Timed impeccably to coincide with the Mortgage Bankers Association’s Legal Issues and Regulatory Compliance Conference held in May 2017 in Miami, the Conference of State Bank Supervisors (CSBS) and the New York Department of Financial Services (NYDFS) teamed up to continue to push back against what CSBS calls the US Office of the Comptroller of the Currency’s (OCC) “fatally flawed” decision to offer a special-purpose national non-bank charter designed to regulate the financial technology (Fintech) industry. Below are highlights of actions and initiatives underway, including what Fintechs and others in the Consumer Finance Services industry should see as an invitation to help shape how state regulatory agencies will seek to license, regulate and monitor related non-bank financial activities in the future.
- April 26, 2017: CSBS files a lawsuit against the OCC in the US district court in the District of Columbia challenging the OCC’s authority to create a special-purpose national bank charter for Fintech firms.
- May 10, 2017: CSBS announces Vision 2020, a series of initiatives to modernize state regulation of non-banks, including Fintech firms.
- May 11, 2017: CSBS launches a website on the redesign of the Nationwide Multistate Licensing System (NMLS 2.0).
- May 12, 2017: The NYDFS files a lawsuit against the OCC in the US district court in Manhattan relating to national Fintech charters, garnering strong support of CSBS’ President and CEO John W. Ryan. The NYDFS also announces plans to begin using the NMLS to license Fintech businesses beginning July 1, 2017.
Vision 2020 serves as a blue print for adapting the existing state regulatory framework to support the rapidly changing financial services landscape. Among other things, it describes strategies that CSBS and the state regulatory agencies responsible for regulating the non-bank consumer financial services industry will employ to modernize regulatory regimes, enhance uniformity in examinations, and facilitate best practices, particularly in relation to the burgeoning money services businesses and emerging payment systems that rely heavily on technology for the conduct of business. Specifically, Vision 2020 describes how CSBS and the state regulatory agencies are working together to create innovative data-driven solutions that will allow for an integrated 50-state licensing and supervisory platform, leveraging technology to streamline multi-state regulation and transform the interaction between industry, regulators and consumers. The core objectives of the Vision 2020 initiative are to:
- Redesign the Nationwide Multistate Licensing System (NMLS)
- Harmonize multi-state supervision
- Form a Fintech industry advisory panel to supplement the role that individual state regulators already have played in engaging the Fintech industry in formal dialogue
- Assist state banking departments
- Make it easier for banks to provide services to non-banks
- Make supervision more efficient for third parties
For more on the Vision 2020 initiative and the state regulatory perspective on Fintech, including but not limited to the Model Regulatory Framework and Consumer Guidance for Virtual Currencies, the Consumer Survey on Virtual Currencies and the Emerging Payments Stakeholder Hearing, visit The State Perspective on Fintech.
As noted above, a component of Vision 2020 involves the redesign of the NMLS. To demonstrate its commitment to this objective, CSBS launched a website to publicly unveil efforts well underway to rebuild the NMLS to accommodate the dynamic world of state licensing and states’ efforts to expand services to the industries they serve. With the NYDFS announcing plans to join other states in using the NMLS platform to license money services businesses and other innovative and expanding industries that fall within the Fintech business sector, Fintech companies have a tremendous opportunity to provide feedback to help shape the cross-industry licensing and supervisory system that will regulate their activities, at least for the foreseeable future.
In the wake of the financial crisis, the NMLS was selected to implement the individual Mortgage Loan Originator (MLO) licensing obligation mandated by the Secure and Fair Enforcement Act (SAFE Act), and currently serves as a uniform licensing platform for various consumer financial services-related activities. Since the licensing and registration portal was first introduced in 2008, the NMLS has become the system of record not only for MLOs, but also for many of the company-level licenses issued to mortgage bankers, mortgage brokers and mortgage loan servicers that sponsor MLOs for licensure. In recent years, states also have adopted the NMLS to support other industry-related licensing, such as money service businesses and money transmitters, debt collectors and collection agencies, consumer finance companies, and sales finance companies and retail installment lenders. Thus, it seems a natural fit that New York announced last week that it has adopted the NMLS as the portal through which it will license entities engaged in business activities that fall under the Fintech business sector.
Mayer Brown’s Consumer Finance Services practice has been working with CSBS to represent clients in the development of the NMLS since its inception. Serving on the Industry Development Working Group (IDWG) to offer an industry perspective on the functionality and policy-related aspects of the NMLS, we have witnessed significant improvements in uniformity with respect to both licensing and supervisory oversight. More recently, the IDWG has been working with CSBS on the development of the NMLS 2.0, an improved version of the NMLS which is expected to replace the existing system in late 2018. With the launch of a website dedicated to the NMLS 2.0 initiative, CSBS invited the public to participate in the development process. The NMLS 2.0 website provides both updates and opportunities to engage in the process.
This is a perfect time for Fintechs to gain a better understanding of how the NMLS operates today and to participate in the development of the future system. We will be sharing more detailed information regarding our experience with the current version of the NMLS, as well as certain policy-related matters that we hope will be addressed with the development of NMLS 2.0.
NYDFS lawsuit against the OCC
In a carefully crafted press release issued May 12, 2017, the NYDFS described its reasons for opposing the OCC’s Fintech charter, which proposes to cover a wide variety of activities that have not previously been authorized or regulated by the OCC, and for filing a lawsuit to prohibit the OCC from granting such charters to institutions subject to New York State law. The press release includes links to the NYDFS’ comment letters opposing the OCC’s white paper and its licensing manual supplement, as well as the NYDFS’ statement of support for the complaint CSBS filed in the US District Court for the District of Columbia on April 26, 2017.
The NYDFS did not mince words referring to the OCC’s charter decision as “lawless” and “ill-conceived,” and asserting that it is “destabilizing of financial markets that are properly and most effectively regulated by New York and other State regulators.” The press release further alleges that the charter would put “New York financial consumers – and often the most vulnerable ones – at great risk of exploitation by newly federally chartered entities seeking to be insulated from New York’s strong consumer protections." Simply put, the NYDFS contends that “regulators like DFS are experienced at, and better equipped to, regulate cash-intensive nonbank financial service companies. Such regulation requires, among other things, strict oversight and enforcement of anti-money laundering, consumer identification and transaction monitoring statutes and regulations, for which the OCC is not equipped nor authorized.”
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With these recent developments, CSBS and the NYDFS have established their position on the regulation of Fintech companies and their intent to offer the Fintech industry a smart, streamline, and technologically advanced approach to implementing a uniform licensing and supervisory platform to rival the OCC’s plans for a special-purpose national non-bank charter. Mayer Brown applauds these efforts and welcomes the opportunity to provide more information about the pros and cons of the NMLS and the challenges that the Consumer Financial Services Industry has faced through the development of the existing licensing and supervisory platform.