21 January 2020

Trump Administration Embraces Fintech

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The Trump administration embraced an emerging corner of the financial sector on Tuesday, telling companies that offer new ways to bank and invest that the federal government wants to help them grow.

The Treasury Department in a report recommended that regulators adopt changes it said would better support such financial companies. It recommended a “sandbox” giving regulatory financial relief to startups; encouraged the federal consumer regulator to rescind its payday-lending rule; pushed for a fresh look at rules governing fintech investments by banks; and endorsed an effort by nonbank lenders like LendingClub Corp. to ease the resale of loans.

The regulator of federally chartered banks also said it would start accepting applications from fintech firms “effective immediately,” opening the door for those firms to receive charters that allow them to operate without acquiring licenses in every state.

Many of the Treasury’s roughly 80 recommendations require additional action from regulators or Congress to bring to reality.

Others face hurdles. Any application for a fintech bank charter is likely to face a lawsuit from state regulators, for instance.

Industry reaction to the report was broadly positive from banks, payment companies, online lenders and others.

Brian Knight, a senior research fellow at George Mason University who has argued current U.S. rules for fintechs are inefficient, said the regulatory regime described in the report toed a middle ground. “It increases competitiveness of fintechs, to the extent they are disadvantaged under the current environment, but in other areas [it] will help banks,” he said.

Some recommendations, including the payday lending section, drew criticism from consumer advocacy groups.

Aaron Klein, a former Obama Treasury official at the Brookings Institution think tank, said that part of the report amounted to a “decision to politicize a document that could have been broadly embraced.”

The Treasury report is the last in a four-part series setting out the Trump administration’s financial regulatory agenda, following reports on banks and credit unions, capital markets, and asset management and insurance.

Senior Treasury officials said that after meeting with industry groups, regulators, advocacy groups and other experts, they concluded the U.S. needs a simpler rulebook for financial startups.

“We must keep pace with industry changes and encourage financial ingenuity to foster the nation’s vibrant financial-services and technology sectors,” Treasury Secretary Steven Mnuchin said in a statement.

The report said fintech firms should be able to have a “single process” to get permits for experimenting without violating U.S. rules—a so-called sandbox. The process should be one that “coordinates and expedites regulatory relief,” it said. Federal and state regulators, and possibly Congress, would have to work together to make this happen.

Treasury also said the Office of the Comptroller of the Currency, which oversees nationally chartered banks, should “move forward with prudent and carefully considered applications” from fintech companies that want a federal charter that would allow them to operate across state lines.

Hours later, Comptroller Joseph Otting said his agency would start accepting applications “effective immediately.” He said the charters “can make the federal banking system stronger by promoting economic growth and opportunity, modernization and innovation, and competition.”

The OCC said applicants would have to show how they would meet appropriate rules around the stability of their funding sources and their ability to fail in an orderly way without disrupting the financial system. Applications must also include “financial inclusion commitments as appropriate” showing how they will serve borrowers of all income levels.

The Obama administration had been moving toward taking such applications from start-up payments companies, lenders and others. But that work has stalled while Trump-appointed officials reviewed the initiative.

The Treasury report wades into a long-running debate about how state interest-rate caps should apply to loans that are originated by a bank in one state but then sold across state lines. LendingClub and others have had to modify their business models in the wake of court rulings they say have made loan resales more difficult, and Congress has been considering legislation to override the court decisions.

Congress should clarify that loans are “valid when made,” the report said, “to preserve the functioning of U.S. credit markets.” It also said bank regulators should use existing legal authority to address the issue.

On short-term lending, the report said state regulators have broad authority and “additional federal regulation is unnecessary.” It recommends that the Consumer Financial Protection Bureau rescind an Obama-era rule governing payday lending. The rule is currently under review by the Trump-appointed head of the agency.

The report makes a series of recommendations on financial-data policies, including that consumers should be able to revoke access to their account and transaction data, that consumers—and so-called data aggregators acting on their behalf—should be able to access the data on request and that Congress should enact national standards governing data breaches.

The report also said regulators should make it easier for big banks and fintech companies to partner. It said the Federal Reserve should reassess its rules governing bank investments in technology firms “to provide firms a simpler and more transparent standard to facilitate innovation-related investments.”

Click here for the original article from The Wall Street Journal.  

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