Alston & Bird Consumer Finance Blog

Archives for August 27, 2024

CFPB Submits Comment Letter on Use of AI in Financial Services

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What Happened?

On August 12, the Consumer Financial Protection Bureau (CFPB) submitted a comment letter in response to a Treasury Department Request for Information on the use of AI in financial services.

Why Is It Important?

Reiterating that “there is no ‘fancy new technology’ carveout to existing consumer financial laws,” the CFPB has emphasized that products and services built with innovative technologies must conform with consumer protection laws and regulations, including the Equal Credit Opportunity Act (ECOA), and Unfair, Deceptive, or Abusive Acts or Practices (UDAAP), in both origination and servicing practices.

The CFPB’s comments underscore the sustained regulatory focus on the use of emerging technologies, and the goal of responsible innovation balanced with consumer protection.  The CFPB has made clear that companies must comply with consumer financial protection laws when adopting emerging technology, stating, “[i]f firms cannot manage using a new technology in a lawful way, then they should not use the technology.”

The comment letter emphasizes the CFPB’s focus on the growing use of emerging and innovative technologies in consumer financial services, including machine learning, “traditional” forms of artificial intelligence, and generative artificial intelligence.  As the CFPB balances support for innovation in the consumer space, it is clear that it has set its sights squarely on how those technologies are used, and what the consumer impact may be.

What To Do Now?

Companies using (or considering using) emerging technologies should have clear governance mechanisms to ensure alignment between business priorities and appropriate risk management practices, including where vendors are engaged to provide innovative technology solutions.  There is no one size fits all model, however, and the use case for the technology will drive the primary risk analysis.  As use of emerging technologies continues to expand, ensuring stakeholder involvement and alignment should be a top priority.

VA Issues Guidance on Processing Assumptions with Secondary Financing

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What Happened?

On August 11, 2024 the Department of Veterans Affairs (the “VA”) released Circular 26-24-17, clarifying how a servicer should process an assumption when there is secondary financing.  Significantly, the VA clarified an open question of whether a junior mortgage obtained simultaneously with the assumption of a first-lien VA-guaranteed loan must also be assumable.

Why Does it Matter?

Assumable mortgage loans have been gaining in popularity in our current high interest rate environment.  Often, however, buyers will need secondary financing to make up the difference between the mortgage to be assumed and the purchase price of the property.  There has been a lack of guidance on how to process the assumption of a first-lien VA-guaranteed loan that involves secondary financing, as well as the question of whether such secondary financing must also be an assumable loan.

VA Circular 26-24-17 clarifies that the VA does not prohibit an assumer (regardless of whether a Veteran) of a VA-guaranteed loan from obtaining secondary financing (i.e., a junior lien) in conjunction with an assumption of the VA-guaranteed loan, and that such secondary financing does not need to be an assumable mortgage.  However, if the secondary financing is not assumable, “the holder of the VA-guaranteed loan should counsel the assumer that this may restrict their ability to sell the property to another creditworthy assumer through an assumption in the future.”

Additionally, to protect the VA-guaranteed loan priority, holders are expected to ensure:

  • The secondary financing is subordinate to the VA-guaranteed loan, such as through a subordination agreement.
  • Documentation exists in the loan file that provides the name of the secondary lender, the amount of the secondary borrowing, and the repayment terms of the secondary borrowing agreed to by the assumer.
  • Proceeds of the secondary financing are used for amounts due to the seller at closing as part of the assumption process or allowable closing costs.  Note, that the assumer cannot receive cash back from the secondary financing.
  • Contract terms of the secondary financing include a reasonable grace period before a late charge is assessed and, in the event of default, before the secondary lender may commence foreclosure proceedings. The interest rate can be negotiated between the assumer and the lender and can be higher than the rate on the VA-guaranteed loan.
  • Underwriting decisions include the recurring payment of any secondary financing.

What Do I Need to Do?

Servicers that process assumptions of VA-guaranteed loans should review the circular closely and ensure the requirements are implemented into servicers’ compliance management systems, as this circular took effect immediately when issued on August 11, 2024.

Strike Force on Unfair and Illegal Pricing Holds First Public Meeting: CFPB Director Highlights Work on Junk Fees

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What Happened?

As reported by Alston & Bird’s Antitrust Group, the Federal Trade Commission and the Department of Justice hosted the first public meeting of the Strike Force on Unfair and Illegal Pricing (the “Strike Force”).  President Biden announced the Strike Force’s formation in March 2024 to strengthen interagency efforts to root out and stop illegal corporate behavior that burdens American families through anticompetitive, unfair, deceptive, or fraudulent practices.  Officials from several agencies, including the CFPB, highlighted their work to lower prices across multiple industries for Americans.

Why Does it Matter?

With regards to the CFPB, Director Chopra highlighted some of its work on cracking down on so-called “junk fees,” many of which we have previously highlighted here, here, and here.

The CFPB has been prolific on its junk fee initiative, issuing 14 press releases, 10 blog posts, three enforcement actions, promulgating rules, commissioning eight reports, as well as issuing Advisory Opinions, Circulars and videos. In its prepared remarks at the Strike Force meeting, the CFPB Director outlined the Bureau’s work on junk fees imposed by companies that process payments, in this case for children’s school lunches. In his recent remarks, Director Chopra makes clear, the agency is not stopping and forecasted that:

  • The CFPB is looking at the costs for credit reports and credit scores and using existing laws to ensure that fees for such credit products are “fair and reasonable.”
  • The Bureau is “closely scrutinizing all aspects of the credit card market.”
  • The CFPB is “investigating the role of not just individual executives, but also the investors, like private equity funds, that call the shots.” According to Director Chopra, such controlling investor or other investment vehicle could be subject to direct liability if they are “calling the shots.”

What Do I Need to Do?

Companies subject to CFPB supervision should consult with consumer protection and antitrust counsel to make sure they are not inadvertently engaging in anticompetitive, deceptive, unfair or fraudulent practices, when setting pricing or when imposing, adding, or changing fees.

Companies should also evaluate their pricing and fee practices to ensure they are making independent decisions for setting prices.

When changing pricing or adding fees, companies should look closely at the CFPB’s priorities, which is wide and deep and includes fees in mortgage origination, mortgage servicing, credit cards, and payment processors, among others.