CSBS Issue Briefings - August 2020

CSBS Issue Briefings

September 14, 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

Appraisals

CSBS Official Public Position

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

Federal appraisal thresholds have been raised over the last two years. For 1-4 family residential transactions, the threshold is now $400,000. For commercial transactions, the bank threshold is $500,000 while the credit union threshold is $1 million. CSBS acknowledges that changes are occurring in the appraisal industry. Automated valuation methods are now used by the GSEs in 40% of their transactions. The Appraiser Qualifications Board of the Appraisal Foundation, which sets minimum qualifications for real property appraisers in the United States, last revised and reduced the educational requirements to become a licensed/credential residential appraiser in 2018. However, these changes may not be enough to address appraiser shortages in underserved 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 financial institutions to facilitate commerce in local communities. The Federal Financi al Institutions Examination Council’s Appraisal Subcommittee (ASC) indicated in September 2019 that it would improve the process for applicants seeking the temporary waiver of appraiser credentials available under Title XI of the Financial Institutions Reform, Recovery and Enforcement Act. The ASC issued FAQs on the temporary waiver authority in December 2019. In 30 years, the waiver has been approved for only the Northern Mariana Islands and North Dakota.

Why it Matters to State Regulators

A shortage of qualified appraisers can leave markets underserved, stifling economic activity. Commercial and residential lending are critical for local economic development. Qualified appraisers make that lending possible. Many state regulators continue to observe a shortage of appraisers in regions across the country.

Talking Points

• 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. • A Tennessee bank applied for a waiver in 2018 but was denied. • North Dakota’s waiver application was approved for one year in 2019 and extended for an additional year August 2020. • The appraiser waiver process needs to be clarified in a way that it would help address the limited appraiser availability in underserved markets. • The temporary waiver is only a bandage that does not, by itself, correct the underlying problem of scarcity.

FOR STATE REGULATOR USE ONLY

• 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 reflect the availability or willingness of local appraisers to work in underserved markets. • The barriers to entry for new entrants into the profession need to be addressed – the education and apprenticeship requirements should be re-evaluated given widespread changes in the market (included automated valuation methods that are supplanting the use of residential appraisers).

SME Contact: Daniel Berkland, Director, Supervisory Processes: (202) 559-1987 or DBerkland@csbs.org

Date Updated: 9/8/2020

FOR STATE REGULATOR USE ONLY

Bank Service Company Examination Coordination Act

CSBS Official Public Position

CSBS strongly supports H.R. 241/S. 4154, 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 e fficient 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 and 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. The Bank Service Company Examination Coordination Act (H.R 241/S. 4154) would amend the BSCA to permit federal and state banking agencies to coordinate examinations of TSPs and share results. 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. • H.R. 241/S. 4154 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. Talking Points Why it Matters to State Regulators

FOR STATE REGULATOR USE ONLY

• H.R. 241 passed the House of Representatives by voice vote in September 2019. Bipartisan Senate companion legislation, S. 4154, was introduced in July 2020, and we encourage the Senate to act swiftly on this legislation.

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

Date Updated: 8/24/2020

FOR STATE REGULATOR USE ONLY

Community Bank Leverage Ratio

CSBS Official Public Position

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.

Summary

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 law required the FDIC, OCC and Federal Reserve to consult with state bank supervisors in establishing and implementing the CBLR framework. Over the course of late 2018 and early 2019, the federal banking agencies held multiple calls and meetings with state regulators, issuing 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 Prompt Corrective Action (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.

Why it Matters to State Regulators

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 will hopefully provide the relief intended by Congress.

Talking Points

• The CBLR rule should not incorporate PCA proxies and should utilize a Tier 1 leverage ratio in order to provide the regulatory relief intended by Congress. • The FBAs should not implement the CBLR in a manner that creates regulatory burden rather than provide regulatory relief. SME Contact: Mike Townsley, Director of Regulatory Policy & Policy Counsel: (202) 728-5738 or MTownsley@csbs.org

FOR STATE REGULATOR USE ONLY

Date Updated: 8/31/2020

FOR STATE REGULATOR USE ONLY

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. • There is a lack of transparency regarding analysis methods and an inconsistent degree of communication and coordination between federal regulators, banks and state regulators. • Federal regulators a ssert compliance violations based on the recurrence of a “pattern or practice,” but they have not provided a definition of what this means. • Thresholds for violations differ among regulators. • Lack of clarity regarding “disparate impact” analysis inhibits th e 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. 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. Why it Matters to State Regulators

FOR STATE REGULATOR USE ONLY

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 and soundness. • 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 of examinations. • 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 the U.S. Department of Justice (DOJ). • Federal banking regulators should be empowered to review and resolve potential fair lending issues without being obligated to refer all cases to the DOJ.

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

Date Updated: 08/25/2020

FOR STATE REGULATOR USE ONLY

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 of 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. 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. Why It Matters to State Regulators • A study presented at eh CSBS-Federal Reserve-FDIC Community Bank Research Conference found that much of the recent decline in the number of banks is due to a collapse of entry: If the current pace of consolidation continues with limited new bank entrants, there could be 1,000 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 both stablishing a new procedure through which new bank organizers can request feedback on their draft deposit insurance applications before filing the official application and announcing the agency 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 are FDIC regulated (76.5%). • From year end 2009 to year end 2017, only 11 de novo charters were approved. Talking Points

FOR STATE REGULATOR USE ONLY

• Twenty-three applications for deposit insurance have been approved since the beginning of 2018, and at least 20 applications are pending. • Texas DOB recently approved their first de novo charter application since 2009.

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

Date Updated: 08/31/2020

FOR STATE REGULATOR USE ONLY

Dodd-Frank Act Section 1071

CSBS Official Public Position

State regulators believe Congress should revisit the small business lending data collection requirements mandated by the Dodd-Frank Act to ensure they do not have a disproportionately negative impact on community banks or 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. 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. The CFPB held a symposium focused on small business lending data collection in November 2019. At the symposium, Director Kathy Kraninger said the CFPB would move forward with the Section1071 rulemaking wi th “care and consideration in order that the rule not impede the ability of small businesses – including minority and women owned small businesses – to access the credit they need.”

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. State regulators are concerned that the 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.

Talking Points

• 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 DFA 1071. • 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.

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

Date Updated: 08/25/2020

FOR STATE REGULATOR USE ONLY

Home Mortgage Disclosure Act

CSBS Official Public Position

While state regulators support the statutory intention of HMDA, CSBS believes 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.

Summary

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 CFPB 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 24, 2018, the president signed into law the Economic Growth, Regulatory Relief and Consumer Protection Act, sometimes known as S. 2155. Section 104 of the Act requires the CFPB to adjust the transactional threshold in Regulation C, allowing institutions to 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. A total of 2,251 reporters made use of the EGRRCPA’s partial exemptions for at least one of the 26 data points eligible for the exemptions. The 2018 HMDA data became available in August of 2019 and (released in 2019) contains a variety of information reported for the first time. 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. In a 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.” In 2019, the CFPB issued only one action related to fair lending, fining Freedom Mortgage $1.75 million for alleged violations of HMDA. In April 2020, the CFPB finalized a rule further increasing the reporting threshold for closed-end mortgages from 25 to 100 loans for both depository and non-depository lenders. The permanent threshold for reporting open-end lines of credit will increase from 100 to 200 on Jan. 1, 2022, when the current temporary threshold of 500 (from S. 2155) expires.

Why it Matters to State Regulators

FOR STATE REGULATOR USE ONLY

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 undertaken by federal and state 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. • State regulators support the statutory intent of HMDA and endorse the steps taken by the CFPB to reduce burden on small financial institutions. • The relationship lending model of small community banks should not be subject to the same amount of scrutiny as large, global institutions. • Excessive reporting requirements impose a disproportionate cost burden on those small reporters, especially community banks. • Methods for analyzing HMDA compliance should be transparent and consistent across regulators. • While some of these concerns have been abated by the new transaction volume thresholds (in place as of October 2019), there are still more efforts that can be made to reduce burden. Talking Points

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

Date Updated: 08/25/2020

FOR STATE REGULATOR USE ONLY

Nonbank Supervision: 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. 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. State regulators are working together to harmonize nonbank licensing and supervision, leveraging technology and new approaches to modernize supervision. • States are the primary financial regulator of nearly 25,500 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 • In 2019: o State-regulated MSBs handled $2 trillion worth of transactions o State-licensed firms originated $1.3 trillion and serviced $6.3 trillion in mortgages o CFPB relies on NMLS to register more than 574,000 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 Development of the State Examination System – the next generation technology platform for licensing and supervision Why it Matters to State Regulators Talking Points

FOR STATE REGULATOR USE ONLY

o Identifying areas for greater state harmonization o Enhancing existing and building new “suptech”

• CSBS has published a white paper that covers the nonbank industry supervised by state financial regulators. 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: 8/20/2020

FOR STATE REGULATOR USE ONLY

OCC Fintech Charter

CSBS Official Position

CSBS opposes the Office of the Comptroller of the Currency (OCC)’s proposed 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. For the past several years, to OCC has attempted to implement a special purpose national bank charter to fintechs that do not take deposits. CSBS and state regulators oppose the so-called fintech charter for a number of reasons, chief among them that this is not allowed by the National Bank Act. Over the summer in 2020, Acting Comptroller Brian Brooks proposed that the OCC will offer the “fintech charter” for nonbank payments companies sometime in the fall. 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 again dismissed our case as not ripe because the OCC had not accepted an application for a fintech charter. 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. The court specified that its order had nationwide applicability. In December 2019 the OCC appealed this ruling to the Second Circuit in December. CSBS filed an amicus brief supporting the NYDFS in July 2020. Consumer groups, a national banking trade group and legal scholars also filed briefs supporting the NYDFS. Legal Action

Why it Matters to State Regulators

As proposed by the OCC, the federal charter would preempt state oversight over fintech companies involved in payments and/or lending, allowing those companies to avoid licensure and consumer protection and safety and soundness oversight by the states.

Facts, Stats, and Anecdotes

FOR STATE REGULATOR USE ONLY

• The states oversee companies responsible for $1.4 trillion in annual payments, encompassing small brick-and-mortar companies to large internationally active corporations, moving billions of dollars • Through Vision 2020, states are using tech tools to better supervise a variety of nonbank institutions, including fintechs • A national bank charter for institutions that do not take deposits exceeds the OCC’s statutory authority • Congress defines a bank as an institution that takes deposits; a bank can also make loans or process payments, but the deposits function is not optional • A fintech charter would distort and harm the marketplace by arbitrarily picking winners and losers • Taxpayers would be exposed to a new risk: failed fintech • A federal court has determined the OCC lacks authority to grant a bank charter to an entity that does not take deposits • The New York court decision applies to lending and/or payments and has nationwide applicability • There is no difference between t he OCC’s proposed fintech charter and its new payments charter proposal; both are invalid because the OCC does not have the authority or power to define a bank • 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 • State regulators support market competition and innovation while ensuring that businesses are locally accountable and that consumers are protected

Talking Points

SME Contact: Margaret Liu, Sr. VP, Legislative Policy & Deputy General Counsel: (202) 728-5749 or MLiu@csbs.org

Date Updated: 8/20/2020

FOR STATE REGULATOR USE ONLY

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.

All QM loans must have the following mandatory feature 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 threshold1. • Small Creditor – Mortgage originations held in portfolio by federally insured banks and credit unions under $10 billion dollars in assets.2 • Removal of DTI – The CFPBhas released a notice of proposed rulemaking regarding major changes to the general QM definition which removes DTI and instead designates a loan QM if it the APR exceeds APOR3 for a comparable transaction by less than two percentage points as of the date the interest rate is set. The proposal would retain the existing product-feature and underwriting requirements and limits on points and fees. The proposal would also mark the end of the GSE eligible definition. • Seasoned QMs – The CFPB also released a proposal to add a new category - referred to as “seasoned QMs.” A seasoned QM would be first -lien, fixed-rate covered transactions that have met certain performance requirements over a 36-month seasoning period, are held in portfolio until the end of the seasoning period, comply with general restrictions on product features and points and fees and meet certain underwriting requirements.

Proposed Changes by CFPB:

Why it Matters to State Regulators

FOR STATE REGULATOR USE ONLY

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. 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.

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

Date Updated: 8/27/2020

FOR STATE REGULATOR USE ONLY

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. 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 Bureau 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 no-action letters. 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. 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 18 “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 CFPB’s Product Sandbox or other actions taken (or stayed) by the federal agency. 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. In our comments on the proposed policies, we asked the CFPB to clarify that participation in the Product Sandbox does not Summary Why it Matters to State Regulators

FOR STATE REGULATOR USE ONLY

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. In response to questions on the call, the Bureau reaffirmed their 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 or Dschwartz@csbs.org

Date Updated: 8/25/2020

FOR STATE REGULATOR USE ONLY

Small Dollar Lending

CSBS Official Public Position

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. In the rulemaking process, state regulators have emphasized that federal rulemaking 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 req uirements.

Summary

In July 2020, the CFPB issued a final rule rescinding the ability-to-repay provisions in its final payday/auto title/high-rate installment loan rule (Payday Rule). The initial version of the rule — drafted during the previous administration — had been finalized in 2017 but never went into effect because it had been stayed by a court order. When implemented, the rule will impose restrictions on the ability of bank or nonbank lenders to make repeated attempts to debit customer accounts for payment on covered small dollar loans. The CFPB’s final rule includes an exemption 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 requirement s. This exemption, combined with recent guidance issued by the banking agencies, should encourage banks to offer small dollar loans to their customers. As the CFPB worked to re-assess the small dollar rulemaking over the past several years, the federal banking agencies also took steps to alter their policies regarding bank small dollar lending. In 2017, the OCC rescinded their 2013 Deposit Advance Guidance in 2017 and the FDIC took similar action this spring. In May, the agencies for the first time issued joint guidance regarding their expectations for small-dollar lending. The guidance encourages banks to make “responsible small - dollar loans” and outlines high level risk management practices and controls that banks should put in place as they implement small dollar lending programs. Outside of small amounts of “accommodation” style lending, banks have not been particularly active in small dollar lending in recent years, largely due to regulatory uncertainty. Without access to small dollar loans at banks, consumers are often left with limited and expensive choices as they seek small dollar credit. State regulators believe that a robust market for consumer lending depends upon viable market alternatives. Bank participation in small dollar increases competition in the market and should lead to lower costs for consumers. Why it Matters to State Regulators

Talking Points

• 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.

FOR STATE REGULATOR USE ONLY

• 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 limits their ability to impose additional consumer protections for small-dollar credit products. • Recent guidance on responsible small dollar lending by banks should help to clarify regulatory uncertainty • Banks can look to U.S. Banks Simple Loan product as an example of a successful implementation of a small-dollar loan product that fits the criteria outlined in the recent agency guidance.

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

Date Updated: 08/31/2020

FOR STATE REGULATOR USE ONLY

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 i dentify 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. CSBS regularly issues a FIAP Accountability Report on the progress of the recommendations. 2. Next-generation technology platform: In March 2020, CSBS launched the State Examination System (SES), a new nationwide technology platform that allows state examiners collect information from supervised institutions securely and perform key aspects of formal examinations without the normal onsite visits. SES has built these procedures into an automated workflow that is easily accessible from locations near or far. 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 which 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 nonbank licensing and supervision as well as surveys of certain areas of state MSB laws. In February 2020, CSBS released a survey of consumer lending laws and regulations of all 50 states and Washington, D.C. 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 a model cyber regulation and is finalizing an MSB 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

FOR STATE REGULATOR USE ONLY