CSBS Issue Briefings - January 2020

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