounter both lenders and servicers during the life of the loan.

Mortgage servicers are often separate companies which manage mortgage loan accounts and processing loan payments. By the nature of what they do, mortgage servicers function in a critical role in helping and guiding homeowners with repayment. Borrowers normally don’t choose who services their loan, servicers are chosen by the lender that owns the mortgage.  Sometimes the original lender will transfer the ownership and servicing of a mortgage loan and other times the original lender will retain ownership of the loan and only transfer the servicing of the loan.

The 2008 financial crisis and subsequent developments were instrumental in Congress creating the CFPB. One of the driving forces behind the creation of the CFPB was to have the new agency implement new rules to make the mortgage market function better. These mortgage servicing rules first took effect in 2014. The COVID-19 pandemic gave the CFPB an opportunity to see how well the existing mortgage servicing rules were working when unemployment soared. As a result of evaluating the current rules’ effectiveness, the CFPB decided that the rules could be revised to reduce unnecessary complexity.

Last fall, the CFPB asked for input on ways to reduce risks for borrowers who experience disruptions in their ability to make mortgage payments, including input on the mortgage forbearance options available to borrowers. In their Request for Information Regarding Mortgage Refinances and Forbearances, the Bureau sought input on the features of COVID-related forbearance programs and ways to automate and streamline long-term loss mitigation assistance.

Many comments were received, and commenters noted that borrowers seeking help on their mortgages often faced an uphill climb with seemingly endless amounts of paperwork, which ultimately hurts both homeowners and mortgage servicers. This process also commonly included the borrower incurring fees and negative credit reporting while waiting for a resolution to their situation. The temporary pandemic-related changes to the servicing rules were noted to have helped alleviate these problems and accommodate borrowers more quickly.

If recent history is our guide, banks should expect the CFPB to come up with an action plan regarding mortgage servicing rules, including potential changes to the loss mitigation procedures. We’ll have to wait until a proposed rule is published to know for certain what changes might happen, but for starters, the temporary COVID-era changes seem like a step in the right direction in the eyes of the CFPB.  In the meantime, we’re always here to help with any mortgage servicing-related questions you might have.

P2P Platforms and Deposit Insurance

Following the failures of Silicon Valley Bank, Signature Bank, Silvergate Bank, and First Republic Bank, everyone has become more curious about federal deposit insurance coverage, and what is covered in which situations. In a recent Issue Spotlight, the CFPB has highlighted P2P payment platforms (PayPal, Venmo, Cash App, Apple Pay, Google Pay, etc.) to note that funds stored with these providers may not be covered by deposit insurance.

The FDIC deposit insurance system protects depositors at FDIC-insured banks against the loss of their insured deposits up to at least $250,000. Protecting small depositors has been an objective of the deposit insurance system since its founding. However, as new products and services are introduced, it is not always clear to consumers when, or under what conditions, they would be protected by deposit insurance.

P2P payment platforms exist, in part, to electronically transmit funds from A to B.  To accomplish this a consumer opens an account with one of these providers and then links a payment method, such as a bank account or debit card. Consumers can then send funds to another person who has an account with that payment app. Typically, any payments a consumer receives using a payment app are stored on that platform in a stored value account until the consumer requests a transfer of those funds out of their stored value account and into their bank account.

While consumers may perceive a stored value account as functioning like a traditional deposit account, deposit insurance would only apply to funds which are held at an FDIC-insured bank. If the consumers’ funds have not been deposited into an account at the bank, then those funds sitting in the stored value account would not normally be eligible for deposit insurance coverage.

Sometimes a customer’s funds are eligible for pass-through insurance if the customer engages in certain activities using the account, such as opening a debit card, enrolling in direct deposit, using the account to buy or receive crypto assets, or registering the account with the P2P provider’s partner bank. However, user agreements for these payment apps are often confusing about exactly where consumer funds are being held and under what conditions they are insured at a partner bank.

Additionally, some payment apps generate revenue by investing users’ funds in loans and bonds. The payment apps, therefore, have a financial incentive to keep customer funds on their platform in stored value accounts, and not automatically sweep them back to the customer’s bank account.

The implication is clear that funds stored in a payment app, rather than a bank, may be at higher risk of loss. Customer funds invested in securities or other non-deposit products may expose the P2P provider to the risk of insolvency, should the value of the investments decline. These providers could likewise be exposed to risk if customers withdraw their funds all at once. In the event of insolvency, customers may not be the only ones with claims on the P2P’s remaining assets, and even if consumers do not ultimately suffer a loss, they may face significant delays in accessing their funds during the bankruptcy process.

The safest place for consumers to store their money continues to be insured depository institutions. This issue touches bank policy, advertising and marketing, account agreements, and daily interactions with customers, so it’s important that everyone understand what deposit insurance is and how it protects depositors. Feel free to reach out to us on the hotline regarding deposit insurance coverage or anything related to it to see how we can help you and your connections with your customers.