No AI-Induced Hallucinations in Finance, Please
On a scale of 0 to 10, to what extent would you like the financial companies in your life to hallucinate market moves and valuations? How often would you like them to amplify racial biases? How much should they fabricate information on some unknowable whims of foolish financial fancy?
If you answered anything other than zero, then you might just like the unbridled, unregulated release of AI models into the financial sector.
Regulators are now, belatedly, looking at what the financial services industry is already doing as it deploys AI-guided or -enhanced practices. Yes, you ready that right, already doing. Wall Street and AI are already good buddies.
As AI evolves – like techno-protozoa feeding from the primordial Internet ooze – it will introduce new risks into the financial sector. The SEC’s Gary Gensler, among others, have warned of potential financial meltdown in the coming decades if an AI model gets the wrong idea about market goings-on, and then passes those ideas to other AI models.
Earlier this year, the Treasury requested public feedback on the risks posed by the use of artificial intelligence in the financial services sector. AFREF and 24 allies described how oversight is currently “insufficiently robust” and that regulators need to catch up. AI could already harm consumers by amplifying discriminatory patterns in credit markets, increasing consumer costs, and creating barriers to accessible credit. The groups:
called on the Treasury to regulate online surveillance and hyper-targeted marketing that can illegally steer consumers into higher-priced credit and predatory financial products.
urged regulators to strictly oversee all AI/machine learning practices at banks and mortgage lenders to ensure that its use doesn’t fuel discriminatory underwriting and pricing.
pushed for consideration of shortcomings of data generated by automated valuation models for real estate, especially given the history of racial discrimination in lending.
called for scrutiny over whether AI cost-cutting measures could harm vulnerable consumers through the use of AI for debt collection and cost mitigation, or through speech analytics.
raised the possible harm of using chatbots, voice AI and AI collection agents.
Ultimately, the groups want financial regulators to fully enforce civil rights and consumer protection laws for financial products and services powered or enhanced by AI. There are plenty more AI issues related to the financial sector, including privacy protections, fraud by AI bots, and the risk of market manipulation. All of these problems could be harder for regulators to suss out when the mechanisms lurk in the black box of AI.
The Scientific American says ‘ChatGPT Isn’t ‘Hallucinating’—It’s Bullshitting!’ Best to keep the BS out of the banking, right?
BANKING AND FINANCIAL STABILITY: The (Relatively Low) Cost of Regulation – An Industrial-Sized Loophole
CONSUMER: Zelle Scams – Medical Debt and Other Gulf Coast Concerns – Working Overtime – Junk Fees – 2U – No Time to Waste – Enforcement Actions
CAPITAL MARKETS: Shareholder Meetings
PRIVATE MARKETS: Private Equity and Healthcare – Private Equity and Childcare – Private Equity and Harming Pets – Private Real Estate Machines
CRYPTO: Pensions and Crypto – Coinbase Election Violation – DeFi-nite Friction
HOUSING: A Tenant Union’s Tenant Union – Do Your Job, FHLB! – Rents and Pensions – Affordable Housing – Contract-for-Deed – Making Mortgages Easier
CLIMATE AND FINANCE: Solar Lending Scams
POLITICS AND MONEY: Buck the Blockchain’s Electioneering – The Biden Admin’s Corporate Revolving Door – Private Equity Money in Politics
Feedback? Reach us at afrnews@ourfinancialsecurity.org
BANKING AND FINANCIAL STABILITY
The (Relatively Low) Cost of Regulation.
Recessions don’t make new regulatory requirements more expensive, despite the prevailing argument by industry, a paper from the NY Fed suggests. The financial industry often contends that it cannot bear the burden of new regulatory safeguards during economic downturns, but the paper found that during recessions, the cost of new regulation actually decreases. In short: when the people are suffering from economic pressure, “there is more reason, not less reason, to impose more stringent regulations during these downturns.”
An Industrial-Sized Loophole.
Nonbanks can use so-called industrial loan companies (ILCs) to create FDIC-insured institutions that enjoy all the powers of a full-service commercial bank without being subject to the same oversight and prudential standards. AFR has long supported efforts to close the ILC loophole that allows for the creation of these shadow banks. Recently, the FDIC proposed a rule that would change how the agency evaluates applications for ILCs, including by scrutinizing shell companies tied to a single parent, applying safety and soundness rules to legacy ILCs, and closing a loophole on changes in control.
CONSUMER
Zelle Scams.
Zelle, a payment platform co-owned by seven megabanks that lets users instantly transfer money to other users, has been the subject of much scrutiny by lawmakers for its role in facilitating fraud and scams. A recent Senate investigation revealed that victims of scams involving Zelle were denied $560 million worth of rejected reimbursements between 2021 and 2023. Identifying Zelle and other payment apps as hotbeds of scammer activity, House Financial Ranking Member Waters and Sens. Warren and Blumenthal have introduced the “Protecting Consumers from Payment Scams Act,” which would update and clarify the Electronic Fund Transfers Act to address the rise in tech-driven fraud.
Speaking of Zelle: Though the bank is “responding to inquiries” from the CFPB about Zelle fraud, JPMorgan is prepared to sue if the agency decides to bring an enforcement action related to the peer-to-peer platform.
Medical Debt and Other Gulf Coast Concerns.
Like in many places across the country, the burden of medical debt looms large for communities along the Gulf Coast. The issue featured prominently in CFPB Director Chopra’s chats with community leaders, advocates and everyday consumers across Alabama, Louisiana and Texas. It’s why the agency proposed a rule that would wipe medical bills from the credit reports of all Americans earlier this year. AFREF and the Center for Responsible Lending submitted a comment highlighting how racial disparities in medical debt are rooted in structural racism. Said Christine Zinner:
“This proposal will make credit reporting fairer and more accurate for consumers, particularly lower-income individuals and people of color, who — due to decades of systemic racism, redlining, and occupational segregation has driven racial health inequities and undermined access to affordable, quality health care — are more likely to be left with large medical debts on their credit reports, limiting their ability to access affordable credit.”
AFR and over 100 other groups back the CFPB’s proposal.
Also on the minds of Gulf Coast locals: Extreme weather creating an insurance crisis (AFR on that and racially driven bluelining, here) that forces residents into pricey, last-resort insurance plans. Many people also raised mortgage and foreclosure issues. Research suggests that these states have a higher percentage of mortgages 30-89 days delinquent compared to the national average.
Working Overtime.
A decision from the Fifth Circuit, the legal venue that routinely rules in favor of big business, could upend a Department of Labor effort to extend overtime pay protections to millions more workers. Earlier this month, the appeals court heard oral arguments in a case challenging a 2019 update to the Fair Labor Standards Act that raised the overtime wage threshold to $36,600 a year. One business owner contended that the DOL shouldn’t be able to consider how much a worker makes in determining overtime eligibility – just their job duties. The Biden administration has subsequently sought to further expand the rule by setting the threshold to $58,656, which would reach about four million more workers.
Junk Fees.
Earlier this month, the CFPB filed an amicus brief in Salom et al. v. Nationstar Mortgage LLC, in support of a group of plaintiffs who sued the mortgage company for collecting fees that were neither authorized by the underlying contracts or even permitted by law. Nationstar argued that federal law suggests it was allowed to charge an underhanded “pay to pay” fee that consumers would fork over to be told their payoff amounts, but the CFPB disagreed.
2U.
One of the largest and fastest growing online education technology companies, 2U, Inc., has filed for Chapter 11 bankruptcy. The company relied on a mountain of debt to fuel its acquisitions and partnerships with prestigious universities, and the debt load combined with declining revenues tipped it into bankruptcy. Many students using its programs are owed money, yet 2U is prioritizing paying debts to partners rather than students.
No Time to Waste.
The Biden administration has worked to do away with any “corporate tricks and scams” that let a company waste an average American’s time and money: excessive paperwork, long wait times, and the insurmountable hurdles just to cancel a subscription. To name a few, but not all: An FTC rule would require companies to make it as easy to cancel a subscription service as it was to register for it. A Department of Transportation rule now requires automatic refunds from airlines for canceled or significantly altered flight plans. And, among other initiatives, the CFPB wants to tackle “doom loops,” in which customers who want to talk to a flesh-and-blood representative get instead a phone-tree runaround.
Enforcement Actions.
All American Check Cashing. The CFPB took action against the cashing and payday loan company for its failure to disclose the cost of cashing a check and the use of deceptive practices to prevent consumers from canceling or refunding transactions. Over 43,000 consumers will receive over $8mn from the Civil Penalty Fund.
CAPITAL MARKETS
Shareholder Meetings.
AFREF submitted a letter to the SEC expressing opposition to a New York Stock Exchange proposal to exempt closed-end funds from the requirement to hold annual shareholder meetings. Closed-end funds raise money initially from investors, many of whom are mom-and-pop retail investors, and the proposal would shield fund leaders from accountability and a venue to raise concerns or vote on the fund’s governance. AFREF recognizes the distinct benefits of closed-end funds compared to open-end funds, but transparency for shareholders remains a priority.
PRIVATE MARKETS
Private Equity and Healthcare.
The implosion of Steward Health Care – the formerly Cerberus-backed healthcare company whose hospitals were unable to pay its debts – has spurred lawmakers in Massachusetts to push legislation (S2871) to enhance oversight on medical investments by PE and real estate investment trusts (REITs), set leverage limits, and require firms to take out bonds to stay afloat in times of stress, among other provisions. Similarly, the California legislature is considering a bill (AB3129), which would require PE firms and hedge funds to acquire written consent from the state at least 90 days before acquiring healthcare businesses and would bar them from owning certain types of practices, among other measures.
Meanwhile: Steward has sealed a deal to sell its doctors group to Rural Healthcare Group, a company backed by Kinderhook… another private equity firm.
Private Equity and Childcare.
Childcare is already a salient issue as many families struggle to afford it, and private equity is making the situation worse. KKR began investing in the childcare provider KinderCare, the nation’s largest chain, during the 1990s. KKR bought KinderCare for $500 million and sold it for over $1 billion seven years later. KKR and KinderCare show a popular PE trend that continues to grow in the industry: Acquire the business, make it shiny and new compared to the old, smaller businesses, price them out, drive up the cost, and sell for a profit. Eight of the eleven largest providers by capacity are now backed or owned by PE firms.
Private Equity and Harming Pets.
Senator Elizabeth Warren is pushing back against the effects private equity firms are having on veterinary practices. Prices have surged since COVID-19, when many Americans acquired pets. PE now owns 30 percent of the market, and the FTC has had to take action in some cases, ordering firms to divest veterinary clinics or hospitals in certain areas. Senator Richard Blumenthal joined Warren in writing a letter to JAB Holding Company, a German-owned PE firm, seeking insight into the firm's practices and expressing concern about roll-up strategies.
Private Real Estate Machines.
Private equity firms enticed smaller investors to push cash into private REITs, vehicles that own a broad portfolio of real estate. They’re a lot less appealing now that interest rates have risen and the commercial property market is ailing, but it’s been difficult for investors to cash out. Most REITs limit how much investors can withdraw in a given month or quarter.
CRYPTO
Pensions and Crypto.
Crypto lobbyists are pushing for crypto to become a more frequent investment option for pension funds, which already rely on other volatile investments such as private equity and real estate. Financial mega-firms such as Fidelity and BlackRock, are pushing state level lawmakers to do so as well, by arguing their crypto-based ETFs are a safer way to invest in digital tokens without owning them - even though crypto markets remain highly volatile and vulnerable to massive market manipulation. According to The Washington Post, many state-level officials admitted to owning Bitcoin as well.
Coinbase Election Violation.
A complaint to the FEC signed by Public Citizen and Molly White (software engineer, writer and critic of the crypto industry) alleges that the crypto company Coinbase violated campaign finance laws by contributing $25 million to the pro-crypto super PAC Fairshake. The complaint notes that at the time of the contribution, Coinbase was negotiating a contract with the US Marshals Service, which was in need of a firm that could meet its requirement for managing and disposing of large quantities of popular cryptocurrency assets (often seized as part of criminal cases). However, it is illegal under the Federal Election Campaign Act of 1971 for federal contractors to donate to political committees.
DeFi-nite Friction.
A central premise of crypto’s “use case” is that the use of decentralized blockchain technology can reduce the need for or reliance on “intermediaries” (banks, governments) to broker or oversee transactions. Doing so would supposedly reduce finance costs, increase access to finance, and make it harder for ‘intermediaries’ to profit from or exploit their role. The problem is crypto’s claims of decentralization don’t live up to the hype. Previous studies have shown that crypto markets are actually highly centralized; that even industry experts aren’t sure exactly what decentralization is, or if it exists, much less whether it delivers. And, as a recent study from the NY Fed has shown, crypto has plenty of intermediaries, who use their position facilitating crypto transactions to consolidate their share of the market, and boost profits.
HOUSING
A Tenant Union’s Tenant Union.
That’s what you get from the first-of-its-kind Tenants Union Federation (TUF), a recently launched union-of-tenant unions that brings together local tenant unions across the country to advocate for renters’ rights by leveraging the shared experiences of locals across the country. Said TUF Director Tara Raghuveer:
“Today’s housing market is a catastrophic failure, shaped by the relentless prioritization of those who profit from our basic need for a home. This moment calls on us to take big and small actions, and to build durable infrastructure to sustain this struggle through time…The rent is too damn high, and it keeps getting higher. It is not a given that the people will prevail against today’s odds, but if we have a chance, the chance lives in the tenant union.”
Do Your Job, FHLB!
The Coalition for Federal Home Loan Bank Reform is calling on FHLBanks to support affordable housing. The coalition sent a letter to Treasury Secretary Janet Yellen, echoing her calls “urging the FHLBank System to increase its financial contributions to support fair and affordable housing, particularly focusing on boosting the housing supply.” Senators Cortez Masto and Warren, along with the Biden administration, have also called on the Banks to increase their affordable housing contributions. Several coalition members also issued comments.
Said AFR’s Caroline Nagy:
"Given the record homelessness and unprecedented housing affordability crisis, it is unacceptable for the FHLBank System to continue to put maximizing profits and dividends to its members ahead of fulfilling its public mission to support housing finance and community development…We urge the FHLBank Presidents to heed Secretary Yellen's call to double their contributions to the Affordable Housing Program.”
Rents and Pensions.
When the private equity megafirm Blackstone bought the Shady Lane Apartments near San Diego, previously owned by a nonprofit, it raised rent for vacant units by 21 percentage points more than other nearby landlords. Or, as a new report from the Private Equity Stakeholder Project and Alliance of Californians for Community Empowerment suggest, over twice the San Diego market average. The fund that snapped up the complex had commitments from public pensions across the country, including the California State Teachers’ Retirement System.
Analysis by both the LA Times and PESP suggests that people have been negatively impacted by PE involvement in housing. The groups called on pensions to adopt standards when making housing investments, like a rent cap and timely repair policy, arguing that pensions funded by public money have a responsibility not to harm their members or other working people.
Affordable Housing.
The Biden administration announced $100mn in grants to state and local governments to boost affordable housing construction, at a time when more housing units are under construction than any other time in the past 50 years.
Contract-for-Deed.
The CFPB released an advisory opinion and research report regarding “contract-for-deed,” a form of rent-to-own home seller financing. The Bureau clarified legal guidance regarding mortgage protection, stating that consumer protection laws apply to contract-for-deed transactions. Under these transactions, buyers pay a series of payments before being handed over the deed, leaving them vulnerable to traps where they pay for a home that is in poor condition or over-priced by the time they can actually finalize the purchase.
Making Mortgages Easier.
The CFPB is proposing a rule amending the responsibilities for mortgage servicers. The rule would “add safeguards when borrowers seek help, and revise existing requirements with respect to borrower assistance. The proposed rule would also require servicers to provide certain communications in languages other than English, such as when a borrower is seeking payment assistance with their mortgage.” The goal of the new CFPB rules is to ensure lenders are doing their best to help consumers avoid foreclosure.
CLIMATE and FINANCE
Solar Lending Scams.
The Treasury, FTC and CFPB announced an interagency effort to protect consumers from solar fraud and scams, clamp down on bad actors and practices in the industry, and promote safe green lending that can benefit consumers and responsible solar business. The agencies plan to expand access to affordable residential solar and tamp down on abusive practices. Said AFR’s Jessica Garcia:
“We are enthusiastic about agency efforts to curb bad practices and root out bad actors in the solar industry as a starting point…A lack of proactive consumer protection plans and requirements from federal and state agencies and program implementers could reduce public trust in clean energy technologies and green lenders, undermining federal efforts to expand viable solar and clean energy projects that help mitigate climate change.”
In line with that, the CFPB put out a PSA: Consumers should steer clear of expensive and complex loans used to finance the installation of solar panels on their homes. As door-to-door salespeople descend upon neighborhoods to pressure homeowners to install solar, some try to hawk complicated loans and financing agreements without always disclosing the upfront and long-term costs. Consumers often have cheaper, safer options available to install solar. The Treasury also issued a consumer advisory and launched a consumer solar awareness website, and the FTC issued advisories to both consumers and businesses. Said AFR’s Christine Zinner:
“We look forward to robust regulatory and enforcement measures to complement these efforts, maximizing the safety and soundness of these green lending products to protect households, particularly the elderly or those with limited language access, from predatory or fraudulent green loans.”
POLITICS and MONEY
Buck the Blockchain’s Electioneering.
The crypto industry has channeled cold, hard cash into state and federal elections, via a cadre of super PACs. Defend American Jobs has put $12mn into Republican Bernie Moreno’s race to unseat Senate Banking Chair Brown in Ohio. Meanwhile, crypto execs have been meeting with White House officials on pro-crypto bills. The WashPost editorial board warns Americans to “beware.”
The Revolving Door Project raised the alarm on a bill from Cynthia Lummis, the self-described “Bitcoin senator,” as a way for the government to “waste billions of taxpayer dollars subsidizing those who have invested in Bitcoin” – a so-called “strategic Bitcoin reserve.”
The Biden Admin’s Corporate Revolving Door.
Appointees in the Biden administration with ties to the business world may have been hampering parts of his agenda, such as the the Justice Department’s refusal to crack down adequately on white-collar crime, according to arguments made by the Revolving Door Project. They called on Vice President Harris, should she win the White House, to take steps to ensure her administration won’t partake in this trend, even among Democratic officials, such as Eric Holder for Attorney General after his failures to go after Wall Street in the wake of the 2008 crisis (Holder took a Big Law gig that helps firms responsible).
Private Equity Money in Politics.
The Center for Media and Democracy introduces us to the private equity financiers who are interested in having their taxes cut, by supporting candidates who support the carried interest tax deduction, “which allows them to pay a lower 23.8 percent tax rate on the capital gains passed on to them as compensation rather than the top income tax rate of up to 40.8 percent.” About 90 percent of PE contributions this election cycle have gone toward Super PACs backing Republican candidates. The groups include the usual suspects: Blackstone, Apollo, and Caryle. The biggest individual donors are Jeffrey & Janine Yass of Susquehanna International, who have given $70.5 million.