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Nutter Bank Report: November 2024
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- CFPB to Extend Federal Supervision to Large Nonbank Digital Payment Providers
- FinCEN Warns of Fraud Schemes Involving Deepfake Media Created with Generative AI
- FDIC Extends Comment Period for Recordkeeping Rule for Third-Party Accounts
- Federal Reserve Governor Bowman Advocates for Balanced Approach to Regulating AI
- Other Developments: Unbanked Households and Federal Reserve Pricing
Full Reports
1. CFPB to Extend Federal Supervision to Large Nonbank Digital Payment Providers
The CFPB has adopted a final rule to extend its oversight to the largest nonbank providers of digital consumer payment applications, including those that enable transfers from deposit accounts held at banks and other insured depository institutions. According to the CFPB, the final rule announced on November 21 is meant to protect consumers who use popular digital payment applications from misuse of personal data, reduce fraud, and stop unfair “debanking.” The final rule applies to nonbanks that facilitate an annual covered consumer payment transaction volume of at least 50 million transactions (as defined in the final rule) and do not qualify as small business concerns based on applicable size standards established by the U.S. Small Business Administration. The final rule will become effective 30 days after it is published in the Federal Register, which is expected shortly. Click for a copy of the final rule.
Nutter Notes: The final rule gives the CFPB the authority to conduct examinations of covered nonbank companies for compliance with applicable federal consumer protection laws and rules, such as the Electronic Fund Transfer Act and its implementing Regulation E, and the privacy provisions of the Gramm-Leach-Bliley Act and its implementing Regulation P. Among the concerns, the CFPB said that it intends to address under its final rule is unfair debanking, which may occur when a consumer loses access to a digital payment application without notice or a consumer’s ability to make or receive payments is disrupted. The CFPB noted that consumers are growing increasingly reliant on nonbank digital payment applications to access funds held in bank accounts. The CFPB also stated its hope that the final rule will make compliance with federal consumer financial laws and rules more consistent between larger nonbank providers and insured depository institutions.
2. FinCEN Warns of Fraud Schemes Involving Deepfake Media Created with Generative AI
The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued guidance to banks and other financial institutions about how deepfake media may be used in fraud schemes. The guidance released on November 13 is meant to help financial institutions identify fraud schemes facilitated with generative artificial intelligence (“GenAI”) tools. According to FinCEN, criminals have used GenAI to create counterfeit documents, photographs, and videos to circumvent financial institutions’ customer identification, verification, and due diligence controls. The guidance provides advice on detecting and mitigating deepfake identity documents, and detecting, preventing, and reporting suspicious activity related to the use of GenAI tools for fraudulent purposes. Click to access FinCEN’s guidance on fraud schemes involving deepfake media.
Nutter Notes: The alert includes red flags that FinCEN has identified as indicative of possible use of GenAI tools for fraudulent purposes. For example, the guidance warns that if a customer’s photo appears to be internally inconsistent (e.g., it shows visual tells of being altered) or is inconsistent with their other identifying information, the photo may be a deepfake. The guidance also warns institutions to be suspicious of a customer using a third-party webcam plugin during a live verification check, or attempting to change communication methods during a live verification check due to excessive or suspicious technological glitches. The guidance provides examples of how deepfakes may be used to attempt fraudulent transactions, such as family emergency schemes in which criminals use deepfake voices or videos to impersonate a victim’s family member, friend, or other trusted individual to induce a transfer of funds.
3. FDIC Extends Comment Period for Recordkeeping Rule for Third-Party Accounts
The Federal Deposit Insurance Corporation (FDIC) has extended the comment period for its proposed rule on deposit insurance recordkeeping for custodial deposit accounts with transactional features. The FDIC announced on November 18 that the comment period has been extended for 45 days so that public comments on the proposed rule are now due by January 16, 2025. The proposed rule would require that FDIC-insured banks that hold certain custodial accounts would be required to take steps to ensure accurate account records are maintained that show the individual owner of the funds contained in the custodial accounts, including a requirement to reconcile the account for each individual beneficial owner on a daily basis. According to the FDIC, the proposed rule would strengthen recordkeeping for deposits received from non-bank companies that accept such deposits on behalf of both consumers and businesses. Click for a copy of the notice of extension and information about the proposed rule.
Nutter Notes: The new recordkeeping requirements proposed by the FDIC in September would apply to banks that hold custodial deposit accounts with transactional features, other than certain custodial accounts specifically exempted. The term “custodial deposit accounts with transactional features” would be defined as a deposit account that meets each of the following requirements: (1) the account is established for the benefit of beneficial owner(s); (2) the account holds commingled deposits of multiple beneficial owners; and (3) a beneficial owner may authorize or direct a transfer through the account holder from the account to a party other than the account holder or beneficial owner. The scope of the definition is limited to custodial accounts that hold deposits, meaning that other types of custodial accounts, such as those holding non-deposit securities, would be excluded. The proposed rule would exempt custodial accounts where federal or state law prohibits the disclosure of the identities of the beneficial owners of the deposits.
4. Federal Reserve Governor Bowman Advocates for Balanced Approach to Regulating AI
Federal Reserve Governor Michelle W. Bowman recently expressed concern about whether regulators have sufficient tools to promote the benefits of artificial intelligence (AI) in financial services while helping to mitigating the risks associated with its use. In a speech on November 22, at the 27th Annual Symposium on Building the Financial System of the 21st Century, Governor Bowman suggested that regulators must consider how to balance the risks AI may pose to the safety and soundness of individual banks and the overall stability of the financial system with the need to allow for continued innovation in the use of AI. Governor Bowman pointed out that there is evidence that AI tools may be effective in fighting fraud and indicated that regulators should be receptive to the use of AI in circumstances that would protect banks and their customers. Click to access Governor Bowman’s remarks.
Nutter Notes: Governor Bowman specifically addressed the use of AI to potentially expand access to credit for those who are “un-” or “underbanked.” For example, she suggested that AI could be used to better understand creditworthiness on the basis of alternative data to extend credit to consumers with poor or no credit history but with sufficient cash flow to support loan repayment. Governor Bowman acknowledged that using AI in a way that has a direct impact on credit decisions affecting individual customers also presents more substantial compliance challenges than other uses of AI. However, she cautioned that regulatory skepticism of AI could negatively affect competition in the financial system by pushing activities outside of the regulated banking system or preventing the use of AI. Governor Bowman urged a regulatory framework that promotes competition in the development and use of AI financial tools in a safe and sound manner.
5. Other Developments: Unbanked Households and Federal Reserve Pricing
- FDIC Survey Finds Over 95% of U.S. Households Were Banked in 2023
The FDIC on November 12 released the results of a national survey that found that about 4.2% of U.S. households, representing 5.6 million households, were unbanked in 2023, and that another 19.0 million households were considered underbanked. The FDIC’s report also suggests ways in which un- and underbanked households might be reached by the banking system. Click to access the FDIC’s report on the survey.
Nutter Notes: The FDIC reported that the rate of unbanked households in the U.S. fell slightly from 4.5% in 2021. The FDIC also pointed out that the unbanked rates among Black, Hispanic, and American Indian or Alaska Native households remained several times higher than the unbanked rate among White households. The most common reason cited for not having a bank account among unbanked households was, “Don’t have enough money to meet minimum balance requirements,” followed by the second-most common reason, “Don’t trust banks.”
- Federal Reserve Announces 2025 Pricing for Payment Services
On November 22, the Federal Reserve announced pricing, effective January 1, 2025, for payment services that the Federal Reserve Banks provide to insured depository institutions, such as the clearing of checks, ACH transactions, instant payments, and wholesale payment and settlement services. Click to read the Federal Reserve’s announcement.
Nutter Notes: The Federal Reserve Banks estimated that the price changes for 2025 will result in a 2.8% average price increase for “established, mature services.” According to the Federal Reserve, new services like the FedNow Service are not expected to initially have stable costs. Federal law requires that the Federal Reserve establish fees for payment services sufficient to recover the costs of providing the services.
Nutter Bank Report
Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP. Chambers and Partners, the international law firm rating service, after interviewing our clients and our peers in the profession, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. Visit the U.S. rankings at Chambers.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Heather F. Merton. The information in this publication is not legal advice. For further information, contact:
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Michael K. Krebs Tel: (617) 439-2288 |
Matthew D. Hanaghan Tel: (617) 439-2583 |
Kate Henry Tel: (617) 439-2304 |
This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.
