Last month I attended the Online Lending Policy Summit in Washington, D.C. A number of takeaways will be of interest to the ARM industry, including the Federal Reserve's view of the nation's regulatory structure, and some pre-election insight into the Democrats' agenda for leadership of the House Financial Services Committee.
The one-day event was hosted by the Online Lending Policy Institute (OLPI), which is based out of Boston University. It was attended by approximately 200+ (my estimate) state and federal regulators, as well as government affairs and industry stakeholders in the fintech space. Speakers were from the Office of the Comptroller of the Currency (OCC), Treasury, the Bureau of Consumer Financial Protection, Congress, and state regulators/attorneys general.
Overall messages I took away:
- The U.S. regulatory structure is in the way of robust fintech progress
- 10+ federal agencies are vying in uncoordinated fashion to regulate the space
- 50 states, 50 AGs complicate the regulatory environment even further
- There is disparity between treatment of bank vs. non-bank service providers
- There is a constant swing of the pendulum between over and under regulation
- The industry lauded a recent Treasury report about innovation which recommended that:
- Laws should be harmonized
- Regulatory overlap should be reduced
- Regulations should be better tailored for the size and complexity of businesses
- Credit flow needs to be improved
- The cost of credit is an important component
- Innovation is of critical importance - it’s exploding outside of the regulated world, but not inside
- Regulators should network more (it was noted by a Conference of State Bank Supervisors speaker that this happens more than it used to) and work together (i.e. importance of NMLS).
- Lending by fintechs currently = 36% of all personal loans
- The mortgage process will be increasingly more digitized
- The IRS income verification system should be updated to a modern, technology-driven interface that protects taxpayer information and enables automated and secure data sharing with lenders or designated third parties.
Of particular note is that the report specifically recommends "modernizing rules for digital communications, such as the Telephone Consumer Protection Act and the Fair Debt Collection Practices Act."
The following are highlights from some of the speakers I thought would be of interest.
Grovetta Gardiner, Senior Deputy Comptroller for Compliance and Community Affairs at the OCC shared that there is a war of sorts going on between the OCC -- which recently announced the availability of a special purpose charter for fintechs (which would allow them to operate nationally and level the playing field, and is in the public interest because their mission is to expand access to the financial system) -- and states, which think this usurps their power. She reminded attendees that “innovation is inherent in the banking system” – as examples she said that checking accounts, ATMs and banking by smart phone were all novel when introduced.
Paul Watkins, head of the BCFP Office of Innovation –which, notably, has three employees where the Research group has 40-- offered his guiding principles. He said that consumer protection advocates usually relate to the concept of innovation negatively and with skepticism, but as we (the Bureau) were engaging in consumer protection we had to shift from the eyes of just the regulator to the eyes of the consumer. From a consumer perspective, only a small portion of transactions are redressable by enforcement. As a regulator, he said, you have to care because innovation drives competition, and we noticed that regulators around the world were creating sandboxes, promoting innovation through change in regulatory structure.
Watkins reiterated the Bureau’s responsibility to review regulations that may be outdated or unnecessary, and he described their trial disclosure and no action letter programs (which have been essentially unused since created). He said they will be taking a more flexible approach, allowing disclosures to be tested (with the ability to tweak) for up to two years, and trade groups can apply. By the way, consumer groups have bashed this approach as irresponsible. Watkins said he’s learned that it’s rare for fraud to occur in a sandbox; crooks tend to not want to engage with regulators. He noted that most financial disclosures were created for paper delivery and we need to facilitate new ways of communicating with consumers in the market.
He concluded with his core principles of clarity of timing, expectations, and coordination with other regulators. His advice to industry is to know specifically what you want and back it up with statutory support; in other words, “Here’s what we want, and here is how we think you can use your scope of jurisdiction to make the change.” He said, “We just don’t see this from business.”
Rep. Gregory Meeks (D-NY) serves on the House Financial Services Committee. He shared that during law school he used rent to own furniture, and his father used legal and illegal sources of capital to make ends meet.
This event took place just about one month prior to the election. He said, “If we take back the house, I would hope we don’t make the same mistakes. We need compromise. Blue dog dems are more moderate and more likely to compromise and bring us back together. Being from NY, I don’t see how we can say all the financial institutions are bad. The dialogue of Main Street vs. Wall Street is bad. One doesn’t work without the other.”
Meeks confirmed that if the Democrats win control of the House, Maxine Waters would be Chair of the Financial Services Committee, and that she would work to fix/shore up the CFPB (he said CFPB, not BCFP) to restore consumer confidence that someone is working to level the playing field and make sure those that are good get to move forward; those who are bad don’t. He said that opportunities for early wins/cooperation include a charter for online lenders, and rules/regulations from the CFPB to create certainty.
“I’ve started to sit down with consumer groups - to try to compromise and get them to pull back on some of their objections -- take the ‘them vs. us’ out of it. The only way to fix the CFPB is through legislation. The problem is we have one head vs. five directors. I may be on the other side of my colleagues on this. It should not be a ping pong ball. That’s not good for anybody. Good folks need certainty. A board would help this.”
You can watch additional highlights here.
I shared a version of this recap the November meeting of the Consumer Relations Consortium (CRC). Innovation and modernization are key focus areas for the group, illustrated in part by our current work on proposing a standard debt collection disclosure form (which would serve as the validation notice) -- including a digital-first version, designed to be delivered on a mobile device.
Other takeaways from the Online Lending Summit that align with CRC initiatives include the concepts that access to large amounts of data will drive the future of the industry, and API standards are needed to facilitate data sharing.