The Treasury Department on Tuesday released its fourth and final report in a series that responds to the president’s 2017 executive order focusing on regulatory core principles, with this one offering recommendations to “support nonbank financial institutions, embrace financial technology, and foster innovation.”
“American innovation is a cornerstone of a healthy U.S. economy. Creating a regulatory environment that supports responsible innovation is crucial for economic growth and success, particularly in the financial sector,” Treasury Secretary Steven Mnuchin said in Tuesday’s announcement. “America is a leader in innovation. We must keep pace with industry changes and encourage financial ingenuity to foster the nation’s vibrant financial services and technology sectors.”
Today’s report responds to Executive Order 13772. Issued by President Donald Trump in February 2017, the order directs Treasury to identify laws and regulations that are inconsistent with the core principles for financial regulation it set forth.
The 222-page report offers more than 80 recommendations organized under four broad themes: embrace the efficient and responsible use of consumer financial data and competitive technologies; streamline the regulatory environment to foster innovation across business models; modernize activity-specific regulations; and facilitate experimentation – for example, by working with federal and state regulators to establish a kind of “regulatory sandbox” to encourage innovation.
Some of the key recommendations – in brief, and in no particular order – are as follows:
- New bank (fintech) charter: Recommends that the Office of the Comptroller of the Currency (OCC) move forward with “prudent and carefully considered applications” for special purpose national bank charters. The special purpose banks should not be able to accept deposits insured by the Federal Deposit Insurance Corp. (FDIC). OCC should consider whether they should have financial inclusion requirements, and the Federal Reserve should determine whether they should have access to federal payment services.
- Payday lending: The report recognizes and supports states’ authority to establish comprehensive requirements for short-term, small-dollar installment lending and recommends that the Bureau of Consumer Financial Protection (CFPB) rescind its payday rule. Treasury also recommends that regulators take steps to encourage sustainable and responsible short-term, small-dollar installment lending by banks. “Specifically, Treasury recommends that the FDIC reconsider its guidance on direct deposit advance services and issue new guidance similar to the OCC’s core lending principles for short-term, small-dollar installment lending,” the report says.
- Mortgage lending: Supports promoting changes to accommodate an end-to-end digital mortgage, including acceptance of digital promissory notes, recognition of modern digital notary standards, and automated property appraisals.
- Marketplace lending: Recommends codifying (by Congress) the “valid when made” doctrine and the role of the bank as the “true lender” of loans it makes to better support productive partnerships between banks and newer technology based firms. The report adds that federal banking regulators should use available authorities to address these challenges.
- Communications: Suggests modernizing rules for digital communications, such as the Telephone Consumer Protection Act and the Fair Debt Collection Practices Act.
- Consumer data security: Recommends enacting a federal data security and breach notification law that is technology-neutral, scalable to the type of activity and entity, and recognizing existing federal data security requirements for financial institutions; and coordinating regulatory actions by relevant agencies to protect data held by credit reporting agencies.
- Third-party arrangements: Recommends harmonizing guidance related to bank partnerships with third parties to improve efficiency and further enable technological innovation prudently.
- Investing in innovation: Recommends improving the ability of banks to make innovation-related investments and flexibly adapt to new technologies by considering changes to applicable banking regulations.
- New credit models and data: Suggest further enabling the testing of newer credit models and data sources by both banks and nonbank financial companies to expand access to credit and improve risk assessments.
- Licensing and exams: Recommends encouraging state authorities to further harmonize licensing requirements and supervisory examinations, particularly for money transmission activities.
- Payments: Recommends modernizing payment services by having the Federal Reserve continue to work to facilitate a faster retail payments system. In particular, smaller financial institutions, like community banks and credit unions, should also have the ability to access the most-innovative technologies and payment services.
Treasury says that in drafting the report, it consulted extensively with a wide range of stakeholders focused on consumer financial data aggregation, lending, payments, credit servicing, financial technology, and innovation.