On November 30, 2020, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) granted a no-action letter (“NAL” or “Letter”) to Upstart Network, Inc. (“Upstart”), a company that that has developed a model incorporating alternative data and machine learning for use in making credit underwriting and pricing decisions. The NAL specifically addresses Upstart’s “automated model for making underwriting and pricing decisions with respect to applications by consumers for unsecured, closed-end loans.” Under the terms of the NAL, the Bureau will not make supervisory findings or bring an enforcement action against Upstart under certain sections of the Equal Credit Opportunity Act and Regulation B or under the Bureau’s authority to prevent, unfair, deceptive, or abusive acts or practices (“UDAAPs”) concerning alleged discrimination on a prohibited basis arising from Upstart’s use of its model for making underwriting and pricing decisions on applications by consumers for unsecured, closed-end loans. The CFPB updated its NAL Policy last year, and this Letter was issued consistent with those guidelines. The NAL expires three years after the date of the Letter. The NAL represents another step forward toward regulatory acceptance of the use of alternative data and machine learning models for credit underwriting.
Continue Reading The CFPB Issues Second No Action Letter to Facilitate the Use of Alternative Data and Machine Learning in Lending Decisions
CFTC’s Civil Monetary Penalty Guidance: A Perspective from a Former CFTC Regulator
On May 20th the U.S. Commodities Futures Trading Commission (the “CFTC”) Division of Enforcement (the “Division”) announced new guidance for Division staff to consider when recommending civil monetary penalties in an enforcement action (the “CMP Guidance” or the “Guidance”). As a former CFTC regulator who brought dozens of cases over a 13 year career in
CFTC Extends Certain Comment Periods for Pending Proposed Rules in Response to Covid-19
On April 10, 2020 the Commodity Futures Trading Commission ( the “CFTC” or the “Commission”) extended certain currently-open comment periods for several pending proposed rules in light of the COVID-19 pandemic. The Commission completed voting to adopt the relatively short extensions on Thursday, April 9. The measure passed by a final tally of 3-2, with both the Democratic commissioners dissenting on the basis that the extensions were too short, making them meaningless. Of the extensions, Chairman Heath P. Tarbert said “[t]hese extensions reflect my commitment to providing market participants with additional flexibility during this pandemic. Commenters on recently proposed rules will now have at least 90 days, and in many cases more, to provide feedback that we value tremendously as we seek to finalize rules.”
After consultation with market participants, in order to identify relief and assistance that would support orderly and liquid markets, the Division of Market Oversight (“DMO”) sought to extend the comment period for the five proposed rules discussed below. The extensions are applicable to rules proposed by DMO with comment periods that began in January and February of 2020. Extensions were approved to allow the comment periods for all the proposed rules relating to swap data reporting to terminate on the same date – May 22, 2020.
Financial Group Urges Senate to Advance SAFE Banking Act
On March 6, 2020, the American Bankers Association (“ABA”), on behalf of the banking industry in 49 states and Puerto Rico, sent a letter to leaders of the Senate Banking, Housing and Urban Affairs Committee (the “Committee”) urging them to advance a bill that would expand banking access for legal marijuana businesses, the Secure and Fair Enforcement Banking Act of 2019 (the “SAFE Banking Act,” S. 1200).
In September 2019, the U.S. House of Representatives overwhelmingly passed H.R. 1595, the SAFE Banking Act. The SAFE Banking Act would allow banks to serve marijuana-related businesses in states where the activity is legal. It does not facilitate marijuana sales in states that have chosen not to legalize the drug.
In its letter the ABA stated that, while their members do not take a position on the legalization of marijuana, they are committed to serving the financial needs of their communities. The letter explained, “thirty-three states covering 68 percent of the nation’s population have legalized marijuana for medical or adult-use, and the issue could appear on as many as 10 state ballots this November.” Current federal law, including the Controlled Substances Act, prevents banks from providing services to marijuana businesses without fear of federal sanctions. As a result, according to the ABA, local marijuana businesses and service providers to such businesses are forced to operate on an all-cash basis, which in turn creates serious “public safety, revenue administration and legal compliance concerns in local communities.”
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IOSCO Issues Report on Risks Relating to Crypto-Asset Trading Platforms
On February 12, 2020, the Board of the International Organization of Securities Commissions (“IOSCO”) released a report titled Issues, Risks and Regulatory Considerations Relating to Crypto-Asset Trading Platforms. The report describes the risks associated with crypto-asset trading platforms (“CTPs”) and sets forth key considerations for regulators in addressing such risks. IOSCO is an association of primary securities and futures regulators from over 100 different nations. The U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission are ordinary and associate members, respectively, of IOSCO.
To prepare this report, IOSCO first issued a consultation report on May 28, 2019, which included a survey of the approaches member jurisdictions were currently undertaking or considering with respect to CTPs. The final report draws upon the consultation report and includes a summary of the survey’s findings.
The report notes that many of the issues and risks associated with trading on CTPs are similar to the issues and risks associated with trading traditional securities or financial instruments on trading venues. Consequently, IOSCO states that the three core objectives of securities regulation are relevant in the crypto-asset context. The three core objectives are: (1) protection of investors; (2) ensuring that markets are fair, efficient and transparent; and (3) reduction of systemic risk. Supporting these objectives are principles that foster efficient markets, including: effective price discovery, appropriate transparency, market integrity, and fair access. The final report, to assist regulators in evaluating CTPs under their purview, sets forth the following list of key considerations:
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FDIC Chairman McWilliams Speaks at Community Development Bankers Association Meeting
On June 4, 2019, Jelena McWilliams, the Chairman of the Federal Deposit Insurance Corporation (“FDIC”), addressed the Community Development Bankers Association. Her remarks emphasized the importance of community banking in the U.S. economy while also touching upon a number of related topics including Minority Depositary Institutions (“MDIs”), the Community Reinvestment Act (“CRA”), Small-Dollar Lending and Innovation.
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CFPB Director Kraninger Outlines Approach in First Major Speech
On April 17, 2019, CFPB Director Kathleen Kraninger outlined her approach in executing the Bureau’s statutory mission in a speech to the Bipartisan Policy Center. This was Director Kraninger’s first major speech since taking the helm at the Bureau. Kraninger’s remarks were organized around the tools that the Bureau will utilize to advance its core
The Latest Brexit Chaos: What Does it Mean for Derivatives Markets?
The past few weeks have been chaotic for both Brexit negotiations and U.K. politics overall. On January 15, 2019, British Prime Minister Theresa May’s Brexit plan succumbed to historic defeat in Parliament. Brexit watchers expected a defeat but the record margin of 432 votes against, and 202 votes for, was still shocking. On January 16, 2019, the Prime Minister narrowly survived a vote of no-confidence in her government. On Monday, she submitted to Parliament a Plan B for Brexit with a vote on such plan scheduled for tomorrow, January 29th. Against this backdrop of upheaval and uncertainty, derivatives markets must still function and, over the past few months, the European Commission ( the “EC” or the “Commission”) has taken steps to mitigate the negative impacts of a possible no-deal Brexit. Nevertheless, issues and market concerns remain.
No Deal Brexit and the Limits of EU Equivalence
If anything, recent activities in the U.K. have heightened expectations of a no-deal Brexit. For months now, investors and advisors, particularly those in the U.K., have been flagging concerns about the impact of Brexit on the derivatives industry, including fragmented markets and liquidity shortfalls.
Facing such risks to the multi-trillion-dollar derivatives market and attendant long-term impacts on its economy, the EC announced on December 12 that it would adopt an equivalence decision to address some, but not all, of the issues associated with a no-deal Brexit. The EC stated it will issue temporary licenses to clearinghouses, recognizing U.K. laws as “equivalent” to EU standards, to ensure that derivatives markets will continue to function with minimal disruption.
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New Guidelines to Assist in Designing Secure Platforms for Processing Payment Transactions
On January 17, 2019, the Payment Card Industry Security Standards Council (the “Council”), a payment industry association, released a new framework for PCI software security – the PCI Software Security Framework – to assist companies in designing and maintaining secure software for processing payment transactions. The framework includes two standards: the PCI Secure Software
Chairman of the CFTC Releases White Paper on Cross-Border Swaps Reform
On October 1, 2018, Chairman Giancarlo of the Commodity Futures Trading Commission (“CFTC” or “Commission”) released a white paper titled “Cross-Border Swaps Regulation Version 2.0: A Risk-Based Approach with Deference to Comparable Non-U.S. Regulation.” The Chairman previewed both his views on cross-border swaps reform and the paper in speeches delivered in London, Tokyo and Singapore