There’s a big ballyhoo brewing at the federal level over the Office of the Comptroller of the Currency’s efforts to supervise and regulate nonbanks.
Consumer advocates oppose this initiative because it pre-empts state usury rates, which they have long supported and weaponized as a way to control prices through legislative and ballot initiatives — even though such price controls and rate caps ultimately harm consumers by restricting credit access and eliminating credit products from the market.
State regulators and their trade association, the Conference of State Bank Supervisors, are also opposed. They dislike federal regulators taking licensing and supervision away from their long-held oversight authority, which leads to a loss of licensing revenue and standing in this new fintech environment.
While these groups are resisting federal oversight of nonbank fintech companies as a way to hold on to their power, it is a mistake to leave the system as it is.
Instead, let us turn our heads and look to a dual licensing authority that seems to work, as it is the bank system that exists today. Under the current model, banks are licensed either by states or the federal government. As of today, there are approximately 819 state-licensed banks and 5,177 national banks. These banks can choose and switch licensing regimes depending on their business model—something that occurs frequently. As such, the banking regulatory agencies are fully staffed and equipped to deal with this dual model.
This model can also exist for fintech and nonbank businesses, and we should promote regulatory actions to put such a model in place.
Nonbank consumer lending has historically been licensed only at the state level. Because of technology and innovation, however, companies now want to explore a federal approach to licensing — largely because the byzantine labyrinth of multiple state laws and regulations creates a compliance nightmare for nonbank lenders serving customers nationwide.
This is not an unprecedented problem. We saw similar issues in the late 1950s and 1960s, when credit cards were evolving and federal and state authorities wanted control. To address this, Congress passed a series of laws in the 1970s to address the emerging issues and modernize the system. That’s why, today, we have the Fair Credit Reporting Act, the Unsolicited Credit Card Act, the Truth in Lending Act, the Equal Credit Opportunity Act and the Fair Debt Collection Practices Act — laws that apply to all lenders, even those that are only state-licensed. The credit card rails of Visa and Mastercard are like the internet today, enabling and empowering seamless financial product offerings that can be available to everyone without a patchwork of state licensing and regulation regimes bogging innovation down.
For years, the OCC needed the melding of talent between banks and fintech thinking — a need that, at long last, was met and exemplified by Brian Brooks as the acting comptroller. If the United States is to lead in financial innovation, our laws and how we supervise industries must be designed to promote leadership — not restrain it.
The federal government has recognized this imperative, notably in the 2018 U.S. Treasury report that also foresaw the need to unleash innovation by encouraging banks to partner with fintech companies as consumers are quickly migrating to financial offerings like Apple Pay, Venmo and PayPal. While these companies started in the payments space, they have since migrated into credit products.
We need to respond accordingly, priming the pump to unleash innovation by better regulating and supervising financial products. Our regulatory apparatus is badly in need of updating, so it can respond to the landscape as it exists today and as it continues to evolve.
To that end, let’s have federal or state supervision of nonbank fintechs based on the company’s size and scope of their product offerings. If companies are federally licensed and supervised — and if there is coordination between federal and state governments for companies that appear to be doing harm (we want to avoid the mortgage crises) — there should be no reason not to have a federal charter for nonbanks.
Technology will continue to change the way we do business and govern. We can either pretend like these changes aren’t happening, or we can meet the moment and take the actions that have long been sorely needed. The financial products that have been unleashed by recent innovations have expanded credit access to previously unserved populations — a development that we all should be heralding. And by implementing a model that licenses and regulates non-bank fintech companies just like the model currently in place for banks, we can spur more innovation that will provide a massive benefit for millions of consumers across the country.
Mary Jackson is the CEO of the Online Lenders Alliance, the first and largest trade association representing the growing industry of fintech companies that harness technology to deliver safe, convenient, private and reliable credit options for consumers.
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