CSBS Issue Briefings - January 2020

C SBS Issue Briefings

January 15, 2020

These issue briefings provide CSBS policy and positions on a range of issues. They are provided as a guide when discussing these issues with external audiences. They are intended to be used for background purposes and are not for distribution.

For questions, please contact: Jim Cooper, Vice President of Policy JCooper@csbs.org (202) 808-3557

CSBS ISSUE BRIEFING Appraisals

CSBS Official Public Position State regulators support the increase to the appraisal threshold for transactions secured by residential real estate. In addition, CSBS believes the current regulation needs to better address the appraiser shortage in rural and underserved urban markets, as well as the difficulties for appraisers to enter those markets. Summary Financial markets have changed substantially since the appraisal thresholds were last raised in 1994, and state regulators continue to observe the burden that inflexible or outdated appraisal standards present. One of the only options available to address the shortage—a temporary waiver that would allow appraisals to temporarily be made without credentialing—is not viable because the guidance around its use is unclear, lengthy and underutilized. The Appraisal Subcommittee (ASC) has indicated that it will create clearer standards for evaluation for applicants seeking the temporary waiver. Since the option has been available, only one state has received the temporary waiver. In July 2019, the ASC (with concurrence from the FFIEC) voted to approve a request from the state of North Dakota for a temporary waiver (with option to renew) from appraiser licensing requirements, stating a scarcity of appraisers. CSBS acknowledges that changes are occurring in the appraisal industry. In April 2018, the threshold level at or below which appraisals are not required for commercial real estate transactions increased from $250,000 to $500,000. Additionally, Congress acknowledged in the Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA) that relief is needed for certain rural transactions. Currently, relief from appraisal requirements is provided for some real estate transactions (those under $400,000) in rural areas, but to qualify, lenders must show that three appraisers were not available within five days beyond a reasonable time frame (determined by the bank) for an appraisal. In September 2019, the federal banking agencies agreed to increase the residential threshold for residential real estate-related transactions from $250,000 to $400,000. The final rule incorporates the rural residential appraisal exemption in Section 103 of EGRRCPA. Finally, in May 2018, the Appraiser Qualifications Board of the Appraisal Foundation, which sets minimum qualification for real property appraiser in the United States, revised and reduced the educational requirements to become a licensed/credential residential appraiser. Despite these developments, it is still uncertain what impact any of these changes will have in resolving the shortage of appraisers in rural and underserved urban markets. State regulators are committed to working with the agencies to address the appraiser shortage and urge federal counterparts to revisit and improve options for impacted banks to ensure commerce can continue in local communities. Some recommendations could be focused on raising the transaction thresholds for residential real estate to reflect inflation, improving the data provided in the National Registry and increasing awareness of the FAQs on the Appraisal Regulations and the Interagency Appraisal and Evaluation Guidelines issued on Oct. 16, 2018. Why it Matters to State Regulators Current appraisal regulations can curtail mortgage lending in markets that lack qualified appraisers or comparable sales. Many state regulators continue to observe a shortage of appraisers in regions across the country. The limited availability of appraisers, particularly in rural and underserved urban markets, has led to a significant delay in the home purchasing process.

CSBS ISSUE BRIEFING

Talking Points • The appraiser waiver process needs to be clarified in a way that it would help address the limited appraiser availability in many rural states. • In 2017 state and federal banking agencies met with bankers across the country and encouraged the use of the waiver to deal with appraiser shortages. • Tennessee and North Dakota have held outreach sessions to bring together various stakeholders to address appraiser shortages and related issues experienced in their states. • The National Registry of Real Estate Appraisers does not accurately reflect local shortages of appraisers. • Congress acknowledged in the Economic Growth, Regulatory Relief, and Consumer Protection Act that obtaining appraisals for certain rural transactions are an issue and that an avenue for relief is needed. 

SME Contact: Alisha Sears, Senior Analyst, Policy Development, (202) 759-9403, ASears@csbs.org

Date Updated: 1/10/2020

CSBS ISSUE BRIEFING Bank Service Company Examination Coordination Act

CSBS Official Public Position CSBS strongly supports H.R. 241, the Bank Service Company Examination Coordination Act, which would enhance state and federal regulators’ ability to coordinate examinations of and share information on banks’ technology vendors in an effective and efficient manner. Summary Banks have long partnered with technology service providers (TSPs), which can be bank affiliates or subsidiaries or third-party vendors, to outsource a range of critical business services, including hardware management, software development, cybersecurity, payments systems and call centers. TSPs are expected to comply with the same applicable laws and regulations as the bank using their services. Increasingly, banks of all sizes are seeking to leverage technological innovations, such as partnering with fintechs or migrating to the cloud, for a variety of back office as well as customer-facing services. State regulators seek to support the work of banks with TSPs in a manner that is consistent with safety and soundness and consumer protection requirements. Ensuring effective regulatory oversight of banks’ partners and vendors is important to accomplishing this goal. The Bank Service Company Act (BSCA) authorizes federal regulators to examine TSPs but is silent about the authority and role of state regulators. However, many states have laws giving state bank regulators authority to examine TSPs. Why it Matters to State Regulators While the BSCA does not bar state regulators from participating in exams with federal regulators, its failure to include state regulators has been interpreted as a barrier to information sharing and regulatory coordination, even when those TSPs provide core services to state-chartered banks. Limitations on coordination between state and federal regulators potentially result in duplicative and less efficient supervision. Talking Points • H.R. 241 is common-sense legislation that makes state and federal supervision more efficient and more effective. • Oversight of the businesses providing state-chartered banks with critical services is key to ensuring a safe and productive financial system. • This legislation helps regulatory agencies better safeguard individual institutions, the banking system and consumers. Improved TSP information sharing and coordinated TSP supervision increases the likelihood of regulators revealing risks and weaknesses in individual institutions and in the greater financial system. • The 2017 Annual Report of the Financial Stability Oversight Council recommends legislation for coordinated TSP examinations. • H.R. 241 passed the House of Representatives by voice vote on Sept. 10, 2019, and we encourage the Senate to act swiftly on this legislation. H.R. 241 would amend the BSCA to permit federal and state banking agencies to coordinate examinations of TSPs and share results.

CSBS ISSUE BRIEFING SME Contact: Nathan Ross, Senior Director, Legislative Policy: (202) 728-5753 or NRoss@csbs.org

Date Updated: 1/2/2020

CSBS ISSUE BRIEFING Community Bank Leverage Ratio

42T CSBS Official Public Position 19T42T

CSBS19T42T CSBS believes the community bank leverage ratio (CBLR) should be implemented to provide relief from the complexities of risk-based capital rules while not sacrificing the safety and soundness of community banks.

19T 19T 19T 19T

42T Summary 19T42T

T4 The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 contained a provision requiring the federal banking agencies to establish a CBLR that would exempt banks of a certain size and risk profile from the current regulatory capital rules if they maintain a certain amount of tangible equity capital. The Act required the federal banking agencies (FBAs) to consult with state bank supervisors in establishing and implementing the CBLR framework. Over the course of late 2018 and early 2019, the FBAs held multiple calls and meetings with state regulators. The FBAs issued a proposed rule in early 2019 and final rule in late 2019 to implement the CBLR. The proposed rule would have made the CBLR a tangible leverage ratio and established proxy PCA levels that would deem a bank that falls below a CBLR of 9% less than well capitalized. In multiple comment letters, CSBS expressed opposition to the proposed PCA proxies and advocated instead for banks that fall below the CBLR to be given a two-quarter transition period to either bring their CBLR back above 9% or to revert to risk-based capital reporting requirements. CSBS also took the position that the CBLR should be a Tier 1 leverage ratio because this a metric with which community banks are very familiar and preserves comparability across banks within and outside of the CBLR framework. Under the final rule, banks that satisfy certain qualifying criteria and have a Tier 1 leverage ratio greater than 9% could opt into the CBLR and would be exempt from risk-based capital reporting requirements. Banks that fall below the 9% level and/or fail to satisfy the qualifying criteria after opting in will have a two- quarter grace period to either raise their CBLR back above 9% and/or satisfy the qualifying criteria or revert to the current risk-based capital framework. Banks that fall below a CBLR of 8% in a single quarter must begin reporting risk-based capital immediately. 42T The staggering complexity of the current regulatory capital rules imposes an unsustainable regulatory burden on community banks. The CBLR was intended to provide relief from this complexity. As finalized, the CBLR hopefully will provide the relief intended by Congress. 42T Talking Points 19T42T • 19T The FBAs should not implement the CBLR in a manner that creates regulatory burden rather than provide regulatory relief. 42T Why it Matters to State Regulators 19T42T

42T SME Contact: Mike Townsley, Director of Regulatory Policy & Policy Counsel: 202-728-5738 or mtownsley@csbs.org 19T42T 19T

42T Date Updated: 12/31/2019 19T42T

CSBS ISSUE BRIEFING Compliance Examination Process

CSBS Official Public Position CSBS has identified multiple inconsistencies and pain-points in compliance examination procedures and processes across the federal banking agencies. Processes followed by the agencies lack transparency and inefficiencies have resulted in lengthy examinations and a climate of fear within the industry regarding the impact of compliance violations. State regulators strongly believe that federal consumer compliance exam processes should be corrective rather than punitive. Summary In recent years, state regulators have shared many instances in which their supervised banks experienced difficulty with the opaque and inconsistent fair lending examination process. Although there has been an overall decline in the number of formal enforcement actions against banks, the monetary cost associated with these actions can be significant. Several issues with the current compliance examination process include: • Examinations in which fair lending issues are identified can span multiple years, often resulting in confusion for institutions and an inability to continue normal operations. • Lack of transparency regarding analysis methods and an inconsistent degree of communication and coordination between federal regulators, banks and state regulators. • Federal regulators assert compliance violations based on the recurrence of a “pattern or practice,” but no definition of this has been provided by federal regulators. • Thresholds for violations differ between regulators. • Lack of clarity regarding “disparate impact” analysis inhibits the ability of banks to understand how they are being evaluated and limits ability for self-analysis and compliance monitoring. • Perception that minor violations result in severe regulatory consequences. • Regulatory expectations regarding pricing practices force banks to reduce and sometimes eliminate discretion in pricing. This is counterintuitive to the traditional community bank model. Why it Matters to State Regulators Although only a handful of states (MA, ID, UT, NY) do their own compliance examinations, almost every state is becoming increasingly involved in the compliance examination process. Having a seat at the table during state supervised bank compliance exam ensures that the local perspective of the state regulator is heard. It also ensures that state regulators will be aware of compliance issues that could lead to CAMELS downgrades and/or have an impact on a bank’s safety and soundness rating. State participation is especially important given that much of the analysis and decision making related to a federal compliance examination happens at the regional or national level. State regulators share the desire of the federal agencies to ensure that banks are providing fair access to credit and complying with consumer laws. However, state regulators believe that the small sample sizes and analysis methods used by the federal agencies within the exam process do not provide substantial value and/or weight towards a fair lending analysis and do not always capture the intent of the relationship lending model.

CSBS ISSUE BRIEFING

Talking Points •

States and federal regulators have a long-standing agreement to coordinate in compliance supervision: In 1996 state and federal regulators signed the Nationwide State/Federal Supervisory agreement and accompanying protocol, which established a framework for coordinated examinations and enforcement, regardless of exam type. • The 1996 agreement recognized that an institution’s consumer compliance functions have a critical impact on its safety andsoundness. • Even for states that do not have the resources or desire to conduct compliance exams, the state, as the chartering authority, must have the unconditional ability to fully participate in meetings and receive examination findings related to compliance issues. • State regulators believe that federal regulators should adopt more stringent expectations regarding the duration ofexaminations. • State regulators have been pushing for a consistent approach to fair lending supervision. The recent creation of interagency HMDA exam procedures is a step in the right direction. • Federal regulators should issue guidance to the industry regarding the use of models for fair lending analysis and to establish regulatory expectations for market pricing variations. • Congress should amend the statutory requirement mandated by the Equal Credit Opportunity Act (ECOA) for federal banking regulators to refer ECOA violations to DOJ. Federal banking regulators should be empowered to review and resolve potential fair lending issues without being obligated to refer all cases to theDOJ. • At the September 2019 FFIEC Council Meeting, FFIEC Chairman and CFPB Director Kathy Kraninger noted her interest in reinstating coordinated interagency collaboration on fair lending statistical analysis between the FFIEC and other agencies including DOJ, HUD, and FTC. A kick- off meeting has been scheduled for Jan. 27, 2020. Economists from each agency and CSBS have been invited to participate in the group. The goal is to identify the degree to which different agencies use different fair lending analytical approaches for examinations.

SME Contact: Daniel Schwartz, Director of Policy Development, (202) 728-5742, Dschwartz@csbs.org

Date Updated: 01/09/2020

FOR STATE REGULATOR USE ONLY

CSBS ISSUE BRIEFING De Novo Banks

CSBS Official Public Position The entry of new financial institutions helps preserve the vitality of the community banking sector and fills important economic gaps in local banking markets. State regulators support the formation of new financial institutions and welcomes the applications for de novo banks. Summary Recent Federal Deposit Insurance Corporation (FDIC) research on new bank formation since 2000 highlights both the economic benefits of de novo banks and their vulnerability to economic shocks. Community and de novo banking institutions typically carry out the banking core functions: gathering core deposits and making loans to individuals and small businesses. New bank formations have historically been cyclical in nature, as evidenced during economic upswings in the early 1960s, early 1970s and early 1980s. Even with the recovery in community bank earnings following the most recent economic recession, low interest rates, narrow net interest margins and intense regulatory scrutiny have made new bank formations relatively unattractive. Thankfully, the regulatory and economic environment for de novo banks has begun to improve. Why It Matters to State Regulators The U.S. economy has long been characterized by a high degree of entrepreneurial activity; de novo banks typically serve entrepreneurs and small businesses, which still account for the majority of new jobs. As a matter of fact, de novo banks invest a larger share of their assets in small business loans (Goldberg and White, 1997) and can help fill the gap in reduction in small business loans resulting from bank mergers or the increasing trend in bank size. In addition, de novo entry can curb the exercise of market power and make banking markets more competitive. If the current pace of consolidation continues with limited new bank entrants, there could be one thousand fewer banks in 10 years, compared to 500 fewer banks based on historical trends . • In April 2016, the FDIC rescinded FIL 50-2009 which had extended the de novo period for newly organized, state nonmember institutions from three to seven years for examinations, capital maintenance, and other requirements. • Under Chairman Jelena McWilliams, the FDIC has taken additional steps to encourage de novo applications by establishing a new procedure through which new bank organizers can request feedback on their draft deposit insurance applications before filing the official application and announcing it would act on all deposit insurance applications within 120 days. • Trends in de novo chartering: 1,042 community de novo banks from 2000-2008; most areFDIC- regulated (76.5%). From year and 2009 to year end 2017, only 11 de novo charters were approved • Since the beginning of 2018, 23 applications for deposit insurance have been approved and at least 20 applications are pending. Texas DOB recently approved their first de novo charter application since 2009. Talking Points •

SME Contact Info: Daniel Schwartz, Director, Policy Development, (202) 728-5742, Dschwartz@csbs.org

Date Updated: 01/09/2020

FOR STATE REGULATOR USE ONLY

CSBS ISSUE BRIEFING

Dodd-Frank Act Section 1071

CSBS Official Public Position State regulators strongly believe that the proposed small business lending data collection requirements would have a disproportionately negative impact on community banks and would disrupt small business lending in local communities. Summary Section 1071 of the Dodd-Frank Act is intended to expand Regulation B of the Equal Credit Opportunity Act and grant the Consumer Financial Protection Bureau (CFPB) the authority to collect data from small business lenders. Essentially, the CFPB would require financial institutions to compile, maintain and report information concerning credit applications made by women-owned, minority-owned and small businesses. Why It Matters to State Regulators A lack of transparency regarding how the small business loan data will be used in the examination or compliance assessment process could cause banks to reduce their small business lending. At a minimum, these new data collection requirements will impose additional and disproportionate compliance costs on smaller financial institutions with limited resources and unnecessarily raise the cost of originating small business loans by all lenders. Studies have established that long-term lending relationships between banks and businesses are valuable to small firms in terms of increased credit availability and protection against adverse credit shocks. • Community banks hold a relatively small percentage of total industry assets but are responsible for more than 45% of small loans to businesses. • The relationship lending model utilized by community banks does not lend itself to an inflexible set of data points contemplated by DFA1071. • Small business lending is highly individualized; underwriting and loan pricing depend on many heterogeneous variables that are inherently unsuitable for mass-data fair lending analysis. • Banks already demonstrate their commitment to small business lending through the Community Reinvestment Act, and expanded reporting is unnecessary. • In its spring 2019 rulemaking agenda, the CFPB restored Section 1071 rulemaking to current rulemaking status (where it had previously before been classified as a long-term item), with January 2020 indicated as the date for pre-rule activity. • CFPB held a symposium focused on small business lending data collection in November 2019. • CFPB has indicated its next step will be convening a panel under the Small Business Regulatory Enforcement Fairness Act to consult with representatives of small businesses that may be affected by the rulemaking. Talking Points •

SME Contact: Daniel Schwartz, Director of Policy Development, (202) 728-5742, Dschwartz@csbs.org

Date Updated: 01/09/2020

FOR STATE REGULATOR USE ONLY

CSBS ISSUE BRIEFING

Home Mortgage Disclosure Act

CSBS Official Public Position The Home Mortgage Disclosure Act (HMDA) requirements have changed on a few occasions due to 2015 CFPB rulemaking that implemented Dodd-Frank changes to Regulation C and made other discretionary changes as well as Section 104 of last year’s Senate regulatory relief bill. While state regulators support the statutory intention of HMDA, we believe the relationship lending model of community banks should not be subjected to the same scrutiny as large, global institutions that deploy standardized model-based lending programs. These concerns have largely been abated by new transaction volume thresholds (in place as of October 2019) that go beyond what CSBS has supported in comments regarding HMDA. Summary/Timeline In October 2015, the Consumer Financial Protection Bureau (CFPB) finalized amendments to HMDA (Regulation C). The updated rule required financial institutions to report 25 new data points identified in the Dodd-Frank Act, as well as other data points that the Bureau believes may be necessary. The rule also sought to provide limited relief to the smallest depository HMDA reporters by increasing the threshold for reporting from one covered loan to 25 covered loans. In May 2018, President Trump signed into law the 2018 Economic Growth, Regulatory Relief and Consumer Protection Act. Section 104 of the Act made it so that institutions required to report HMDA data will only report certain new HMDA data points (added by DFA and the 2015 Rule) if they originated more than 500 closed-end mortgage loans in each of the two preceding calendar years. In August 2018, the CFPB issued an interpretive and procedural rule to implement and clarify the partial exemptions that will apply if the bank or credit union originated fewer than 500 closed-end mortgage loans in each of the preceding two calendar years (and have a satisfactory CRA rating). The rule clarified 26 data points are covered by the partial exemption, and 22 data points still must be reported by institutions or credit unions that qualify for the partial exemption. The 2018 HMDA data contains a variety of information reported for the first time. A total of 2,251 reporters (2018 data) made use of the EGRRCPA’s partial exemptions for at least one of the 26 data points eligible for the exemptions. In May 2019, the CFPB proposed changes to HMDA’s transactional reporting thresholds to implement the threshold increase included in the Senate regulatory relief bill. In October, the Bureau issued an updated HMDA rule implementing that proposal. The final rule amended Regulation C to adjust the threshold for reporting data about open-end lines of credit by extending the current temporary threshold of 500 open-end lines of credit to January 2022. The CFPB issued an ANPR in June 2019 seeking industry feedback on the reporting of new data points. In 2019, the CFPB issued only one action related to fair lending, fining Freedom Mortgage $1.75 million for alleged violations of HMDA. Why it Matters to State Regulators State regulators are the primary supervisor for the vast majority of lenders required to report loan data under HMDA. The data serves as the basis for Community Reinvestment Act and fair lending reviews

FOR STATE REGULATOR USE ONLY

CSBS ISSUE BRIEFING

undertaken by federal and state regulators. Given its importance, state regulators believe methods for analyzing HMDA compliance should be transparent and consistent across regulators. Working through the Federal Financial Institutions Examination Council Task Force on Consumer Compliance, state regulators pushed successfully for an interagency approach to supervision of HMDA reporting compliance. Prior to 2018, each agency followed its own exam procedures and data resubmission guidelines. • Even though most states do not directly examine for HMDA compliance, it is important for state regulators to understand how the data is assessed given the impact that compliance violations can have on CAMELS ratings and safety and soundness. • In comments regarding changes to Regulation C, state regulators have emphasized that the relationship lending model of community banks should not be subjected to the same scrutiny as large, global institutions that deploy standardized model-based lending programs. • Recently implemented increases to the reporting thresholds go beyond what CSBS asked for in comments on the 2015 HMDA rule. • With the release of the 2018 data, the FFIEC urged users of the data to be cautious when exploring whether new data points indicate discrimination. We believe this language is helpful and in line with a corrective, rather than punitive approach to fair lending analysis. From the FFIEC press release announcing availability of 2018 data on mortgage lending: “HMDA data alone cannot be used to determine whether a lender is complying with fair lending laws. The data do not include some legitimate credit risk considerations for loan approval and loan pricing decisions. Therefore, when regulators conduct fair lending examinations, they analyze additional information before reaching a determination about an institutions compliance with fair lending laws.” Talking Points

SME Contact: Daniel Schwartz, Director, Policy Development, (202) 728-5742, 36T

Dschwartz@csbs.org 36T

Date Updated: 01/13/2020

FOR STATE REGULATOR USE ONLY

CSBS ISSUE BRIEFING

Nonbank Regulation: States’ Role

CSBS Official Position CSBS strongly believes state regulators should continue to be the primary regulator of nonbank financial service providers. The state regulatory system promotes economic diversity and local accountability. Summary State regulators are the primary regulator for thousands of nonbank entities, including mortgage lenders, consumer lenders, debt collectors and money transmitters. While state regulators share jurisdiction with federal agencies for certain non-depository financial institutions, they retain the ability to develop regulatory approaches best suited to achieve their state’s policy priorities. The system enables local policy makers to engage with consumers and industry and tailor regulations to address issues such as consumer protection to economic growth. Why it Matters to State Regulators State regulators are appointed by elected state officials who are locally accountable for fulfilling their state’s policy priorities to a degree unparalleled by any federal agency. States serving a primary regulatory role over nonbank financial services allows for a diverse pool of firms, encouraging small start-ups and innovation. A state system can be seen as a de facto sandbox or “laboratory of innovation” where successful innovations can gain broader scale. The state regulatory system is being reengineered as states work together to harmonize nonbank licensing and supervision, leveraging technology and new approaches to modernize supervision. States are the primary financial regulator of nearly 24,000 nonbank financial services companies that operate in areas like mortgage, money transmission and consumer finance markets. • The business models of most fintechs can be placed in context of existing state laws: o Originating mortgages, apply mortgage lending laws (e.g., Rocket Mortgage) o Lending to individuals, apply state consumer lending laws (e.g., SOFI) o Moving money from Point A to Point B, apply money transmission laws (e.g., PayPal) • State regulators oversee a dynamic, well-regulated market where new companies enter, and licensees stop doing business with little risk to consumers (or loss of customer funds) o In 2018: state-regulated MSBs handled over $1.4 trillion of transactions o In 2018: state-licensed firms originated $890 billion and serviced $3.9 trillion in mortgages o Two-thirds of the MSB market by dollar volume was supervised by multi-state exam teams o CFPB relies on NMLS to register more than 422,000 individual mortgage loan originators • State regulation encourages innovation and business growth: Fintechs can test approaches in a limited number of states before refining business models for broader market use • Through CSBS Vision 2020, state regulators have begun to reengineer the state system of supervision by: o Forming and meeting with a fintech advisory panel of 33 companies o Beginning development of next generation technology platform for licensing and supervision o Identifying areas for greater state harmonization o Enhancing existing and building new “suptech” Talking Points •

FOR STATE REGULATOR USE ONLY

CSBS ISSUE BRIEFING

• CSBS has developed a white paper that covers the nonbank industry supervised by state financial regulators. Published chapters include an overview of the nonbank industry, nonbank supervision and specific chapters focused on mortgage, MSBs, debt collection and consumer finance. The final chapter, “Reengineering Nonbank Supervision” is scheduled for release February 2020. SME Contact: Chuck Cross, Sr. VP, Nonbank Supervision and Enforcement: (202) 728-5745 or ccross@csbs.org ; or Margaret Liu , Sr. VP, Legislative Policy & Deputy General Counsel: (202) 728-5749 or MLiu@csbs.org

Date Updated: 1/9/2020

FOR STATE REGULATOR USE ONLY

CSBS ISSUE BRIEFING

OCC Fintech Charter

CSBS Official Position CSBS opposes the Office of the Comptroller of the Currency (OCC)’s federal fintech charter.

Summary Fintech, or financial technology, is an umbrella term that commonly refers to companies and products leveraging technology in financial services. Companies and activities that self-identify as fintech include online lenders (Quicken Loans), digital wallets (PayPal, Apple Pay), peer-to-peer payments (Venmo), crowdfunding (Kickstarter), micro-loans (Kiva), marketplace lending (Lending Club, Prosper) and big data companies (Mint, Banktivity). Currently, many fintech firms are licensed and regulated primarily by the states. CSBS filed a lawsuit against the OCC in April 2017 seeking to prevent the OCC from granting national bank charters to entities that operate as nonbanks, arguing such charters exceed the authority granted by Congress. The U.S. District Court of the District of Columbia dismissed the lawsuit in April 2018, stating the dispute was not “ripe,” as the OCC had not decided whether it would proceed with the fintech charter program. In July 2018, OCC finalized its fintech charter guidance and announced it would begin accepting applications. CSBS refiled its lawsuit in October 2018. In August 2019, the court against dismissed our case as not ripe because the OCC had not accepted an application for a fintech charter. Why it Matters to State Regulators A federal charter could allow fintech companies to avoid licensure and supervision in the states in which they operate and remove the ability of state supervisors to decide what businesses operate within their state borders. Talking Points • An OCC federal fintech charter is a train wreck in the making. • All options are on the table for CSBS action. • A national bank charter for uninsured institutions exceeds the OCC’s statutory authority. • A fintech charter would distort and harm the marketplace by arbitrarily picking winners and losers, which smacks of centralized industrial policy. • OCC’s charter would preempt strong state consumer protection laws, such as interest rate caps. • Taxpayers would be exposed to a new risk: failed fintechs. • The last time the OCC pre-empted state consumer protection laws in a sweeping manner--the early 2000s--predatory lenders were let off the hook and contributed to the largest number of home foreclosures since the Great Depression. Facts, Stats, and Anecdotes The New York Dept. of Financial Services on Sept. 14, 2018 also filed a suit against the OCC to stop the proposed national charter. In June 2019, the court denied OCC’s motions to dismiss and held that receiving deposits is indispensable to the business of banking. In October 2019, the court issued a final order invalidating the regulation relied on by the OCC and in December 2019 the OCC appealed this ruling to the Second Circuit. SME Contact: Margaret Liu , Sr. VP, Legislative Policy & Deputy General Counsel: (202) 728-5749 or MLiu@csbs.org Date Updated: 01/14/2020

FOR STATE REGULATOR USE ONLY

CSBS ISSUE BRIEFING

Qualified Mortgage/Safe Harbor

CSBS Official Position State regulators continue to support the principles that drive the Qualified Mortgage (QM) Ability-to- Repay (ATR) rule but have made several recommendations that would better tailor the rule commensurately to the community bank business model. CSBS supports a Safe Harbor for all mortgage loans held in portfolio by community banks. Summary A qualified mortgage refers to a mortgage that fulfills the ATR requirements as set out by the Consumer Financial Protection Bureau’s rule. As of January 2014, banks were granted protection from consumer litigation if their loan fulfilled the QM requirements. • Points and fees are less than or equal to 3% of the loan amount (for loan amounts less than $100k, higher percentage thresholds are allowed) • No risky features like negative amortization, interest-only, or balloon loans • Maximum loan term is less than or equal to 30 years. In total there are currently three main QM categories: • General QM Loan – any loan that meets, in full, the QM mandatory feature requirements specified above with greater than or equal to 43% DTI ratio. • GSE Eligible – under the GSE patch, any loan that meets the QM feature requirements and is eligible for purchase, guarantee, or insurance by a GSE, FHA, VA or USDA is a QM, regardless of whether it is above the 43% DTI ratio threshold 1 . • Small creditor –Mortgage originations held in portfolio by federally insured banks and credit unions under $10 billion dollars in assets. 2 Why it Matters to State Regulators The community bank business model relies on social capital, or relationship lending. Because community banks are often located in rural communities and have a smaller customer base, expanded qualitative data is taken into consideration throughout the lending process. It can be a challenge for small community banks to originate mortgage loans that fit inside the QM standard, often because the markets in which they do business require more flexible underwriting. Community banks are also more likely to hold originated loans in portfolio, compared to their larger counterparts that typically focus on standardized mortgage products and routinely sell their mortgage loans on the secondary market. When mortgage loans are held in portfolio, the interests of the borrower and lender are aligned because the lender is fully incentivized to ensure the borrower can meet the monthly obligations of the mortgage. All QM loans must have the following mandatory feature requirements:

1 FHA allows up to 57% DTI but not all of the loans may be at the GSEs are within FHA conforming loan limits 2 The Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155) adjusted the small creditor QM category. Before S.2155, the threshold was $2 billion in assets and 500 or fewer first mortgages per year .

FOR STATE REGULATOR USE ONLY

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Providing QM status to all mortgage loans held in community banks portfolios would encourage more mortgage lending by community banks. Access to affordable and flexible mortgage credit is not simply about advancing homeownership, but also small business growth. Small business owners often rely on home equity as a significant credit source, and the overly rigid ATR standard can inhibit community banks from extending this type of credit to worthy borrowers. In the year’s following the crisis many state regulators have observed that the two-billion-dollar threshold to be eligible for small creditor status under Regulation Z does not capture all community banks that engage in portfolio lending. Because the community bank business model is distinct and not necessarily linked to asset size, state regulators recommend that the CFPB utilize a definition that is primarily activities-based. The FDIC community bank research definition, introduced in 2012, defines community banks by an indexed asset threshold and certain activities. The Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155) fixed this disconnect with a new QM category. Mortgage originations made by federally insured banks and credit unions under $10 billion dollars in assets are now considered QM if they are held in portfolio. In July 2019, the Bureau issued an ANPR to gather input regarding whether to propose revisions to Regulation Z’s general qualified mortgage (QM) definition in light of the planned expiration of the temporary QM provision on Jan. 10, 2021. Talking Points • Community banks rely on relationship lending and need to be flexible on their loan products • Many community banks have not been able to take advantage of the existing small creditor QM due to having assets above $2 billion. • To mitigate this issue, S.2155 added a new QM category that makes originations from insured banks and credit unions under $10 billion dollars in assets QM if held in portfolio.

SME Contact:  Joey Samowitz, Policy & Supervision Analyst: (202) 559-1978 or  jsamowitz@csbs.org

Last Updated: 1/10/2020

FOR STATE REGULATOR USE ONLY

CSBS ISSUE BRIEFING

Sandboxes

CSBS Official Public Position State regulators oppose any effort by the Consumer Financial Protection Bureau (CFPB) to preempt state enforcement authority via its No-Action Letter policy (NAL Policy) or “Product Sandbox” proposal. The CFPB should not attempt to prevent state regulators from enforcing specific federal consumer financial laws against entities that receive relief under these policies. The proposal also removes language from the existing policy regarding consultation with state regulators prior to granting a NAL. Summary In September 2019, the CFPB finalized proposed revisions to its existing NAL Policy, established in 2016. It also finalized the proposed creation of a Product Sandbox that would provide additional statutory and regulatory relief. Several changes to the NAL policy include: • NAL’s will be binding on the CFPB, whereas previously they were staff-level, no action recommendations. • NAL applications will no longer be required to share data about the product or service with the Bureau. • The revised version of the NAL policy will remove language noting that the Bureau will consult and communicate with the appropriate state regulators in evaluating the issuance of a NAL. The Product Sandbox would also include the same relief that would be granted by the NALs. However, it would offer additional relief in the form of approvals by order from statutory and regulatory provisions under the CFPB’s rulemaking authority. The proposal states that entities that receive the approval relief within the Product Sandbox would have a safe harbor from enforcement actions (related to the Truth and Lending Act, the Equal Credit Opportunity Act and the Electronic Funds Transfer Act) by any federal or state authorities, as well as from lawsuit brought by private parties. State regulators believe the extent of this relief exceeds the authority of the CFPB under Title X of the Dodd-Frank Act. While the CFPB can choose not to enforce federal consumer financial laws under its purview, it is not authorized to prevent state officials from enforcing federal consumer financial laws. Why it Matters to State Regulators While CSBS does not have policy on the state-level sandboxes, several states have enacted or are working on enacting regulatory sandboxes. We will continue to work with state regulators to monitor such developments. At the federal level, Dodd-Frank limited the ability of federal agencies to preempt state law and empowered the state to enforce any of the eighteen “enumerated consumer laws” as defined by Title X of the Dodd-Frank Act. State financial regulators reserve the right to use the authority Congress provided them under the statute to protect their consumers, regardless of an entity’s status as a participant within the Bureau’s Product Sandbox or other actions taken (or stayed) by the CFPB. State regulators believe broad language detailing the scope of relief could lead entities to mistakenly believe they are exempt from laws with which compliance will continue to be required.

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CSBS ISSUE BRIEFING

In our comments on the proposed policies, we asked the CFPB to clarify that participation in the Product Sandbox does not provide a safe harbor from state enforcement of federal consumer law just as it does not exempt an entity from state consumer protection laws. Following the finalization of the policies, the CFPB held a briefing call for state regulators on Tuesday, Sept. 24, 2019. In response to questions on the call, the CFPB reaffirmed its belief that the safe harbor provided via sandbox relief would prevent states from taking action against an entity within the sandbox. Talking Points • State regulators oppose the preemption of state enforcement authority via the creation of the CFPB’s proposed sandbox. • State regulators are independently empowered to enforce the statutory provisions of federal consumer financial law within their respective states.

SME Contact: Daniel Schwartz, Director, Policy Development: (202) 728-5742, Dschwartz@csbs.org

Date Updated: 01/13/2020

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CSBS ISSUE BRIEFING

Small Dollar Lending

CSBS Official Public Position A final rule issued by the Consumer Financial Protection Bureau (CFPB) in 2017 (but not yet implemented due to a court order and efforts to reassess the rule) would bring federal consumer protections to the small dollar lending space for the first time. If implemented, the rule will cover any bank or nonbank lender that makes a small dollar loan with a term of less than 45 days and certain loans with longer-terms and balloon-payments. However, the final rule includes an important exception that would allow community banks to provide up to 2,500 “accommodation” style small dollar loans per year to their customers without having to comply with the rule’s requirements. State regulators were pleased to see that the CFPB responded to our comments on this topic by including the de minimis exemption for community banks. State regulators believe it is essential for community banks to be able to serve as sources of small dollar credit in the communities they serve. Why it Matters to State Regulators The original rule proposed by the CFPB would have covered any small dollar loan made by banks, despite not offering evidence of consumer harms resulting from this type of bank lending. State regulators were concerned that the proposed rules would disincentivize banks from offering small dollar credit to their customers. The inclusion of the de minimis exemption for bank small dollar lending will allow for some lending, but it will not result in banks offering small dollar loan products on a large scale. Under new leadership, the CFPB announced in January that it intended to engage in a rulemaking effort revisit the requirements of the 2017 small dollar loan rule. In February 2019, the CFPB issued a revised version of the rule that would rescind the mandatory underwriting provisions within the 2017 Final Rule. The CFPB said it made the new proposal because it determined that the evidence underlying the unfair or deceptive acts or practice, known as UDAAP, component of the rule was not robust or reliable to support that determination and because the rule will have a significant detrimental impact on credit availability. The CFPB is not proposing to reconsider the payment provisions of the 2017 final rule. The Bureau finalized their proposed changes in June and delayed the August 2019 compliance date of the rule to November 2020. Agency leadership from the FDIC, Federal Reserve, and OCC have signaled that joint action on small dollar lending may be on the horizon. Agency rulemaking could play out in a variety of ways. The agencies could choose to rescind their deposit advance guidance, which would essentially be a return to policies in effect prior to 2014. We could see another scenario in which the guidance is left in place and no additional guidance on small dollar lending is released. In this case, banks would be unlikely to participate. Another option would be for the agencies to clarify their guidance and apply it specifically to short-term loans with terms of 45 days or less. Several groups such as the Pew Research Center have suggested that regulators should provide a green light to installment loans that allow for reasonable pricing (double digit APR’s), affordable payments, and reasonable time to repay (terms longer than 45 days), while giving a red light for single payment or balloon payment small dollar loans. The rule sets a floor for federal consumer protections in the small dollar lending market and does not prevent states from implementing laws that are stricter than the CFPB’s requirements.

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Talking Points •

Payday loans are the main focus of the CFPB’s rulemaking. Achieving consensus across the states on the topic of payday lending is difficult because legislatures in 15 states and the District of Columbia have set usury rates that do not permit payday lending. However, in 35 other states, the traditional payday loan product is available to consumers subject to stringent licensing and regulatory requirements. These state differences are integral to the fabric of our regulatory system. • Congress recognized the value of state autonomy in protecting consumers while allowing for beneficial innovation in financial markets by intentionally prohibiting the federal government from setting a national usury rate for nonbank financial services providers. • State specific regulatory regimes for small dollar lending illustrate the challenge of forcing a one- size-fits-all federal regulatory framework for the non-depository financial services industry. • Federal rulemaking would set a floor and not a ceiling for consumer protection. State regulators oppose any federal agency action that fails to respect the ability of states to control interest rates and impose additional consumer protections for small-dollar credit products. • Federal rulemaking should be coordinated to avoid creating a race to the bottom amongst federal regulators and an environment in which nonbanks can attempt to circumvent state laws and regulations through contractual relationships with banks.

SME Contact: Daniel Schwartz, Director, Policy Development, (202) 728-5742, DSchwartz@csbs.org

Date Updated: 01/13/2020

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CSBS ISSUE BRIEFING

Vision 2020

CSBS Official Position In May 2017, CSBS members adopted a policy statement committing state regulators to move towards an integrated, 50-state system of licensing and supervision for nonbanks, including fintech firms, while promoting strong consumer protections. Achieving this goal involves several CSBS and state initiatives. We refer to these initiatives collectively as CSBS Vision 2020.

Summary CSBS Vision 2020 includes:

1. Industry Engagement: Through our Fintech Industry Advisory Panel (FIAP), we brought together 33 firms to identify state licensing and regulation “pain points.” In February 2019, we released the FIAP’s recommendations and announced the steps the states and CSBS are taking to smooth the licensing and supervision of nonbanks across the nation while strengthening consumer protections and local accountability. These next steps focus on forging common definitions and practices, increasing transparency and expanding the use of common technology. In December 2019, CSBS issued a FIAP Accountability Report to update FIAP companies and other stakeholders on progress in addressing the FIAP’s recommendations. 2. Next-generation technology platform: CSBS is building a new end-to-end technology platform that will span from licensing through supervision, dramatically improving the multistate experience. The platform includes a new state examinationsystem, which we piloted during the fall of 2019. 3. Harmonize multistate licensing and supervision : State regulators and CSBS have several initiatives underway to bring more efficiency and standardization to licensing and supervision. • In 2019, we conducted a One Company, One Exam pilot that has now evolved to a greater commitment to a networked approach to supervision greater reliance and sharing of exam work and information. • The states are working on a model approach to MSB licensing requirements and processes. • The states are in the early stages of developing a consumer finance call report. As the mortgage and MSB call reports have done, the consumer finance call report’s goal will be to improve the information reported to regulators while bringing greater consistency to reporting requirements. 4. Better tools for navigating the state system: CSBS is developing several tools and resources to bring greater transparency to state nonbank supervision and licensing. In 2019, we launched a repository of state guidances related to non-bank licensing and supervision as well as surveys of certain areas of state MSB laws. Early this year, we will roll out a 50-state consumer finance law survey. 5. Assist state banking departments : To help better regulate banks and nonbanks CSBS has trained hundreds of state regulators as part of a nationwide cyber training initiative, developed amodel cyber regulation, and is finalizing anMSB accreditation program. 6. Improve third party supervision: Banks seeks to partner with a variety of companies, including many who consider themselves fintechs. The Bank Service Company Examination Coordination Act (H.R. 241) would amend the Bank Services Company Act to allow better federal-state coordination in supervising third-party vendors. The House unanimously approved the measure by a voice vote in September. CSBS urges the Senate to do the same, as the bill would support

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