BPInsights: September 13, 2019 - Bank Policy Institute

Top of the Agenda

The Future of Credit Underwriting: Artificial Intelligence and Its Role in Consumer Credit

On September 9, the Bank Policy Institute hosted a symposium on Capitol Hill on “Expanding Access to Credit Through Artificial Intelligence and Machine Learning.” In conjunction with the event, BPI and the law firm of Covington & Burling LLP (Covington), developed a Discussion Draft to solicit input and views from relevant stakeholders on the appropriate regulatory framework for the use of artificial intelligence and machine learning (collectively, “AI”) in credit underwriting. The event brought together industry experts, policymakers, regulators and lawmakers – including Congressman Bill Foster (D-IL), Chair of the Task Force on Artificial Intelligence, and Task Force Ranking Member Congressman French Hill (R-AR) – to explore the current regulatory landscape and the potential ways in which to enhance the ability of institutions to engage in responsible AI implementation in credit underwriting.

The use of AI in credit underwriting could be an important step forward in expanding the availability and reducing the cost of consumer financial services, particularly for consumers who may be underbanked or unbanked. BPI believes AI has great potential to allow banks to offer additional opportunities for consumers to qualify for credit, and the Discussion Draft seeks to begin a dialogue among relevant stakeholders to help identify a path that regulators and industry can take to further these objectives. As a part of this effort, and based on the input provided by relevant stakeholders, BPI intends to release a final white paper with recommendations for modernizing regulatory approaches to the use of AI in credit underwriting.

5 Stories Driving the Week

1. Congresswoman Maloney Says the ‘Stars Are Aligned’ for AML Reform

At an event at the Brookings Institution on September 11, Congresswoman Carolyn Maloney (D-NY) said the “stars are aligned” for bipartisan Congressional action to end anonymous shell companies. Maloney is the sponsor of H.R. 2513, the Corporate Transparency Act, a bipartisan proposal that would end the creation of anonymous shell companies, which are routinely used to facilitate money laundering, terrorist financing and other criminal activities. The measure passed the House Financial Services Committee with bipartisan support on June 11. Congresswoman Maloney said she is hopeful the bill will pass the full House in October. “These shell companies leave a gaping hole in our national security strategy and the longer we wait to fix this problem, the longer we put our country at risk,” Maloney said.

2. Senate Confirms Bowman to Full Federal Reserve Term

On September 12, the Senate confirmed Michelle Bowman by a vote of 60-31 for a full 14-year term on the Federal Reserve Board of Governors. Bowman, a former Kansas bank commissioner, became a member of the Board of Governors in November 2018 to fill a term ending January 31, 2020. Bowman fills the Board seat reserved for community banking specialists.

3. BPI Joins Industry, Consumer Coalition in Response to CFPB’s Qualified Mortgage Proposal

On September 9, BPI joined a coalition of mortgage lenders, trade associations, and consumer advocacy groups in a letter responding to the CFPB’s advance notice of proposed rulemaking on its Ability-to-Repay/Qualified Mortgage (ATR-QM) rule, in light of the impending expiration of a temporary “patch” exempting GSE-backed loans from certain of the rule’s underwriting requirements. The letter makes several recommendations for the ATR-QM rule intended to preserve access to sustainable loans and avoid market disruption with the expiration of the GSE patch. Specifically, the letter urges the removal of the rule’s debt-to-income ratio underwriting requirement, from which the patch currently exempts GSE-backed loans, as well as the preservation and enhancement of the rule’s existing credit risk safeguards and consumer protections.

3. Congresswoman Maloney Says the ‘Stars Are Aligned’ for AML Reform

At an event at the Brookings Institution on September 11, Congresswoman Carolyn Maloney, (D-NY) said the “stars are aligned” for bipartisan Congressional action to end anonymous shell companies. Maloney is the sponsor of the H.R. 2513, the Corporate Transparency Act, a bipartisan proposal that would end the creation of anonymous shell companies, which are routinely used to facilitate money laundering, terrorist financing and other criminal activities. The measure passed the House Financial Services Committee with bipartisan support on June 11. Congresswoman Maloney said she is hopeful the bill will pass the full House in October. “These shell companies leave a gaping hole in our national security strategy and the longer we wait to fix this problem, the longer we put our country at risk,” Maloney said.

4. CFPB Issues Final No-Action Letter and Compliance Assistance Sandbox Policies

On September 10, the Consumer Financial Protection Bureau published final policies for its No-Action Letter (NAL) and Compliance Assistance Sandbox (CAS) processes. Both policies generally appear to be similar to the proposals. For both policies, CFPB provides for a more defined alternative process for applications by third parties, known as the “NAL Template” and “CAST Template.” In addition, under the CAS (formerly, Product Sandbox), the CFPB clarifies that approvals of consumer financial products or services are intended to “confront” regulatory uncertainty by providing binding assurance related to Federal consumer financial laws and their application to specific aspects of those products or services. The CFPB also issued its first NAL Template to HUD on behalf of more than 1,600 housing counseling agencies that participate in HUD’s housing counseling program.

5. Lauren Anderson, Former Senior Advisor at the Bank of England, To Join BPI’s Regulatory Affairs Team

On September 12, the Bank Policy Institute announced it has hired Lauren Anderson to the role of Senior Vice President & Associate General Counsel. Ms. Anderson will formally join the organization on October 28 and will oversee BPI’s advocacy across a range of domestic and international issues, including bank recovery and resolution planning, policies to address too big to fail reforms and cross-border banking (focusing on host country treatment of foreign banks). She brings with her over a decade of experience in financial regulation and resolution oversight, most recently serving as Senior Advisor at the Bank of England and, before joining the Bank of England, serving as Special Advisor to the Deputy of Policy at the FDIC.

In Case You Missed It

FASB Releases LIBOR Accounting Standards Update
On September 5, the Financial Accounting Standards Board (FASB) released a proposal to ease the potential burden in accounting for or recognizing the effects of LIBOR rate reform on financial reporting. The proposal provides exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships and other transactions if they reference LIBOR, are made or entered into prior to December 31, 2022, and meet certain other criteria. Comments are due October 7.

OCC Approves Fifth Third Petition to Convert to National Charter
On September 10, Politico reported that the Office of the Comptroller of the Currency approved an application from Fifth Third Bank to convert to a national bank from a state bank. The move would make the OCC its primary regulator rather than the Federal Reserve. “The national bank charter continues to have great value in providing banks a flexible regulatory framework that enables them to successfully conduct their businesses across the nation under a single prudential supervisor and meet the needs of the customers and communities they serve in a safe, sound and fair manner,” Comptroller Joseph Otting said in a statement to Politico.

Senate Banking Committee Holds Housing Reform Hearing
The Senate Banking, Housing and Urban Affairs Committee held a hearing on September 10 on housing finance reform, with testimony from Treasury Secretary Steven Mnuchin, Housing and Urban Affairs Secretary Ben Carson and Federal Housing Finance Agency Director Mark Calabria. On September 5, the Treasury Department released a plan for comprehensive housing finance reform, including a pathway to end conservatorship of government-sponsored enterprises Fannie Mae and Freddie Mac.

Fed Proposes Changes to Banking Organization Systemic Risk Report
On September 10, the Federal Reserve proposed revisions to its Banking Organization Systemic Risk Report (FR Y-15), used to determine whether a financial institution is designated a globally systemically important bank (GSIB), and for purposes of the pending macroprudential tailoring rules for U.S. bank holding companies (BHCs) and intermediate holding companies (IHCs), for reports reflecting year-end 2019 reporting. The proposal would require the addition to the complexity indicators (Schedule D) of a line item for equity securities with readily determinable fair values not held for trading; trading volume items to the memoranda section of the substitutability indicators (Schedule C) to capture secondary market activity; and addition of foreign derivative claims, total cross-jurisdictional claims, foreign derivative liabilities, other foreign liabilities, and total cross-jurisdictional liabilities to the memoranda section of cross-jurisdictional activity indicators (Schedule E).

Basel Committee Releases FAQs for Standardized Approach for Operational Risk
On August 14, the Basel Committee on Banking Supervision (Basel) published its first set of FAQs on the standardized approach for operational risk capital set forth in its 2017 “Basel IV” framework. The seven FAQs are part of Basel’s effort to promote a consistent international implementation of the new standard, and they address treatment of refunds due to overbilling, conversion of losses from foreign subsidiaries into local currency, and treatment of losses from outsourced activity, among other topics.

NIST Releases Updated Draft Privacy Framework
The National Institute of Standards and Technology (NIST) released the latest version of a draft privacy framework on September 6. The framework is meant to help government and private industry manage the risks of holding personal data. The privacy framework was developed to align with NIST’s existing cybersecurity framework and follows the same structure. It will serve as a benchmarking tool against which firms will be expected to assess their privacy practices.

In the framework, NIST acknowledges the link between cybersecurity and privacy, but stresses the differences between the two, writing that “while managing cybersecurity risk contributes to managing privacy risk, it is not sufficient, as privacy risks can also arise outside the scope of cybersecurity risks.”

CFPB Seeking Government Partners To Ease Industry Supervision
Consumer Financial Protection Bureau Director Kathleen Kraninger announced on September 9 that the Bureau is “looking for ways to ease the supervision process for the financial institutions by partnering with other regulators.” At a meeting of the National Association of Federal Credit Unions, Kraninger said that the Bureau is “taking a fresh look at the entire” supervision process, with an eye to eliminating areas where its supervision overlaps with and duplicates other agencies’ efforts, as reported by Bloomberg. She said the Bureau will look to ways to use technology to update exams and partner with other agencies on supervision.

Upcoming Events

9/17/19 — FDIC Hosts Board Meeting
9/17/19 — Senate Judiciary Committee Subcommittee Antitrust, Competition Policy and Consumer Rights Hearing on “Oversight of the Enforcement of the Antitrust Laws”
9/17/19 — Federal Reserve FOMC Meeting
9/18/19 — House Financial Services Markup
9/24/18 — House Financial Services SEC Oversight Hearing
9/24/19 — House Financial Services Subcommittee Hearing on Racial and Gender Wealth Gap
9/25/19 — House Financial Subcommittee Hosts Hearing Titled “Promoting Financial Stability: Assessing Threats to the U.S. Financial System
9/25/19 — House Financial Subcommittee Hearing on Protecting Seniors: A Review of the FHA’s Home Equity Conversion Mortgage (HECM) Program
9/26/19 — House Financial Services Hearing on Real-Time Payments
9/26/19 — House Financial Services Debt Collection Hearing: Examining Legislation to Protect Consumers and Small Business Owners from Abusive Debt Collection Practices
11/19/2019 — The Clearing House + BPI 2019 Annual Conference: The Clearing House and BPI will host the 2019 Annual Conference from November 19 to 21. The event provides a forum for the industry’s leaders to examine the changing dynamics of the bank regulatory and payments landscapes with two and half days of high-level keynote speakers, in-depth expert panels, and networking.

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