Consumer Compliance Outlook: Fourth Issue 2022

News from Washington: Regulatory Updates

The Board of Governors of the Federal Reserve System (Board) issues a final rule to amend Regulation II to clarify the prohibition on network exclusivity.

On October 11, 2022, the Board issued a final rule amending Regulation II (12 C.F.R., part 235), the Board’s implementing regulation for §920 of the Electronic Fund Transfer Act (EFTA). The Dodd–Frank Act added §920 (commonly known as the Durbin Amendment) to the EFTA to regulate interchange fees for electronic debit card transactions and the networks available to process them with the goal of reducing the cost of transaction fees for merchants.

Section 920(b)(1)(B) of the EFTA directed the Board to issue regulations prohibiting issuers or networks from inhibiting the ability of a merchant or its acquirer to choose among the available networks to process a debit card transaction. Without this restriction, merchants or their acquirers might not be able to select a network with lower fees. Section 902(b)(1)(A) of the EFTA requires issuers to provide at least two unaffiliated payment card networks to process electronic debit transactions and prohibits issuers from inhibiting merchants’ ability to direct the network through which a transaction is routed.

On July 20, 2011, the Board issued a final rule to implement §920 of the EFTA, including a prohibition on network exclusivity in 12 C.F.R. §235.7(a). However, the technology to process card-not-present (CNP) transactions was not yet widely deployed in 2011. Since then, most networks have introduced the technical capability to process these transactions. Additionally, the volume of CNP transactions has increased from 10 percent of all debit card transactions in 2011 to 23 percent in 2019.

In analyzing the market since enacting the 2011 rule, the Board found that some issuers were not providing two unaffiliated networks to process CNP transactions. The amendment is designed to address this issue by clarifying that issuers must provide at least two unaffiliated networks through which CNP transactions can be processed. The rule also includes restrictions in §235.7(a) to prevent issuers from circumventing these requirements. The Board explained that certain issuers are actively disabling or failing to enable the CNP capabilities of one or more enabled networks, resulting in fewer than two unaffiliated networks to process CNP transactions. The rule is effective July 1, 2023.

Fannie Mae launches initiative to accelerate multifamily positive rent reporting to help borrowers build credit.

Under its Multifamily Positive Rent Payment Reporting pilot program, Fannie Mae is partnering with three fintech providers to collect renter payment history from multifamily property owners and landlords and transmit such information to the three national consumer reporting agencies (Equifax, Experian, and TransUnion). The credit bureaus will include this positive rent payment history in the consumer’s credit report. Fannie Mae noted that about 20 percent of the U.S. population has little or no credit history, and rent payments are generally not reported to the credit bureaus. Fannie Mae also noted that sufficient credit history helps renters increase their credit scores, which in turn can improve access to a broader range of housing and the ability to qualify for credit products. For the first year of the program, Fannie Mae will pay the designated vendors’ fees charged to the property owners for collecting and transmitting the data.

The Consumer Financial Protection Bureau (Bureau) issued Circular 2022-07 concerning consumers’ disputes of their credit report. On November 10, 2022, the Bureau issued Circular 2022-07 to provide guidance on the duties of consumer reporting agencies (CRAs) and furnishers to investigate consumer disputes of information in their credit report. Because consumer credit reports can affect applications for credit, leasing, employment, and insurance, §611 of the Fair Credit Reporting Act (FCRA) requires consumer reporting agencies, as well as furnishers of credit report information, to investigate consumers’ disputes of information in their report.

Despite this requirement, the Bureau found that credit report errors and the challenges in correcting them continue to be an issue. The Bureau received more than 500,000 complaints about credit or consumer reporting during the first nine months of 2021, with errors topping the list of complaints. The Bureau issued this circular to provide guidance to agencies charged with enforcing federal consumer protection laws and help promote compliance with §611. The circular provides guidance on two questions:

  1. Are consumer reporting agencies and the entities that furnish information to them (furnishers) permitted under the Fair Credit Reporting Act (FCRA) to impose obstacles that deter submission of disputes?

No. Consumer reporting agencies and furnishers are liable under the FCRA if they fail to investigate any dispute that meets the statutory and regulatory requirements, as described in more detail below. Enforcers may bring claims if consumer reporting agencies and furnishers limit consumers’ dispute rights by requiring any specific format or by requiring any specific attachment such as a copy of a police report or consumer report beyond what the statute and regulations permit.

  1. Do consumer reporting agencies need to forward consumer-provided documents attached to a dispute to furnishers?

It depends. Enforcers may bring a claim if a consumer reporting agency fails to promptly provide the furnisher with “all relevant information” regarding the dispute that the consumer reporting agency receives from the consumer. While there is not an affirmative requirement to specifically provide original copies of documentation submitted by consumers, it would be difficult for a consumer reporting agency to prove it provided all relevant information if it fails to forward even an electronic image of documents that constitute a primary source of evidence.

Bureau issues outline of its approach to the Section 1033 rulemaking.

On October 27, 2022, the Bureau released a summary of the outline of proposals it is considering to regulate consumers’ right to access their personal financial data. Section 1033(a) of the Dodd–Frank Act authorizes the Bureau to issue regulations requiring financial institutions to provide account data to consumers upon request. The rulemaking will affect the growing use of this data by fintech companies and others. For example, consumers can sign up with data aggregators to collect and aggregate their financial account information so consumers can see their financial picture in one place.

Similarly, algorithms have been developed that analyze consumer bank account transaction data to evaluate consumers’ creditworthiness. But before the Bureau can issue regulations to implement §1033, it is required under the Small Business Regulatory Enforcement Fairness Act (SBREFA) to consult with a panel of small businesses representatives about the likely impact of the regulations on small entities. In October, the Bureau released an outline of proposals it is considering for the §1033 rulemaking. The proposals would address the following topics:

Following the conclusion of the SBREFA process, the Bureau can begin drafting a rulemaking proposal.

The Board expects to launch its FedNow payment service in 2023.

On August 29, 2022, the Board announced that it expects to launch its FedNow payment service between May and July 2023. FedNow is the Federal Reserve’s service for participating financial institutions that will allow consumers and businesses to instantly transfer payments at any time on any day. For example, a consumer could initiate a payment to a repairman from the consumer’s bank account to the repairman’s bank account at another institution that would be received instantly.

Currently, payment transfers through the Automated Clearing House typically settle within one-to-three business days. Payment recipients will have full access to the funds immediately, providing greater flexibility to manage time-sensitive payments. More than 120 organizations are now participating in the pilot program. This announcement follows the June 6, 2022, final rule the Board issued to provide the legal framework for FedNow.

Board issues guidance to Federal Reserve-supervised banking organizations engaging in crypto-asset-related activities.

On August 16, 2022, the Board published Consumer Affairs letter 22-6/Supervision Regulation letter 22-6 to provide guidance on the Board’s expectations for the institutions it supervises regarding crypto-asset activities. The letter notes that the emerging cryptosector provides opportunities for financial institutions but also poses risks, including compliance risk. “Crypto-assets pose significant consumer risks such as those related to price volatility, misinformation, fraud, and theft or loss of assets. In addition, banking organizations engaging in crypto-asset-related activities face potential legal and consumer compliance risks stemming from a range of issues, including, for example, uncertainty regarding the legal status of many crypto-assets.” The letter also discusses risks in technology and operations, anti-money laundering, and financial stability.

The letter encourages any Federal Reserve-supervised banking organization engaging or seeking to engage in crypto-asset–related activities to notify its lead supervisory contact at the Federal Reserve and to have in place adequate systems, risk management, and controls to conduct such activities in a safe and sound manner and consistent with applicable laws. Supervised institutions must also determine, before engaging in a crypto-asset–related activity, that it is legally permissible and whether any filings are required under applicable federal or state laws.