States agree to sweeping reg reforms for fintechs
WASHINGTON — A group of state regulators Thursday agreed to 14 recommendations, developed by the fintech industry, that are geared at streamlining state-by-state licensing and supervision processes.
The effort through the Conference of State Bank Supervisors marks one of the most significant partnerships between state regulators and fintechs to date, and it includes big names like PayPal, Western Union and SoFi. Fintechs have long argued the state-by-state licensing process is burdensome. The agreed-upon recommendations with state regulators come at a time when federal agencies are beginning to offer national bank chartering options for fintechs, underscoring the need for states to remain competitive.
“The 100 hours that industry has poured into this effort, I think, that speaks a lot to our optimism around this process and the harmonization effort,” said Andrea Donkor, vice president of regulatory relations, enterprise risk, compliance and security at PayPal.
Donkor, who was among the fintech leaders speaking at CSBS headquarters in Washington on Thursday, was responding to a question about whether the firm would continue to be state-regulated after going through this effort.
“We are currently a part of the multistate regulatory framework — I think our effort demonstrates that that’s where our focus is at this point in time,” Donkor responded.
The CSBS has been working with 33 fintech companies on an advisory panel since 2017 to put out various recommendations for simplifying the regulatory process for mortgage lenders, digital consumer lenders and money-services businesses across different states. This is part of a larger effort the CSBS calls Vision 2020 to get state regulators to create more uniform licensing and supervision standards by next year.
“As technology has enabled companies to scale more quickly, it has put stress on our multi-state system and new demands on our system,” said John Ryan, president and CEO of the CSBS. “That is why ... in May 2017 the states announced an initiative our Vision 2020 and made a policy commitment to better harmonize multistate licensing and supervision for nonbanks.”
The 14 recommendations released Thursday target specific "pain points" for the payments and lending industries. The recommendations include developing standardized definitions and required activities for a money-service business license and creating a more consistent exam cycle across states.
In response to exam concerns, the CSBS launched a pilot in January with one money transmitter firm to have a single exam used across all the states that regulate the firm.
Previously, “a number of regulators may be working at the same time, kind of coincidentally, at an organization but not necessarily working together,” said Kevin Hagler, commissioner of the Georgia Department of Banking and Finance, which is a part of the pilot. “The pilot is really meant to identify what kind of information we could ask of the company ahead of time and do a much better job of sharing that information and communicating with each other so that we don’t duplicate efforts.”
Hagler added that later this year the CSBS will put together an online database from surveys of state regulators identifying legal "obstacles" for existing and potential state-chartered companies in order to better harmonize such laws.
“As a regulator, I’m aware of what our laws are, but I’m not really that familiar with even our bordering states, the nuances and the different exceptions that they have,” he said. “So this tool will also be very helpful to folks like myself, better understanding what those nuances are and what we need to harmonize.”
The group also recommended streamlining reporting and exam cycles.
“To the extent that the licensing, reporting requirements and exams are more harmonized, it makes the state system much more attractive and gives companies that are trying to be national in scope the ability to scale and operate more efficiently,” said Rob Lavet, general counsel at SoFi.
The student loan platform provider attempted to apply for deposit insurance with the Federal Deposit Insurance Corp. to become a limited national bank but quickly withdrew in 2017 over an internal scandal with then-CEO Mike Cagney.
Regulators also agreed to expand use of the Nationwide Multistate Licensing System, or NMLS, for all nonbank industries.
The CSBS has been improving the National Mortgage Licensing System in recent years, expanding beyond mortgage companies and speeding up the reporting process. The fintech industry also recommended the licensing system move to a fully electronic reporting system to help the industry and state examiners.
Since the licensing system's launch in 2008, "the cost of technology has gone down and you’re able to leverage at a lower cost better services to consumers across the country,” Ryan said. “In the same way, we are able to leverage at lower cost and deliver a more robust system. This is not about deregulation. This is about creating a more robust system, higher standards across the country, but consistent standards to protect consumers, to create a more safe and sound industry.”
The CSBS said it will release a request for information on Friday to get additional feedback on the recommendations and other ways to improve the state regulatory process.
“As a regulator, it’s easy to come up with where we need to go ... but the unintended consequences can be significant and very burdensome if you don’t talk it through with the industry,” Hagler said. “So we very much want their feedback as we get started and during the process.”
At the same time, the bank supervisor group acknowledged the recommendations would have to be voluntarily adopted by state regulators and some might require more of a legislative push than others.
“We can’t force uniformity, but we found that states coming together ... have been able to arrive at solutions that have resulted in consistent adoption,” Ryan said.