Weekly Fintech Focus

  • The CFPB emphasizes flexibility under ECOA for using AI models to make credit decisions.
  • The CFPB issues FAQs to clarify aspects of a creditor’s responsibility to provide adverse action notices to PPP loan applicants.
  • FATF provides recommendations for countries dealing with new money laundering risks as a result of COVID-19.
  • CFPB report shows substantial decline in monthly consumer credit applications.
  • Visa leads latest investment in Nium.
  • Visa’s Fast Track Program is growing.
  • Shopify and Pinterest launch new channel.

CFPB Issues Fair Lending Report with Focus on Innovations in Credit 

The Consumer Financial Protection Bureau (CFPB) issued its annual fair lending report with a focus on innovative credit practices. One of these innovations is credit decisioning using artificial intelligence (AI) technology and algorithms. The report notes that the existing credit regulatory framework has “built-in flexibility” for creditors that utilize AI. In particular, the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B, and the Fair Credit Reporting Act, require that a creditor provide consumers with an adverse action notice with the main reasons for denying credit or taking other adverse action. As part of the adverse action process, a creditor must provide specific reasons for the adverse action taken.

The current regulatory framework provides flexibility when using AI because a creditor does not need to describe how or why a factor affected an application for credit or how that factor relates to creditworthiness (12 C.F.R. pt. 1002, comment 9(b)(2)-3; 9(b)(2)-4). When using an AI model, the creditor’s reasons for taking an adverse action may not be intuitive, but rather based on connections or relationships drawn by the AI model and that are not particularly easy to explain.

The report also notes that while ECOA and Regulation B require disclosure of a list of reasons for an adverse action, the creditor must accurately describe the factors considered by the creditor, even if those reasons are not reflected on the current model forms that the CFPB provides as appendices to the regulations. Accordingly, creditors may develop their own descriptions of reasons for taking the adverse action that reflect more complex models for credit decisions.

Finally, the CFPB recognizes that AI tools are changing rapidly and so is the industry’s adoption of them. The CFPB anticipates that its methods for evaluating the use of AI models will change over time, and it encourages the industry to engage with the CFPB’s innovation policies to address compliance issues that are not now clear.

CFPB Clarifies Adverse Action Notice Requirements for PPP Loans

The CFPB issued three FAQs related to creditor notifications of adverse action taken on a Small Business Administration (SBA) Paycheck Protection Program (PPP) loan application. Under ECOA and Regulation B, a creditor must take certain actions to notify a credit applicant of adverse actions taken with regard to a credit application. We summarize the CFPB’s positions on these issues as discussed in the FAQs below.

A PPP application submitted to the SBA for loan processing is not a “completed application” under Regulation B until a creditor receives a loan number from the SBA or a response about the availability of funds. As a result, the 30-day notification period of action taken on a completed application does not begin until the creditor receives the loan number from the SBA or the SBA’s response about availability of funds.

If a creditor receives a PPP loan application and refuses to grant the credit request without ever submitting the PPP loan to the SBA, then the creditor has taken an adverse action on the PPP application.

A creditor may deny an application for incompleteness only if an application is incomplete regarding information that the applicant can provide, and the creditor lacks sufficient data for a credit decision. As a result, a creditor cannot deny an application for incompleteness if the creditor has not received a loan number from the SBA or a response about the availability of the funds when the creditor has gathered sufficient data from PPP loan applicant for a credit decision.

FATF Provides Recommendations to Combatting Money Laundering Resulting from COVID-19

The Financial Action Task Force (FATF), an international watchdog focused on money laundering and terrorist financing, published a report on money laundering risks created by and related to the COVID-19 pandemic and good practices and policy responses.

Due to changes in travel, trade, and transportation and other business trends, criminals have moved to different forms of illegal activities. Behavioral trends have shifted drastically all around the world, affecting every aspect of the economy. In particular, there has been a rapid shift to remote work and online commerce, as well as massive government stimulus activities. Criminals are moving quickly to take advantage of these new opportunities, finding new ways to make money and to move funds around the world.  As a result of COVID-19, FATF has found that fraud, an increase in cybercrime, and the misdirection or exploitation of government funds or international financial assistance have been occurring. Criminals are using online financial services and virtual assets to move funds, bypass customer due diligence measures, exploit economic stimulus measures, and misappropriate financial aid and emergency funding.

To combat these developments, FATF recommends quick implementation of measures to respond to these new risks. Countries should coordinate internally to assess the impact of COVID-19 on money laundering risks, strengthen communication in the private sector about these issues, encourage full use of customer due diligence measures, and provide support for electronic and digital payment options.

Industry Developments

CFPB Report Shows Substantial Decline in Monthly Credit Applications

The CFPB documented a substantial decline in consumer credit applications for the month of March in its recent Special Issue Brief. This decline is based on the number of hard credit check inquiries. Specifically, the CFPB noted that there was a decline of 40% in credit card inquiries, 27% in mortgage inquiries, and 52% in auto loan inquires. Notably, the CFPB found that the drops were more pronounced for consumers with higher credit scores, possibly resulting from those consumers having more flexibility with their credit needs.

Visa Leads Latest Investment in Nium

Singapore-based Nium has recently received an undisclosed investment from Visa and a subsidiary of Bank BRI of Indonesia to create a diversified payment infrastructure for consumers, small and mid-size enterprises, large corporations, and other financially institutions. The cross-border payments company offers several micro-service driven solutions for transferring and remitting money and making deposits and other payments.

Nium will also use the recent cash infusion to continue the development of its products and strategic acquisitions as it builds out its vertical expertise in Europe, India, and the United States.

Visa’s Fast Track Program is Growing the Global Fintech Industry

Since going global in 2019, Visa’s Fast Track Program has grown 280% and now consists of over 140 fintech companies. Visa’s program allows businesses to leverage the Visa network to get up and running within a matter of weeks and provides immediate access to Visa’s partners and a larger ecosystem.

Visa’s global head of fintech stated, “our goal is to bring cutting-edge fintechs into the Visa ecosystem, to help them grow and scale their business in record time.”

Shopify and Pinterest Launch New Channel

Pinterest launched a new Shopify channel to enable merchants to connect with new customers and grow sales. Now, U.S. and Canada-based merchants can promote their products via Product Pins on Pinterest in addition to having a new shop tab on their Pinterest profile.

With over 350 million monthly active users and 80% of weekly pinners having made a purchase based on a pin that a user has liked, Pinterest and Shopify are looking to leverage this new integration to gain and serve loyal customers.