CSBS Issue Briefings - August 2020

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