US Dept of Treasury Report – A Financial System That Creates Economic Opportunities Nonbank Financials, Fintech, and Innovation

Treaury Department

We thought our readers would enjoy delving into this report at their leisure.  It’s long – 222 pages(!) – but filled with excellent insights on a myriad of sectors with the US financial ecosystem.  Below we’ve published just a piece of the intro – “The Summary of Issues & Recommendations” – from the report with a link at the bottom for you to click thru to read the full report.  Read up and learn about what our US Treasury Department is thinking and doing around fintech and the financial sector!  (Cindy Taylor/Publisher)

“Summary of Issues and Recommendations

Treasury’s review of the regulatory framework for nonbank financial institutions and innovation more broadly has identified significant opportunities to accelerate innovation in the United States consistent with the Core Principles. This review has identified a wide range of measures that could promote economic growth, while maintaining strong consumer and investor protections and safeguarding the financial system. Treasury believes that innovation is critical to the success of the U.S. economy, particularly in the financial sector. Throughout Treasury’s findings, opportunities have been identified to modernize regulation to embrace the use of data, encourage the adoption of advanced data processing and other techniques to improve business processes, and support the launch of alternative product and service delivery systems. Support of innovation is critical across the regulatory system — both at the federal and state levels. Treasury supports encouraging the launch of new business models as well as enabling traditional financial institutions, such as banks, asset managers, and insurance companies, to pursue innovative technologies to lower costs, improve customer outcomes, and improve access to credit and other services.

Treasury’s recommendations in this report can be summarized in the following four categories:

• Adapting regulatory approaches to changes in the aggregation, sharing, and use of consumer financial data, and to support the development of key competitive technologies; • Aligning the regulatory framework to combat unnecessary regulatory fragmentation, and account for new business models enabled by financial technologies;
• Updating activity-specific regulations across a range of products and services offered by nonbank financial institutions, many of which have become outdated in light of technological advances; and
• Advocating an approach to regulation that enables responsible experimentation in the financial sector, improves regulatory agility, and advances American interests abroad. A list of all of Treasury’s recommendations in this report is set forth as Appendix B, including the recommended action, method of implementation (Congressional and/or regulatory action), and which Core Principles are addressed.

Key themes of Treasury’s recommendations are as follows.

Embracing Digitization, Data, and Competitive Technologies
This report catalogues key elements in the evolution of digitization, data, and scalable technologies and highlights areas of relevance to many aspects of financial services, including lending, financial advice, and payments. Treasury recommends that key provisions of the Telephone Consumer Protection Act be updated, and believes closing the digital divide to enable the entire U.S. population to benefit from modern information and communication flow is a priority.

Treasury makes numerous recommendations that would improve consumers’ access to data and its use by third parties that would support better delivery of services in a responsible manner. Treasury has identified the need to remove legal and regulatory uncertainties currently holding back financial services companies and data aggregators from establishing data-sharing agreements that would effectively move firms away from screen-scraping to more secure and efficient methods of data access. The U.S. market would be well served by a solution developed in concert with the private sector that addresses data sharing, standardization, security, and liability issues. It is important to explore efforts to mitigate implementation costs for community banks and smaller financial services companies with more limited resources to invest in technology. Additionally, Treasury recommends that Congress enact a federal data security and breach notification law to protect consumer financial data and ensure that consumers are notified of breaches in a timely and consistent manner.

Removing regulatory barriers to foundational technologies, including the development of digital legal identity, is important to improving financial inclusion and enabling the use of scalable, competitive technologies. Similarly, facilitating the further development and incorporation of cloud technologies, machine learning, and artificial intelligence into financial services is important to realizing the potential these technologies can provide for financial services and the broader economy.

Aligning the Regulatory Framework to Promote Innovation
Many statutes and regulations addressing the financial sector date back decades. As a result, the financial regulatory framework is not always optimally suited to address new business models and products that continue to evolve in financial services. This has the potential negative consequence of limiting innovation that might benefit consumers and small businesses. Financial regulation should be modernized to more appropriately address the evolving characteristics of financial services of today and in the future.

It is important that state regulators strive to achieve greater harmonization, including considering drafting of model laws that could be uniformly adopted for financial services companies currently challenged by varying licensing requirements of each state. Treasury encourages efforts to streamline and coordinate examinations and to encourage, where possible, regulators to conduct joint examinations of individual firms. Treasury supports Vision 2020, an effort by the Conference of State Bank Supervisors that includes establishing a Fintech Industry Advisory Panel to help improve state regulation, harmonizing multi-state supervisory processes, and redesigning the successful Nationwide Multistate Licensing System.

At the federal level, Treasury encourages the Office of the Comptroller of the Currency to further develop its special purpose national bank charter, previously announced in December 2016. A forward-looking approach to federal charters could be effective in reducing regulatory fragmentation and growing markets by supporting beneficial business models.

Finally, Treasury encourages banking regulators to better tailor and clarify guidance regarding bank partnerships with nonbank financial firms, particularly smaller, less-mature companies with innovative technologies that do not present a material risk to the bank. Treasury believes it is important to encourage the partnership model to promote innovation. Further, Treasury makes recommendations regarding changes to permissible activities, including bank activities related to acquiring or investing in nonbank platforms.

Updating Activity-Specific Regulations
This report surveys a wide range of activities where specific recommendations for regulatory reform are suggested. The range of financial services includes:

Marketplace Lending
Marketplace lenders are expanding access to credit for consumers and businesses in the United States. Treasury recognizes that partnerships between banks and marketplace lenders have been valuable to enhance the capabilities of mature financial firms. Treasury recommends eliminating constraints brought about by recent court cases that would unnecessarily limit the functioning of U.S. credit markets. Congress should codify the “valid when made” doctrine and the role of the bank as the “true lender” of loans it makes. Federal banking regulators should also use their available authorities to address both of these challenges.

Mortgage Lending and Servicing
Treasury recognizes that the primary residential mortgage market has experienced a fundamental shift in composition since the financial crisis, as traditional deposit-based lender-servicers have ceded sizable market share to nonbank financial firms, with the latter now accounting for approximately half of new originations. Some of this shift has been driven by the post-crisis regulatory environment, including enforcement actions brought under the False Claims Act for violations related to government loan insurance programs. Additionally, many nonbank lenders have benefitted from early adoption of financial technology innovations that speed up and simplify loan application and approval at the front-end of the mortgage origination process. Policymakers should address regulatory challenges that discourage broad primary market participation and inhibit the adoption of technological developments with the potential to improve the customer experience, shorten origination timelines, facilitate efficient loss mitigation, and generally deliver a more reliable, lower cost mortgage product.

Student Lending and Servicing
The federal student loan program represents more than 90% of outstanding student loan volume and is managed by an extensive network of nonbanks for servicing and debt collection. The program is complex due to a variety of loan types, repayment plans, and product features that make the program difficult for borrowers to navigate and increase the difficulty and cost of servicing. Treasury recommends that the U.S. Department of Education establish and publish minimum effective servicing standards to provide servicers clear guidelines for servicing and help set expectations about how the servicing of federal loans is regulated. Treasury provides recommendations related to the greater use of technology in communications with borrowers, enhanced portfolio performance monitoring and management by Education, and greater institutional accountability for schools participating in the federal financial aid programs.

Short-Term, Small-Dollar Lending
While the demand for short-term, small-dollar loans is high, lenders have been constrained by unnecessary regulatory guidance at the federal level. Treasury recommends that the Bureau of Consumer Financial Protection (Bureau) rescind its Payday Rule, which applies to nonbank shortterm, small-dollar lenders, as the states already maintain the necessary regulatory authorities and the rule would further restrict consumer access to credit. Treasury also recommends that both federal and state banking regulators take steps to encourage prudent and sustainable short-term, small-dollar installment lending by banks.

Debt Collection
Debt collectors and debt buyers play an important role in minimizing losses in consumer credit markets, thereby allowing for increased availability of and lower priced credit to consumers. A variety of stakeholders have expressed concerns about the adequacy of loan information provided when a loan is sold or transferred for collection. When debt collectors and buyers do not receive adequate information, they are unable to demonstrate to the consumer that the debt is valid and owed. Treasury recommends the Bureau establish minimum effective federal standards for thirdparty debt collectors, including standards for the information that must be transferred with the debt for purposes of third-party collection or sale.

New Credit Models and Data
A growing number of firms have begun to use or explore a wide range of newer data sets or advanced algorithms, including machine learning-based methods, to support credit underwriting decisions. Treasury recognizes that these new credit models and data sources have the potential to meaningfully expand access to credit and the quality of financial services, and therefore recommends that financial regulators further enable their testing. In particular, regulators should provide regulatory clarity for the use of new data and modeling approaches that are generally recognized as providing predictive value consistent with applicable law for use in credit decisions.

Credit Bureaus
The consumer credit bureaus collect sensitive information on millions of Americans, and thus are required to protect the information they collect. While the credit bureaus are subject to state and federal regulation for consumer protection purposes, and have been subject to state and federal enforcement actions related to data security, they are not routinely supervised for compliance with the federal data security requirements of the Gramm-Leach-Bliley Act. Treasury recommends that the relevant agencies use appropriate authorities to coordinate regulatory actions to protect consumer data held by credit reporting agencies and that Congress continue to assess whether further authority is needed in this area. Treasury also recommends that Congress amend the Credit Repair Organizations Act to exclude national credit bureaus and national credit scorers in order to allow these entities to provide credit education and counseling services to consumers to prospectively improve their credit scores.

IRS Income Verification
The Internal Revenue Service (IRS) system that lenders and vendors use to obtain borrower tax transcripts is outdated and should be modernized in order to minimize delays in accessing tax information, which would facilitate the consumer and small business credit origination process. In other data aggregation situations, such as gathering borrower bank balances, lenders generally are able to obtain the needed borrower financial information through an application programming interface (API) to instantaneously and safely transfer data. The IRS’s current technology should be updated to accommodate lender access of borrower information to instantaneously and safely transfer data, comparable to similar private sector solutions. While the IRS is working to update its technology more broadly, these efforts would benefit from additional funding, which would facilitate upgrades to support more efficient income verification, bringing a critical component of the credit process up to speed with broader innovations in financial technology.

Treasury recommends that the states work to harmonize money transmitter requirements for licensing and supervisory examinations, and urges the Bureau to provide more flexibility regarding the issuance of remittance disclosures. Treasury encourages the Federal Reserve to move quickly in facilitating a faster retail payments system, such as through the development of a real-time settlement service that would allow for more efficient and widespread access to innovative payment capabilities. Such a system should take into account the ability of smaller financial institutions, such as community banks and credit unions, to access innovative technologies and payment services.

Wealth Management and Digital Financial Planning
Digital financial planning tools can expand access to advice for Americans to accumulate sufficient wealth, particularly as individuals have become more responsible for their own retirement planning. Under the current regulatory structure, financial planners may be regulated at both the federal and state levels. Although many financial planners are regulated by the Securities and Exchange Commission or state securities regulators, they may also be subject to regulation by the Department of Labor, the Bureau, federal or state banking regulators, state insurance commissioners, state boards of accountancy, and state bars. This patchwork of regulatory authority increases costs and potentially presents unnecessary barriers to the development of digital financial planning services. Treasury recommends that an appropriate existing regulator of a financial planner be tasked with primary oversight of that financial planner and other regulators defer to that regulator.

Regulating a 21st Century Economy
Treasury advocates an agile approach to regulation that can evolve with innovation. It is critical not to allow fragmentation in the financial regulatory system, at both the federal and state level, to interfere with innovation. Financial regulators must consider new approaches to effectively promote innovation, including permitting meaningful experimentation by financial services firms to create innovative products, services, and processes.

Internationally, many countries have established “innovation facilitators” and various regulatory “sandboxes” — testing grounds for innovation. These sandboxes have each generally supported common principles, such as promoting the adoption and growth of innovation in financial services, providing access to companies in various stages of the business lifecycle, providing varying degrees of regulatory relief while maintaining consumer protections, and improving the timeliness of regulator feedback offered throughout the development lifecycle. While replicating this approach in the United States is complicated by the fragmentation of our financial regulatory system, Treasury is committed to working with federal and state financial regulators to establish a unified solution that accomplishes these objectives — in essence, a regulatory sandbox.

The ability of regulators to engage with the private sector to test and understand new technologies and innovations as they arise is equally important. Treasury recommends that Congress pass legislation authorizing financial regulators to use other transaction authority for research and development and proof of concept technology projects. Treasury encourages financial regulators to pursue robust engagement efforts with industry and establish clear points of contact for outreach to enable the symbiotic relationship necessary to maintaining U.S. global competitiveness.

Treasury will work to ensure actions taken by international organizations align with U.S. national interests and the domestic priorities of U.S. regulatory authorities. This should include a focus on the needs of U.S. companies that operate on a global basis. Participation by the relevant experts in international forums and standard-setting bodies is important to share experiences regarding respective regulatory approaches and to benefit from lessons learned.

A Bright Future for Innovation
The United States is the global leader in technological innovation. The pace of technological development in financial services has increased exponentially, offering potential benefits to the U.S. economy. Treasury encourages all financial regulators to stay abreast of developments in technology and to properly tailor regulations in a manner that does not constrain innovation. Regulators must be more agile than in the past in order to fulfill their statutory responsibilities without creating unnecessary barriers to innovation. Ensuring a bright future for financial innovation, regulators should take meaningful steps to facilitate and enhance the nation’s strength in technology and work toward the common goals of fostering vibrant financial markets and promoting growth through responsible innovation…”

Full Report Can Be Viewed At This Link: