CSBS Policy Briefings

CSBS Policy Briefings

November 1 9 , 2021

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:

Karen Lawson, Senior Vice President of Policy Klawson@csbs.org (202) 802-9547

Appraisals

CSBS Official Public Position

CSBS believes the current appraisal 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 government-sponsored enterprises 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. Additional updates may be needed to keep the industry competitive in the future, especially 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 Financial 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. The State Liaison Committee initiated a series of meetings in late 2020 with members of the ASC, the Association of Appraiser Regulatory Officials and the Appraisal Qualifications Board to discuss ways to address appraiser shortages in the long- and short-term. • 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 appr oved for one year in 2019 and extended for an additional year in August 2020. • Tennessee and North Dakota have held outreach sessions to bring together various stakeholders to address appraiser shortages and related issues experienced in their states. Waiver Process under Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989:

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

• 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). • The National Registry of Real Estate Appraisers does not reflect the availability or willingness of local appraisers to work in underserved markets. • The appraiser waiver process needs to be clarified in ways that would help address the limited appraiser availability in underserved markets.

FOR STATE REGULATOR USE ONLY

• The temporary waiver is only a bandage that does not, by itself, correct the underlying problem of scarcity.

SME Contact: Dan Berkland, Director, Supervisory Processes: 202-559-1987 or dberkland@csbs.org

Date Updated: August 2021

FOR STATE REGULATOR USE ONLY

Bank Service Company Examination Coordination Act

CSBS Official Public Position

CSBS strongly supports the Bank Service Company Examination Coordination Act (H.R. 2270/S. 1230), legislation that would enhance state and federal regulators’ ability to coordinate examinations of and share information on banks’ technology vendors in an ef fective and efficient manner.

Summary

Banks have long partnered with technology service providers (TSPs), which can be bank affiliates, 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. While bank and vendor relationships are common, they can expose banks and customers to unique and serious risks, particularly cybersecurity or business continuity risks. Recent cyber incidents at technology vendors, such as the SolarWinds hack, underscore the serious vulnerabilities that can exist at TSPs. Ensuring effective regulatory oversight of banks’ partners and vendors is important to mitigating these risks. 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 would amend the BSCA to permit federal and state banking agencies to coordinate examinations of TSPs and share results.

Why It Matters to State Regulators

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.

Talking Points

• The Bank Service Company Examination Coordination Act 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. • State regulators advanced the Bank Service Company Examination Coordination Act to its furthest point last Congress, with the House of Representatives passing the bill by voice vote in September 2019, and the Senate introducing bipartisan companion legislation. • State regulators encourage Congress to swiftly acted upon the bipartisan Bank Service Company Examination Coordination Act -- H.R. 2270 in the House and S. 1230 in the Senate.

SME Contact: Dana Barbieri, Vice President of Legislative Policy: 202-802-9551 or dbarbieri@csbs.org

Date Updated: October 2021

FOR STATE REGULATOR USE ONLY

Cannabis Banking Safe Harbour

CSBS Official Public Position

CSBS supports federal legislation that would provide a safe harbor for financial institutions that allows financial services to state-compliant marijuana and marijuana-related businesses and for the transparent and safe banking of the marijuana industry. Clarity between federal and state law would also benefit the regtech companies operating in this space to assist with anti-money laundering requirements and other functions.

Summary

Today, cannabis-related small businesses are blocked from accessing financial services such as bank deposits, loans, money transmission and credit cards for payment by federal law. Hemp is legal everywhere in the United States, but marijuana remains a Schedule 1 drug federally. The number of states where marijuana is legal continues to grow. Recreational or adult use marijuana is legal in 18 states, the District of Columbia and two territories. Medical cannabis is legal in some form in nearly all states and territories, from low THC and CBD oil to full use and home cultivation of cannabis. Many states run state- licensed dispensaries. FDA regulation of CBD remains a barrier for the hemp industry. The FDA has concluded that THC and CBD products are excluded from dietary supplements and has warned several companies selling CBD products that their claims may be unjustified. Some states allow food and beverages sold within the state to include CBD. By granting a safe harbor for financial institutions and money transmitters, Congress can bring regulatory clarity to the industry and ensure safe access to money services for legal state businesses. Even though California, South Dakota and Washington have passed laws to allow financial institutions to work with cannabis businesses, the federal illegality overrides those state laws. The NCUA is the only federal financial institution regulator that publicly encourages their institutions to serve hemp-related businesses. Marijuana banking requires increased Bank Secrecy Act/Anti-Money Laundering scrutiny. FinCEN guidance, last updated in 2014, requires ongoing filing of marijuana suspicious activity reports (SARs) that could represent a substantial compliance burden for a community financial institution. • The conflict between state and federal laws related to marijuana is causing public safety, tax collection and anti-money laundering concerns. • State-compliant marijuana companies are largely cash-only operations, which heightens the need for safeguards for these state-compliant business activities; State-regulated money transmitters play an important role in the servicing of small businesses across the country by receiving funds from one party and transferring those funds to another party. • Leaving these money transmitters out of safe harbor provisions will perpetuate regulatory uncertainty and the safety issues associated with cash-only operations. • The lack of federal safe harbors or authorization for financial service providers creates commercial risk for the legitimate marijuana industry through operational roadblocks. • This absence of servicing encourages a shadow economy, as industry participants are unable to use safe, regulated and verifiable money services. • Until financial institutions can serve the industry without violating federal laws, consumers, tax collection and the financial system will remain at risk. SME Contact: Dan Berkland, Director, Supervisory Processes: 202-559-1987 or dberkland@csbs.org and Daniel Schwartz, Senior Director, Policy Development: 202-728-5742 or dschwartz@csbs.org Why It Matters to State Regulators Talking Points

Date Updated: August 2021

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 intricacies of risk-based capital rules while ensuring 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 is 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 Congress intended.

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 federal banking agencies 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

Date Updated: January 2021

FOR STATE REGULATOR USE ONLY

Community Reinvestment Act

CSBS Official Public Position

CSBS believes the Federal Reserve Board of Governors, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) should not create an inconsistent Community Reinvestment Act (CRA) regulatory framework. More information gathering, interagency consensus and harmonization with existing rules is needed before any major modernization efforts and reforms are undertaken.

Summary

Congress enacted the CRA in 1977 as part of several landmark pieces of legislation enacted in the wake of the civil rights movement intended to address inequities in the credit markets. The Federal Reserve, the FDIC and the OCC have broad authority and responsibility for implementing the statute, which provides the agencies with a crucial mechanism for addressing persistent structural inequity in the financial system for low and middle income (LMI) communities and minority individuals and communities. The statute and its implementing regulations also provide the agencies, regulated banks and community organizations with necessary structure for facilitating and supporting a vital financial ecosystem that supports LMI and minority-focused community development. The CRA has not been updated since the 1990s, and the federal banking agencies haven taken efforts to modernize the CRA to reflect the current banking environment. In September 2018, the OCC published an advanced notice of proposed rulemaking (ANPR) to solicit ideas for building a new CRA framework and received more than 1,500 comment letters. On Dec. 12, 2019, the FDIC and the OCC issued a joint notice of proposed rulemaking (NPRM). CSBS commented on the OCC’s NPRM in April 2020. Subsequently, on May 20, 2020, the OCC issued a CRA final rule. Although the FDIC initially joined the OCC, it ultimately did not agree to the final CRA rule. On Sept. 21, 2020, the Federal Reserve released its own ANPR to modernize CRA regulations. The Federal Reserve Board’s proposal seeks to : address changes in the banking industry; strengthen implementation of CRA’s core purpose to meet the wide range of LMI banking needs; promote financ ial inclusion; bring greater clarity, consistency and transparency to tailored performance evaluations; tailor performance tests to account for bank size and bank model; recognize the special circumstances of small banks in rural areas; clarify and expand eligible community development activities focused on LMI communities; minimize data collection and reporting burden; and create a consistent regulatory approach. On Sept. 8, 2021, the OCC issued a proposal to rescind its 2020 Community Reinvestment Rule and replace it with rules adopted jointly by the federal banking agencies from 1995. Acting Comptroller Michael J. Hsu stated, “The OCC is committed to working with the Federal Reserve and FDIC on a future joint rulemaking to develop a consistent framework across all banks.” Having inconsistent federal CRA regulations would result in multiple practical problems. Multi-charter banking organizations will likely have to run dual compliance systems with varying Fed, OCC and FDIC rules. State regulators will have to train to examine for compliance with different CRA regulatory frameworks which is time consuming and costly. In addition, state regulators are concerned that the OCC’s new and extensive date collection and reporting requirements create a significant burden for smaller institutions. Why It Matters to State Regulators

Talking Points

State regulators encourage the federal banking agencies to:

• Not create an inconsistent CRA regulatory framework across the federal banking agencies. • Take a more comprehensive approach to data collection and reporting which avoids duplication and unintended consequences by accounting for other regulatory uses of depositor data. • Give greater attention to providing relief to small banks that is proportionate to the potential burden. • Provide greater incentives for establishing and retaining branches in LMI areas, Indian country, underserved areas and distressed areas. FOR STATE REGULATOR USE ONLY

• Place greater emphasis on the total number of CRA qualifying activities rather than the total dollar amount of CRA qualifying activities.

SME Contact: Alisha Sears, Senior Analyst, Policy Development: 202-759-9403 or asears@csbs.org

Date Updated: October 2021

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

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 2008 crisis, low interest rates, narrow net interest margins and intense regulatory scrutiny have made new bank formations relatively unattractive. However, in recent years 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. 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 the 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 establishing 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. • From year-end 2009 to year-end 2017, only 12 de novo charters were approved; however, since then, the FDIC has approved 34 de novo charters. • In December 2019, Texas DOB approved its first de novo charter application since 2009. • This year to date, there have been six new de novo banks (in OH, CA, VA and FL). As of August, there were 16 applications for deposit insurance under review by the FDIC. Talking Points

SME Contact: Daniel Schwartz, Senior Director, Policy Development: 202-728-5742 or dschwartz@csbs.org

Date Updated: September 2021

FOR STATE REGULATOR USE ONLY

Home Mortgage Disclosure Act

CSBS Official Public Position

CSBS supports a HMDA reporting framework that recognizes the differences between the relationship lending model of community banks versus large institutions that deploy standardized model-based lending programs.

Summary

There have been multiple changes to HMDA reporting requirements in recent years. A 2015 CFPB final rule implemented 25 new data points required by Dodd-Frank as well as additional data points. The rule also provided reporting relief to the smallest depository HMDA reporters by increasing the threshold for reporting from one covered loan to 25 covered loans. In April of 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 rule also increased the threshold for reporting data for open-end lines of credit to 200 . The Trump administration took several steps to reduce HMDA reporting requirements. Under then- Director Kraninger, the CFPB issued rulemaking to increase reporting thresholds mandated by the 2015 final rule and paused quarterly reporting for the largest reporters and narrowed data resubmission requirements. Under the Biden administration, the CFPB has signaled a change in course and an increased emphasis on HMDA reporting and fair lending enforcement. The latest HMDA data report identified discrepancies between white, Black and Hispanic borrowers in loan denial rates, interest rates and total loan costs. In 2020, the CFPB issued a public enforcement action against a mortgage lender for illegal redlining and another against a national bank for reporting inaccurate HMDA data. The CFPB also referred four matters to the U.S. Department of Justice related to discrimination in violation of the Equal Credit Opportunity Act.

Why It Matters to State Regulators

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.

Talking Points

• State regulators support the statutory intent of HMDA and endorse the steps taken by the CFPB to reduce burden on small financial institutions. • The increase in reporting thresholds for banks, from one closed-end loan pre-2015 to 100 closed-end loans, has helped ensure statistical samples used to conduct fair lending analysis are representative and meaningful. • The CFPB is in the process of completing the Dodd-Frank mandated five-year assessment of the 2015 HMDA final rule.

SME Contact: Daniel Schwartz, Senior Director, Policy Development: 202-728-5742 or dschwartz@csbs.org

Date Updated: September 2021

FOR STATE REGULATOR USE ONLY

Money Transmitter Model Law

CSBS Official Public Position

The CSBS Board of Directors believes that states must streamline the regulation of money transmission to avoid preemption. To accomplish this, CSBS drafted the Money Transmission Modernization Act, which standardizes the money transmission licensing regime to empower states to better monitor activities within their borders while respecting the need for interstate standards.

Summary

State regulators have committed to adopting an integrated, 50-state licensing and supervisory system that recognizes standards across state lines through their strategic plan priority of Networked Supervision. A primary focus of Networked Supervision is state adoption of the CSBS Money Transmitter Model Law, which would create one standard that can be met with one set of requirements through one process. In recent years, the advancement of technology and the changes to consumer preferences led to a massive increase in nationally licensed money transmitters. While most states utilize a similar framework for their money transmission laws, each statute has its own unique definitions and requirements for licensees. Additionally, state interpretations of these laws vary immensely, creating confusion across the industry. State regulators recognized this confusion and decided to construct a model law that would streamline state supervision of MSBs and enable money transmitters to more easily build a national presence. The Model Law is designed to support the strategic plan priority of Networked Supervision with a specific focus on the pain points identified by the CSBS Fintech Industry Advisory Panel. The Money Transmitter Model Law eliminates redundant licensing and supervisory requirements, establishes a single standard for control, and streamlines supervision through the adoption of multistate initiatives. Additionally, the Model Law focuses on consistently defining and interpreting activities and ensuring safety and soundness requirements are based on the financial condition of a licensee.

The CSBS Board approved the final CSBS Money Transmission Modernization Act on Aug. 9, 2021.

Why It Matters to State Regulators

The states have held exclusive prudential jurisdiction over MSBs for over a hundred years. A streamlined process of regulation and supervision would provide the industry with a more efficient and effective system. It is imperative that the states retain authority in this space as it will strengthen consumer protections and ensure the safe and sound supervision of MSBs.

Talking Points

• The Model Law provides consistent approaches and statutory language for licensing requirements, initiating a more effective and conducive process of state money transmitter supervision. • The Model Law will address the growth in nationally licensed money transmitters and streamline requirements between states to collectively concentrate on the emerging risks. • The Model Law will make supervision more efficient by implementing common standards across state lines. • The Model Law will decrease regulatory burden for the states through the adoption of multistate examination and licensing initiatives. SME Contact: Matt Lambert, Senior Director & Non-Depository Counsel, Nonbank Supervision & Enforcement: 202-407-7130 or MLambert@csbs.org

Date Updated: October 2021

FOR STATE REGULATOR USE ONLY

Networked Supervision

CSBS Official Public Position

Networked Supervision is a regulatory approach that encourages diversity in size and scope, a commitment to streamlining licensing and reducing regulatory burden and an enthusiasm for enabling responsible innovation that benefits consumers and local economies alike. CSBS and the states believe that this single strategic approach will evolve the state system to one where communication occurs in real time, knowledge and expertise flows across the states, and regulation becomes streamlined throughout the industry. State regulators have been working together for decades to leverage resources and tools to better regulate multistate companies. That collaboration has steadily increased over the years with changes in the financial services space and advancements in technology. Some of the milestones toward greater collaboration include the Nationwide Cooperative Agreement formed in 1999, the Nationwide Mortgage Licensing System created in 2008 and the Vision 2020 initiative adopted by the states in 2017. The Vision 2020 initiative launched by CSBS in 2017 implemented a program geared toward multistate regulatory harmonization of nonbank financial services and the development of next generation technologies. Vision 2020 significantly streamlined money services business (MSB) licensing and supervision, providing a strong tailwind for further empowering states to operate as one network. The success of Vision 2020 and advancements in technology accelerated innovation and collaboration, which have been features of state regulation for many years. CSBS refers to this strengthened collaboration as Networked Supervision. In January of 2021, the CSBS Board of Directors approved public priorities that outline actions the state will collectively take to advance Networked Supervision. The priorities focused on MSBs, including money transmitter, encompas s coordinated “One Company One Examination” supervision, common licensing, operational and legal standards, and an industry advisory group. These public priorities emphasize the states’ commitment to harmonization, collaboration, and innovation throughout the state regulatory system. This commitment is furthered by the development of new technologies to aid the state in accomplishing various objectives towards a streamlined system that benefits consumers, industry, and regulators alike. State regulation empowers states to tailor regulations – and consequently the types of financial products available – to the specific needs of their constituents. Common standards will allow the state system to expand its use of technology platforms, increasing efficiency in the system and enhancing risk detection. Without these streamlined regulations, the threat of preemption looms over the state system, leading to new market entry barriers and further industry consolidation. Summary Why It Matters to State Regulators • The State Examination System is a single nationwide platform that allows state agencies to connect directly with companies under examination, promoting greater transparency and collaboration • Agencies can quickly access and share information related to supervisory activities, making it easier to partner on current exams and scope future examinations more carefully. • SES significantly reduces inefficiencies caused by regulators making duplicative data requests or conducting concurrent exams of a single company. • States can address and share consumer complaints with other states electronically, helping to speed up complaint processing and prevent consumer harm from spreading to other states or industries. • Twenty-five states have already onboarded onto SES; to date, 260 exams have either been completed or are in progress, including 16 MSB exams (one of which is multistate). Talking Points Expanded use of Technology Platforms means faster, more efficient and streamlined licensing and supervision.

States continue to expand the use of NMLS to encompass more types of nonbank financial services providers.

FOR STATE REGULATOR USE ONLY

Harmonized multistate supervision creates more effective and efficient licensing and supervision of nonbank financial companies.

States recently implemented key initiatives of Networked Supervision including:

• Cutting in half the time it takes to receive a MSB license by standardizing the licensing process for money transmitters and other MSBs. • Reducing the number of exams for nationwide MSBs to one comprehensive, multistate exam per year starting in 2021, impacting 75 MSBs. • Setting benchmark standards for MSB supervision to increase state collaboration and joint examinations. • Approving the Money Transmission Modernization Act in August 2021 which enacts a single set of nationwide standards and requirements created by the collaboration of industry and state experts.

SME Contact: Laura Fisher, Vice President, Communications: 202-360-4918 or LFisher@csbs.org

Date Updated: October 2021

FOR STATE REGULATOR USE ONLY

Nonbank Supervision: States’ Role

CSBS Official Public 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 affecting local markets and local needs and to react quickly to local trends. State regulators are appointed by elected state officials who are locally accountable for fulfilling mandates encompassing consumer protection, market stability, and economic development. States serving a primary regulatory role over nonbank financial services allows for a diverse financial services ecosystem that supports innovation by small start-ups and large companies with national or global footprints. Talking Points • States are the primary financial regulator of nearly 27,700 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 2020: o State-regulated MSBs handled $2.5 trillion worth of transactions o State-licensed firms originated $2.6 trillion and serviced $7 trillion in mortgages o CFPB relies on NMLS to register more than 579,000 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 launched a focused effort to reengineer the state system of supervision by: o Engaging in a robust, action-oriented dialogue with industry through our Fintech Industry Advisory Panel. o Developing and deploying the State Examination System – the next generation technology platform for licensing and supervision o Identifying areas for greater state harmonization o Enhancing existing and building new “suptech” • Vision 2020 has evolved to a commitment to Networked Supervision, which leverages data and technology platforms to transform the state system into a network of regulators working in coordination to serve the goals of consumer protection, marketplace stability, and economic development. • CSBS published a white paper that covers the nonbank industry supervised by state financial regulators. SME Contact: Chuck Cross, Senior Vice President, Nonbank Supervision & Enforcement: 202-728-5745 or ccross@csbs.org Date Updated: September 2021 Why It Matters to State Regulators

FOR STATE REGULATOR USE ONLY

OCC Fintech Charter

CSBS Official Public 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, the OCC has attempted to implement a special purpose national bank charter for fintechs that do not take deposits and therefore will not be seeking FDIC deposit insurance. 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. In 2020, then-Acting Comptroller Brian Brooks pursued an aggressive fintech agenda, which included promoting a “payments charter” that was nothing more than the fintech charter promoted specifically to payments companies. To date, the OCC has not issued any “fintech charters.” In November 2020, the financial services company Figure submitted an application for a national bank charter. Based on publicly available information, Figure will not be applying for deposit insurance. CSBS filed a lawsuit against the OCC in April 2017 seeking to prevent the OCC from granting national bank charters to nonbank entities that would not be taking deposits and not obtaining deposit insurance. CSBS’ position is that 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. In December 2020, CSBS ag ain filed a complaint challenging the OCC’s authority to issue national bank charters to entities that are not seeking deposit insurance. In June 2021, CSBS filed an unopposed motion to stay litigation due to Acting Comptroller Michael Hsu’s testimony stat ing that the OCC was reviewing their framework for chartering national banks. 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 and obtaining deposit insurance are 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. On June 23, 2021, the U.S. Court of Appeals for the Second Circuit dismissed NYDFS’ challenge to the OCC special purpose charter. Legal Action

Why It Matters to State Regulators

As proposed by the OCC, the federal charter would preempt state licensing and supervision of 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.

Talking Points

• A national bank charter for institutions that do not take deposits and do not obtain deposit insurance exceeds the OCC’s statutory authority FOR STATE REGULATOR USE ONLY

• The federal banking laws a bank as an institution that takes deposits and obtains deposit insurance; a bank can also make loans or process payments, but the deposits function and obtaining deposit insurance from the FDIC 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 and/or obtain deposit insurance from the FDIC. • The New York court decision applies to lending and/or payments and has nationwide applicability • There is no difference between the 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

SME Contact: Mike Townsley, Director of Regulatory Policy & Policy Counsel: 202-728-5738 or mtownsley@csbs.org and Buz Gorman, Executive Vice President, General Counsel: 202-728-5726 or bgorman@csbs.org

Date Updated: August 2021

FOR STATE REGULATOR USE ONLY

Prudential Standards

CSBS Official Public Position

Since 2014, CSBS has advocated strongly for nonbank mortgage servicer prudential standards, enforceable by the state system of supervision. This gap in supervisory coverage presents significant risk to consumers and industry. In 2018, the Non-Depository Supervisory Committee (NDSC) accepted this initiative as part of the CSBS strategic plan. Following a significant amount of work and negotiation with a variety of stakeholders, including a 2020 proposal and comment period, the CSBS Board approved the Model State Regulatory Prudential Standards for Nonbank Mortgage Servicers on July 23, 2021. Nonbank mortgage servicers are an important segment of the financial services community. These institutions currently service over 60% of the government agency mortgage market (FHA/VA > 77%, Fannie/Freddie = 54%) and over 50% of the total $11 trillion single-family residential mortgage market, which includes both federally backed and non-government servicing. As the institutions responsible for transmitting monthly borrower payments to investors or loan holders, mortgage servicers are an integral part of the mortgage market ecosystem and the first line of defense for troubled borrowers. Since 2014, federal and state regulators have focused on the need for regulatory prudential standards for this rapidly growing segment of the mortgage market. In its 2020 annual report, the Financial Stability Oversight Council reiterated this concern: The Council recommends that relevant federal and state regulators continue to coordinate closely to collect data, identify risks, and strengthen oversight of nonbank companies involved in the origination and servicing of residential mortgages. Regulators and market participants have taken steps to address the potential risks stemming from nonbanks, including additional collaboration and the proposed strengthening of prudential requirements . The Council encourages regulators to take additional steps available to them within their jurisdictions to address the potential risks of nonbank mortgage companies. While nonbank mortgage originators have experienced enhanced profitability during the refinance boom, relevant regulators should ensure that the largest and most complex nonbank mortgage companies are prepared should refinances decrease or forbearance rates increase . In addition, the Council recommends that relevant federal and state regulators develop and establish an information-sharing framework to enable collaboration and communication in responding to distress at a mortgage servicer. Regulators should also develop and implement coordinated resolution planning requirements for large and complex nonbank mortgage companies. On Oct. 1, 2020, the Non-Depository Supervisory Committee, through CSBS, issued Proposed Regulatory Prudential Standards for Nonbank Mortgage Servicers for public comment. The final Model State Regulatory Prudential Standards for Nonbank Mortgage Servicers include two major sections covering financial condition and corporate governance requirements. The standards, once adopted by individual states, will cover all servicers operating at the national level with an appropriate de minimis cutoff for smaller servicers. A key element of the standards is the alignment of the financial condition requirements with the Seller/Servicer Eligibility requirements mandated by the Federal Housing Finance Agency (FHFA) for servicers conducting business under Fannie Mae or Freddie Mac. Such alignment establishes consistency across federal and state supervision while mitigating additional regulatory burden faced by industry. The standards and public comments can be found here: https://www.csbs.org/policy/research-data- tools/nonbank-mortgage-servicer-prudential-standards Summary

Why It Matters to State Regulators

State regulators are the only prudential authorities for nonbank mortgage servicers in this country. This seems to come as a surprise to some, but the facts are: • FHFA is the regulator for Fannie Mae, Freddie Mac and the Federal Home Loan Banks, but they do not have any supervisory authority over licensed nonbanks. Absent the state prudential standards, FHFA’s

FOR STATE REGULATOR USE ONLY

requirement are simply program requirements that become voluntary and likely unenforceable by most states. • FHA, VA, USDA, Fannie Mae, Freddie Mac and Ginnie Mae are government established insurers, guarantors and market makers; these agencies are not financial regulators. While they are meaningful stakeholders in the prudential standards discussion, their “authority” only exist s where companies desire and volunteer to participate in these respective government lending programs. • HUD and CFPB are regulators; however, they are not primary or prudential regulators in that they lack licensing/chartering authority and limit their jurisdiction to specific areas of supervision. • There are no federal government housing agencies authorized to regulate the private and whole loan marketplace. The states are both the primary regulator (meaning the licensing authority) and the prudential examining authority for all nonbanks. However, absent these standards, the states do not have any uniform standards for financial condition or corporate governance (including risk management). Federal requirements may be considered adequate for the specific loans each agency covers, but the existing requirements do not cover the entire market and enforcement is only relevant where institutions opt to participate in a specific lending program. Only state regulators have jurisdiction over all types of nonbank mortgage portfolios. A lack of comprehensive prudential standards results in potential industry confusion, gaps in oversight and increased risk of consumer harm. Industry, through four representative associations, supported the development and approval of the standards, agreeing that state regulators are the correct body to establish prudential standards and are the only “regulator” with current authority to establish prudential standards for all nonbank servicers. • Prudential standards are necessary to ensure nonbank institutions remain healthy and well-managed through all economic cycles; comprehensive prudential standards for nonbank mortgage servicers have been publicly called for since 2014. • The states are both the primary regulator (meaning the licensing authority) and the prudential examining authority for all nonbanks; no other regulator has this role. • Proposed standards are developed to align with existing federal standards to the extent feasible, thereby limiting industry compliance burden, with the primary purpose of consumer protection and industry stability. • Nonbanks service over 77% of FHA/VA loans, making them responsible for the majority of low to moderate income borrowers, minorities and first-time homeowners - the population at greatest risk. • Despite a current lucrative housing market, many experts fear a looming foreclosure crisis due largely to the Covid-19 forbearance environment; during such event, servicer stability is key to consumer protection. • The 2017 Ocwen settlement and the 2020 Nationstar/Mr. Cooper settlement contained significant state and federal regulator findings of insufficient financial condition, as well as lapses in risk management, corporate governance and operations. • State supervisor coverage of the $11 trillion mortgage servicing market: o Nonbank share of Ginnie Mae (FHA/VA) servicing: 77% o Nonbank share of GSE (Fannie/Freddie) servicing: 54% o Combined nonbank government agency servicing: 60+% o Total nonbank servicing portion of the $11 trillion market: ~50% Talking Points

SME Contact: Chuck Cross, Senior Vice President, Nonbank Supervision & Enforcement: 202-728-5745 or CCross@csbs.org

Date Updated: September 2021

FOR STATE REGULATOR USE ONLY