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Investments Lending

LendIt: Election years can disrupt fintech, too

Time for a “regulatory sandbox” for startups?

March 6, 2017

Election years can be unpredictable for many industries, and things are no different in the world of fintech.

The extent of concern around the possible impact of regulation was evident in the sheer amount of programming on the topic during LendIt, one of the largest fintech conferences focused on consumer and small business lending. To the conference organizers’ credit, they assembled a diverse lineup of speakers that provided context on the mood and priorities of representatives in Washington, D.C.

Congressman Patrick McHenry, a representative of North Carolina’s 10th congressional district and a member of the Republican Party, gave one of the first major speeches on the topic. Congressman McHenry has been a vocal proponent of fintech regulation overhaul and he discussed his priorities, beginning with the modernization of infrastructure underlying the IRS income verification form (4506T), which is used by lenders to make underwriting decisions (the form is currently manually handled by the IRS and takes 2- 8 business days for processing).

He went on to discuss the confusion created by the outcome of the Madden vs Midland case, which resulted in a scarcity of credit in the areas affected, and proposed that Congress issue a clarification on the concerning laws to ensure the enforcement of the law is consistent with the intent. Lastly, he outlined the proposed “Financial Services Innovation Act” that would mandate the creation of offices of innovation among regulatory agencies to provide a “regulatory on-ramp” for financial innovation, and provide the agency access to valuable data on the products in return.

A counter-point to this speech was provided by Amias Gerety, who served in the U.S. Treasury during President Obama’s time in office. He outlined the ways in which the Treasury Department currently engages with emerging fintech companies through discussions, white papers and, eventually, changes in policy.

He addressed some of the popular requests of fintech companies including the demands for a “regulatory sandbox” for startups to innovate without the shackles of regulation.

This is a particularly popular demand among U.S. entrepreneurs as the U.K. has created such a sandbox to allow companies to test their products with temporary regulatory approval. He pointed out that in order to lend in the U.K., a company needs a national bank charter, whereas this is not necessary in the U.S. He also explained that most regulation in the U.S. is technology agnostic, allowing newer companies to compete alongside old.

Lastly, he discussed the shadow of the crisis on regulators’ minds as it relates to financial innovation, since many of the products that caused the 2008 recession were considered  “innovative” at the time. He encouraged companies to think about innovating across the whole spectrum of the customer value chain of acquisition, user experience, underwriting, funding and servicing / collections, since the last two stages of funding and servicing / collections tended to get overlooked during a growth cycle but tend to result in “immense bad behavior” during a downturn. He emphasized the bipartisan nature of fintech regulation, and sought to allay the concerns of the audience on a possible lack of continuity in to a new administration.

The third notable speech for the day was delivered by Thomas Curry, the Comptroller of Office of the Comptroller of the Currency. He highlighted the power of  “responsible innovation” by fintech companies to expand financial inclusion. He then discussed the role of the OCC’s proposed Office of Innovation and indicated more information would be able soon.

Curry then went on to discuss the OCC’s work as it relates to federal charters for fintech companies providing banking products & services in some detail. He addressed concerns from the comment period, including skepticism around the OCC’s authority and ability to grant national bank charters to fintech companies. He confirmed that the OCC has the necessary authority and highlighted their capabilities, including “…experienced examiners who specialize in banking technology, have expert knowledge of payment systems, credit, and consumer protection, and know where companies can face pitfalls.”

Curry’s next comments addressed the confusion created, presumably, by Madden v. Midland. He rejected flat-out the notion that national bank chartered companies could have weak consumer protections and could avoid complying with state laws with a clear “That’s wrong.” He underscored fintech companies’ need to serve their communities by saying “…expect fintech applicants for national bank charters to include in their business plans a description of how they will support the needs of the communities they serve and promote financial inclusion…” Lastly, he dismissed the notion that the OCC was mixing banking and commerce, and added that the safeguards mentioned in his remarks would encourage, not stifle, the right innovators to apply for a national bank charter.

A recurring theme through all the presentations during the day was an eagerness on the part of all representatives and their staff to hear from and engage with key players in the fintech industry. Our main takeaway from the day’s discussions on regulation is that the representatives and regulators are listening – it is up to us, the players in the ecosystem, to educate, increase awareness, and advocate for the right regulation that balances the needs of innovation and consumer protection.

 

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