[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
LICENSE TO BANK: EXAMINING THE LEGAL
FRAMEWORK GOVERNING WHO CAN LEND AND
PROCESS PAYMENTS IN THE FINTECH AGE
=======================================================================
VIRTUAL HEARING
BEFORE THE
TASK FORCE ON FINANCIAL TECHNOLOGY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 29, 2020
__________
Printed for the use of the Committee on Financial Services
Serial No. 116-112
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
43-526 PDF WASHINGTON : 2021
HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California ANN WAGNER, Missouri
GREGORY W. MEEKS, New York FRANK D. LUCAS, Oklahoma
WM. LACY CLAY, Missouri BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri STEVE STIVERS, Ohio
ED PERLMUTTER, Colorado ANDY BARR, Kentucky
JIM A. HIMES, Connecticut SCOTT TIPTON, Colorado
BILL FOSTER, Illinois ROGER WILLIAMS, Texas
JOYCE BEATTY, Ohio FRENCH HILL, Arkansas
DENNY HECK, Washington TOM EMMER, Minnesota
JUAN VARGAS, California LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam TED BUDD, North Carolina
RASHIDA TLAIB, Michigan DAVID KUSTOFF, Tennessee
KATIE PORTER, California TREY HOLLINGSWORTH, Indiana
CINDY AXNE, Iowa ANTHONY GONZALEZ, Ohio
SEAN CASTEN, Illinois JOHN ROSE, Tennessee
AYANNA PRESSLEY, Massachusetts BRYAN STEIL, Wisconsin
BEN McADAMS, Utah LANCE GOODEN, Texas
ALEXANDRIA OCASIO-CORTEZ, New York DENVER RIGGLEMAN, Virginia
JENNIFER WEXTON, Virginia WILLIAM TIMMONS, South Carolina
STEPHEN F. LYNCH, Massachusetts VAN TAYLOR, Texas
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota
Charla Ouertatani, Staff Director
TASK FORCE ON FINANCIAL TECHNOLOGY
STEPHEN F. LYNCH, Massachusetts, Chairman
DAVID SCOTT, Georgia TOM EMMER, Minnesota, Ranking
JOSH GOTTHEIMER, New Jersey Member
AL LAWSON, Florida BLAINE LUETKEMEYER, Missouri
CINDY AXNE, Iowa FRENCH HILL, Arkansas
BEN McADAMS, Utah WARREN DAVIDSON, Ohio
JENNIFER WEXTON, Virginia BRYAN STEIL, Wisconsin
RASHIDA TLAIB, Michigan
C O N T E N T S
----------
Page
Hearing held on:
September 29, 2020........................................... 1
Appendix:
September 29, 2020........................................... 25
WITNESSES
Tuesday, September 29, 2020
Carrillo, Raul, Policy Counsel, Demand Progress Education Fund;
and Fellow, Americans for Financial Reform Education Fund...... 5
Knight, Brian, Director, Innovation and Governance Program,
Mercatus Center................................................ 11
Sands, Everett K., Chief Executive Officer, Lendistry............ 7
Wilmarth, Arthur E., Jr., Professor Emeritus of Law, George
Washington University Law School............................... 9
APPENDIX
Prepared statements:
McHenry, Hon. Patrick........................................ 26
Carrillo, Raul,.............................................. 28
Knight, Brian,............................................... 54
Sands, Everett K............................................. 150
Wilmarth, Arthur E., Jr...................................... 159
Additional Material Submitted for the Record
Lynch, Hon. Steven:
Written statement of the American Bankers Association (ABA).. 210
Joint written statement of ABA, BPI, and ICBA................ 217
Written statement of the Center for Responsible Lending (CRL) 220
Written statement of the Conference of State Banking
Supervisors (CSBS)......................................... 272
Written statement of the Credit Union National Association
(CUNA)..................................................... 282
Written statement of the Department of Financial Institutions
of the State of Utah....................................... 284
Written statement of the Electronic Transactions Association
(ETA)...................................................... 291
Written statement of the Independent Community Bankers of
America (ICBA)............................................. 294
Written statement of the National Association of Federally-
Insured Credit Unions (NAFCU).............................. 298
Joint written statement of the National Association of
Industrial Bankers and the Utah Bankers Association........ 302
Written statement of Varo Money, Inc......................... 306
LICENSE TO BANK: EXAMINING
THE LEGAL FRAMEWORK GOVERNING
WHO CAN LEND AND PROCESS
PAYMENTS IN THE FINTECH AGE
----------
Tuesday, September 29, 2020
U.S. House of Representatives,
Task Force on Financial Technology,
Committee on Financial Services,
Washington, D.C.
The task force met, pursuant to notice, at 12:15 p.m., via
Webex, Hon. Stephen F. Lynch [chairman of the task force]
presiding.
Members present: Representatives Lynch, Gottheimer, Axne,
Tlaib; Emmer, Hill, Davidson, and Steil.
Chairman Lynch. Welcome, everyone. It's great to have our
witnesses with us, and also the Members. And thank you to our
staff, Petrina and Clement and the rest of the staff, for
setting this up. We really do appreciate it.
We have just a few housekeeping measures that I have to go
through here for a minute before we get to the actual hearing.
The Task Force on Financial Technology will come to order.
Without objection, the Chair is authorized to declare a
recess of the task force at any time.
Also, without objection, members of the full Financial
Services Committee who are not members of this task force are
authorized to participate in today's hearing.
Members are reminded to keep their video function on at all
times, even when they are not being recognized by the Chair.
Members are also reminded that they are responsible for muting
and unmuting themselves, and to mute themselves after they have
finished speaking.
Consistent with the regulations accompanying House
Resolution 965, staff will only mute Members and witnesses as
appropriate, when not being recognized by the Chair, to avoid
inadvertent background noise.
Members are also reminded that all House rules relating to
order and decorum apply to this remote hearing.
Today's hearing is entitled, ``License to Bank: Examining
the Legal Framework Governing Who Can Lend and Process Payments
in the Fintech Age.''
I now recognize myself for 5 minutes to give an opening
statement.
In the past year-and-a-half, this task force has witnessed
the many ways in which banking is changing. With just my cell
phone, I can deposit a check, apply for a loan, send money to a
friend, and buy cryptocurrency. The financial services world,
once dominated by brick-and-mortar institutions, is now filled
with so-called disruptors who are responding to evolving
consumer preference and revolutionizing the way that we
interact with our own money.
The implications of these changes are clear. Banking is
becoming less centralized. Consumers have access to a wider
array of services than they once did. Technology and tech
companies are playing an ever-increasing role in our finances,
and our laws and regulations are struggling, to be kind, to
keep the peace.
In an attempt to address these facts, regulators have been
proposing new charters and reviving and re-imagining existing
ones. In 2016, the Office of the Comptroller of the Currency
(OCC) proposed a special purpose national bank charter for
nondepository Fintech firms.
Earlier this year, Acting Comptroller Brian Brooks
announced plans for another special purpose charter, this time
for payment companies, amounting to what he has described as a
national version of a State money transmitter license.
Additionally, in March of this year, the FDIC approved
Nelnet and Square for FDIC deposit insurance, the first time
they have approved a new industrial loan charter (ILC)
applicant since 2008. These actions have been met with
significant controversy. The OCC's Fintech Charter is the
subject of litigation right now over their authority to grant
banking charters to nondepository institutions.
The Southern District of New York has sided with the New
York Department of Financial Services in that case. Meanwhile,
the planned payment charter is expected to face similar legal
challenges. And both banking industry associations and consumer
groups have signed a letter to the FDIC in opposition to the
approval of the new ILC applications.
Supporters of these new charters argue that they promote
financial innovation and access to capital while eliminating
redundant licensing requirements across the States. Opponents,
however, worry about firms using these charters as a way to
skirt important consumer protection laws and to avoid
additional regulatory oversight at both the State and Federal
level.
Both the charters and the ILC approval raise questions
about the traditional separation of banking and commerce and
the entry of technology firms with their move-fast-and-break-
things approach into the financial services arena, which has
become rule-bound as a result of congressional responses to a
series of major national financial crises over the past
century.
The current legal questions and regulatory conflicts should
be addressed by Congress. Our regulators and the courts
mediating these disputes have been forced to resort to 19th
Century books to interpret the intentions of Congress from a
time when these issues were far less apparent.
Banking has changed. We can't afford to allow outdated laws
to create opportunities for regulatory arbitrage and additional
consumer harm.
We need to update our regulatory framework to provide
clarity, opportunity for innovation, and, most importantly,
safeguard the consumer and the American taxpayer.
Chartering authority is the cornerstone of this system. Our
charters determine which firms can engage in banking and which
regulators will ensure their safety and soundness. This
conversation is as important as any in financial services could
be right now, and this discussion could not be more timely.
This morning, we will hear from a distinguished panel of
experts on what these proposed changes might mean for
regulating the business of banking and the implications of
changing the process for granting special purpose national bank
charters. I look forward to today's discussion.
The Chair now recognizes the ranking member of the task
force, my friend from Minnesota, Mr. Emmer, for 4 minutes for
an opening statement.
Mr. Emmer. Thank you, Mr. Chairman.
Thank you for convening this important hearing today.
Before I go into the content of the hearing, I want to
acknowledge what is likely our last Fintech Task Force hearing
of this Congress.
I would like to thank the Chair, and the past leadership of
former Ranking Member French Hill on this task force, for
producing thoughtful, nonpartisan conversations about the
emerging technologies with which regulators and Congress are
grappling.
No matter the outcome of November's election, I hope it has
become apparent on both sides, the multitude of policy
questions and topics in the area of Fintech. The growth of
these technologies and the considerations for Congress and
regulators will only continue to grow. That is why next
Congress, this committee should create a financial technology
subcommittee in order to provide proper attention to this
expanding and exciting area. A subcommittee would allow for
greater focus on the details of many of the topics we discussed
as a task force.
The consequences of Congress' action or inaction on these
topics stand to greatly influence the economy as well as the
location of the next great technological innovation like the
internet.
As a body, we have already fallen behind on our knowledge
and understanding of technology issues. If we don't catch up on
Fintech, these innovations will pass us by.
Today, we close out our hearings with our attention toward
the regulator that has likely been the most forward-leaning and
supportive of new technologies that could build a more open and
free financial system and equip millions of Americans
previously excluded with the tools to build a credit and
prosperous financial future: the Office of the Comptroller of
the Currency.
The OCC, under the leadership of Acting Comptroller Brian
Brooks, has undertaken tremendous efforts to clearly spell out
the regulatory environment for emerging technologies and ensure
their domestic development rather than allowing for more
departures to countries that have provided more clear rules of
the road. Many have weighed in after the prospect of a payments
charter became news.
As Congress and regulators tackle issues with our changing
financial system, it is important and prudent to consider the
implications involved and to make sure consumers are protected
and our financial institutions remain strong and secure.
At the same time, a charter under the OCC is by no means a
license to operate free from regulation. It is not even
regulation, as some of the testimony today will portray. It, in
fact, imposes many responsibilities and duties to adhere to
safe business practices and disclose information in an effort
to ensure market stability.
The OCC has long held and will continue to ensure that
their regulated institutions operate in a safe and sound
manner, provide fair access to financial services, and treat
customers fairly.
I am certain that as details begin to emerge and payment
charters are granted, the OCC will continue to fulfill their
mission. In addition, regulatory certainty is a goal that
Acting Comptroller Brooks and I share. That is why, last week,
I introduced the Securities Clarity Act, which will clarify
securities law in a technologically agnostic way and allow for
the distribution of an underlying asset that is, in fact, a
commodity.
With regard to blockchain technologies, the Securities
Clarity Act would allow for the distribution of a token
following the registered securities offer. So long as actors
play by the rules of the road, they deserve assurances that
regulators will not continue to cause uncertainty and will, in
fact, support innovation in America.
I am grateful for the support of Darren Soto, a co-Chair of
the Blockchain Caucus like myself, and Ro Khanna, a member of
the Caucus, as well as a Member of Congress from the State of
California, whose district has directly seen the benefits of
these new technologies.
It is through practical, nonpartisan solutions like this
that this task force could be most effective during this
Congress, and continuing into the next Congress.
Again, I would like to thank Chairman Lynch for convening
this hearing and leading the task force, and I hope we will
continue to work together to better understand financial
technologies and the ways Congress can support and foster
innovation in America.
I yield back.
Chairman Lynch. The gentleman yields back. Thank you, Mr.
Emmer.
I understood that Mr. McHenry was going to be afforded an
opportunity for an opening statement. Is he on board, because I
did not see him in the grid?
Okay. We don't see Mr. McHenry. Mr. Emmer, would you like
to reassign that minute remaining on the Minority side to any
of your Members or consume it yourself?
Mr. Emmer. No. At this point, Mr. Lynch, I will yield back.
Chairman Lynch. Okay. I thank the gentleman.
At this point, I would like to welcome our witnesses.
Today, we will hear from several distinguished witnesses who
are great authorities in this area.
First, Raul Carrillo is the Policy Counsel for the Demand
Progress Education Fund, and also a Fellow for the Americans
for Financial Reform Education Fund, where he helped develop a
regulatory response to the Facebook Libra project and other
emerging financial technologies.
Raul has also served as Special Counsel to the Enforcement
Director of the Consumer Financial Protection Bureau, and
worked in the executive office of then-California Attorney
General Kamala Harris. Welcome.
Second, Everett K. Sands is the Chief Executive Officer at
Lendistry, a Fintech community development financial
institution (CDFI), and small business and commercial real
estate lender. Mr. Sands has more than 20 years of experience
in lending at national and community banks.
He is also a board member of the Penn Institute for Urban
Research, which informs urban decision-making and public policy
on issues of sustainable urban growth and development.
Thank you, also, for being here.
Third, Arthur E. Wilmarth, Jr., is Professor Emeritus of
Law at George Washington University Law School. Professor
Wilmarth is the author of the forthcoming book, ``Taming the
Megabanks: Why We Need a New Glass-Steagall Act,'' and co-
editor of, ``The Panic of 2008: Causes, Consequences, and
Implications for Reform.''
In 2010, he was a consultant to the Financial Crisis
Inquiry Commission and is a member of the International
Advisory Board of General Banking.
Welcome, Professor Wilmarth.
And finally, Brian Knight is director of the Innovation and
Governance Program at the Mercatus Center. Mr. Knight's
research focuses on financial regulation, including the role of
federalism in Fintech regulation and the use of digital assets
for financial transactions.
Prior to joining Mercatus, Mr. Knight worked for the Milken
Institute, where he was in charge of the Fintech and capital
access programs. Thank you as well for being here.
Our witnesses are reminded that your oral testimony will be
limited to 5 minutes. A chime will go off at the end of your
time, and I would ask that you respect the Members' and other
witnesses' time by wrapping up your oral testimony at that
point.
And, without objection, your written statements will be
made a part of the record.
Mr. Carrillo, you are now recognized for 5 minutes to give
an oral presentation of your testimony.
STATEMENT OF RAUL CARRILLO, POLICY COUNSEL, DEMAND PROGRESS
EDUCATION FUND; AND FELLOW, AMERICANS FOR FINANCIAL REFORM
EDUCATION FUND
Mr. Carrillo. Thank you, Chairman Lynch, Ranking Member
Emmer, and distinguished members of the task force for inviting
me to testify today. My name is Raul Carrillo, and I am policy
counsel to Demand Progress Education Fund, and a fellow at the
Americans for Financial Reform (AFR) Education Fund.
Demand Progress is more than 2 million affiliated activists
fighting to keep the democratic character of the internet,
contest concentrated corporate power, and hold government
accountable. AFR is a coalition of more than 200 consumer,
civil rights, investor, retiree, labor, business, and faith-
based groups.
While assessing new bank-like technologies, policymakers
should look at possible benefits to individual users but also
to risk to the integrity of the financial system, consumer
protections, and our civil rights. They should also guard
against developments that will entrench the power of Big Tech
and further erode our democracy. We urge Congress to adopt a
bright-line precautionary approach to digital bank-like
activities.
What industry calls ``innovation'' is often easily mapped
onto an existing product or service. In some cases, there is
something new. In those cases, policymakers should ask why a
technological development is being proposed. Treating
innovation as an unqualified good not only leads us to ignore
equity but sustainable innovation. Precaution should be the
norm, just as it is, and just as it should be, in food and drug
regulation.
The OCC and FDIC's current approach encourages rent-a-bank
predatory lending. In Madden, the court followed a tradition
dating back to the American Revolution, that States may limit
the interest rates charged by non-bank companies as well as the
general rule that consumer protections are not preempted unless
they significantly interfere with the banks partnering on the
loan.
Together, the so-called, ``Madden fixed rules'', and OCC's
so-called, ``true lender rule'' would allow non-bank companies
to charge rates as high as they would like even if their bank
partners would merely put their name on the paperwork.
Similarly, special charters would allow non-bank companies
to exercise special privileges without special regulation.
During the pandemic and depression, we should be moving in
exactly the opposite direction, including by instituting a 36-
percent rate cap, and functionally expanding the Military
Lending Act, to cover us all.
Although Fintech firms make many promises with respect to
financial inclusion, we advise healthy skepticism. Too often,
new tech yields predatory inclusion. Companies offer needed
services to certain classes of users only for those benefits to
evaporate or become eliminated in the long term.
The use of alt data, AI, predictive analytics, has already
enabled price discrimination. Complex algorithms also make it
difficult to know what factors an algorithm has used and how it
has used them. This can lead to steering and additional
redlining and generally shields violators of the Equal Credit
Opportunity Act or Fair Housing Act from claims of disparate
impact.
We strongly agree with Professor Wilmarth that Wall Street
and Silicon Valley are irresponsibly integrating banking and
commerce. Congress should close the ILC loophole and generally
separate the ownership of financial institutions from large
tech companies.
We are especially concerned by dominant tech platforms'
recent encroachment into payments, most notably, the proposed
Facebook Libra project. Payments data allows platforms to more
easily engage in predatory pricing, to self deal, sparring
rivals in next adjacent markets, and to generally accumulate
political power.
Mobile payment platforms also avoid most banking
regulation. Constitutional law professors Dan Awrey and Kristin
van Zwieten call them, ``shadow payment platforms.'' Big Tech
should not be storing funds without appropriate protections,
but the U.S. currently lacks a general law of deposit that
would facilitate sufficient oversight. Congress must step up.
We also urge Congress to shift the burden of privacy
protection away from consumers who cannot meaningfully consent
to surveillance and toward Big Tech. Congress should establish
a list of permissible purposes for data collection and ban all
others.
We also urge Congress to protect cash as an option. We
shouldn't supplant money that doesn't track us with money that
necessarily creates a more detailed picture of our intimate
political, religious, familial, and romantic lives. As Justice
Thurgood Marshall warned in the 1970s, evolved banking also
leads to easier access to data which corporations and law
enforcement agencies may use inappropriately.
This task force should more deeply consider the social and
political consequences of Fintech. We strongly support
innovation in the public interest, and for that reason, call
for privacy-respecting public options for real-time payments,
safe deposits, remittances, and other basic services provided
by the Federal Reserve, Treasury, and USPS, institutions we can
more readily hold accountable compared to Big Finance and Big
Tech.
Thank you.
[The prepared statement of Mr. Carrillo can be found on
page 28 of the appendix.]
Chairman Lynch. Thank you.
Mr. Sands, you are now recognized for a 5-minute
presentation of your written testimony. Thank you.
STATEMENT OF EVERETT K. SANDS, CHIEF EXECUTIVE OFFICER,
LENDISTRY
Mr. Sands. Thank you very much. I appreciate that.
Chairman Lynch. Thank you, sir.
Mr. Sands. Task Force Chair Lynch, Task Force Ranking
Member Emmer, Chairwoman Waters, Ranking Member McHenry, and
distinguished members of the task force, it is an honor for me
to appear before you today. My name is Everett K. Sands, and I
appreciate the committee's interest in financial technology and
this opportunity to provide insights and information.
My testimony will address several of the task force's areas
of interest, and will focus on lending generally and on small
business lending, so many of my comments are also applicable to
other areas of lending, as they are closely tied in terms of
credit parameters from a consumer perspective and origination
activity from Fintech lenders.
The single, unified perspective that ties together my
testimony is this: In lending, there are good and responsible
actors, and there are bad and unscrupulous actors. And it is my
belief and experience that the best protection against bad
actors is to take action designed to incentivize more good
actors to come into the field, making their offerings more
available and crowding out bad actors.
Fintechs can have a constructive role in lending if their
rates and product offerings are responsible. Today, small
businesses, and consequently, the United States, are in crisis.
The stakes for expanding responsible lending are enormous, and
urgent need for action in this regard cannot be overstated.
I have more than 20 years of experience in the banking and
lending field. Prior to starting Lendistry, I was part of both
national and community banking. I have served as a board member
and as an executive, and I have led high-growth business units
and closed more than $3 billion in transactions.
Businesses I have led have been regulated by the CDFI Fund,
FDIC, FHA, FHSA, FHLB, OCC, OTS, SBA, VA, and several State
regulators.
Today, I am the CEO of Lendistry. Lendistry is a minority-
owned and technology-enabled CDFI. We are dedicated to
providing economic opportunities to underserved urban and rural
small business borrowers and their communities. Lendistry is
also a signatory to the Small Business Borrowers' Bill of
Rights, which are guidelines set by the Responsible Business
Lending Coalition.
As a hybrid of a Fintech lender and a community bank,
Lendistry combines the best of Fintech--efficiency,
scalability, and seamless user experience--with the best of
traditional lending--low cost of acquisition, low cost of
funds, and strong risk management.
Currently, Lendistry is playing a very active role in the
COVID-19 small business recovery effort. To briefly summarize,
Lendistry has originated, processed, and approved more than
$180 million in Paycheck Protection Program (PPP) loans to more
than 3,500 businesses in the 12 States where the Small Business
Administration (SBA) gave us temporary authorization to lend.
We have also utilized our technology platform to process
more than 50,000 small business Coronavirus Aid, Relief, and
Economic Security (CARES) Act-related grant applications for
the State of Pennsylvania, and we will fund approximately
10,000 of those grants, totalling $190 million, and up to an
additional $50 million for several other counties, all in
partnership with the PA CDFI network.
I will focus the remainder of my remarks on responsible
lending in the context of the areas the committee is exploring.
It is my view that incentivizing and expanding responsible
lending is the best protection against predatory lending.
Importantly, the Federal Government should empower and harness
systems and authorities it already has. Congress should use
these systems to create compelling incentives for Fintechs to
choose to operate within a regulated framework and conduct
lending activities in a responsible manner.
I would like to introduce one such incentives-oriented
solution today, and it begins with making more effective use of
the CDFI Fund. The solution has three components. First, create
compelling incentives to be a CDFI, and include automatic
approval for all of SBA's products, membership to the Federal
Reserve, and the ability to lend nationally, as well as easier
access to capital from banks.
Second, raise the bar for qualifying to be a CDFI, for
example, an interest rate ceiling of 36 percent APR,
standardized payment cycles including no more than two payments
a month, and additional disclosures and accountabilities.
Third, empower the CDFI Fund to monitor compliance with
additional requirements.
The membership asked about OCC special charters. Though we
believe in an enhanced role for the CDFI Fund as the preferred
solution, it should be adopted for the OCC. But payment and
lending each require significant adjustments to regulation, and
we suggest the OCC focus on payments first as new technology
like Bitcoin, blockchain, and cryptocurrency gain traction.
The task force asked about industrial loan charters (ILCs).
Despite theoretical risks of ILCs to the banking system,
historically, the mixing of banking and commerce has not had a
negative impact on the consumer and the deposit insurance fund.
We think ILCs are a viable solution. However, the parent
company must be subject to the Bank Holding Act.
Finally, I would like to emphasize the importance of annual
oversight. Whatever path is taken moving forward, the evolution
and speed of the Fintech industry demands that the regulatory
authorities be empowered and mandated to conduct annual reviews
of the requirements in order to ensure accountability and
transparency.
I thank you for opportunity to be here today.
[The prepared statement of Mr. Sands can be found on page
150 of the appendix.]
Chairman Lynch. Thank you, Mr. Sands.
Next up, Professor Wilmarth. You are now recognized for 5
minutes for a presentation of your written testimony.
STATEMENT OF ARTHUR E. WILMARTH, JR., PROFESSOR EMERITUS OF
LAW, GEORGE WASHINGTON UNIVERSITY LAW SCHOOL
Mr. Wilmarth. Thank you, Chairman Lynch, Ranking Member
Emmer, and distinguished members of the committee and the task
force.
My testimony today criticizes recent attempts by the OCC
and the FDIC to confer banking powers and privileges on
nonbanks and commercial firms without requiring those companies
to comply with the regulations that govern banks and bank
holding companies.
The OCC's and FDIC's initiatives are unlawful and contrary
to the public interest. They represent a dangerous form of
regulatory arbitrage that allows nonbanks and commercial firms
to evade fundamental policies embodied in our Federal statutory
framework for banking institutions.
I urge Congress to use its legislative and oversight powers
to block these initiatives or persuade the agencies to withdraw
them.
I am going to focus my oral testimony on the OCC's
nondepository Fintech Charter and the FDIC's proposed ILC rule.
The National Bank Act, the Federal Reserve Act, and the Federal
Deposit Insurance Act prohibit the OCC from granting national
bank charters to financial firms that do not accept deposits,
and I point the committee to 12 U.S.C. Sec. 222 in particular.
The only national banks that are permitted to operate without
deposit insurance are nondepository, special purpose trust
companies, and those companies were specifically authorized by
a special amendment, a very narrow amendment, adopted by
Congress in 1978. The OCC has no other authority to charter
institutions that don't accept deposits.
Bank deposits play a very vital role in our monetary
system, and as Gerald Corrigan observed 20 years ago,
depository institutions serve as a transmission belt for the
nation's monetary policy. Depository institutions have a very
privileged relationship with the Federal Reserve, and they
receive very beneficial services from the Fed, including
discount window loans, Fed payment services, and Fed settlement
and custody services. Fedwire, for example, guarantees
immediate final payment among financial institutions. No
nondepositories can get access to these services.
The OCC's nondepository Fintech Charter would create
massive conflicts with the Fed's design. Those firms, if they
got charters, could claim that they have the automatic right to
become Fed members and to get all of the benefits that
depository institutions get from the Fed.
For example, nondepository Fintech banks could get discount
window loans. That is completely contrary to Section 13-3 of
the Federal Reserve Act which puts very, very strict
restrictions on the ability of the Fed to give any loans to
nondepository firms.
Also, Big Tech firms could get very significant influence
on our monetary and economic policies. They would have the
right, if they were admitted as Fed members, to vote for
Federal Reserve Regional Reserve Bank Presidents, who
participate on the Federal Open Market Committee (FOMC), so
they would be able to directly influence monetary policy
decisions.
Now, let's turn for a moment to the FDIC's ILC proposed
rule. This would allow any type of commercial company to
acquire FDIC-insured depository institutions, known as ILCs,
who basically can conduct very close to a full service banking
business. This would be an even greater threat to the current
policy, which has been long established of separating banking
and commerce. It would give them direct access to all of the
Fed services, and, of course, to the very important Federal
deposit insurance part of the safety net.
So, we can see that these OCC Fintech Charters and the
FDIC's proposed ILC rule would essentially allow commercial
firms, and especially Big Tech firms, to get the advantages of
all that the Federal safety net offers.
This would give them huge competitive advantages over
smaller commercial firms that could not afford to acquire
Fintech Charters or ILCs. This is certainly completely contrary
to the Bank Holding Company Act, and our long history of
separating banking and commerce, and it would, in my view, pose
great systemic dangers.
The Federal Government bailed out several very large
corporate owners of ILCs during the financial crisis, as I
explained in my statement. We can anticipate that the same
problem would occur again if Big Tech firms are allowed to
acquire banking institutions with direct access to the safety
net but without complying with the Bank Holding Company Act and
many other statutes.
I would be happy to discuss this further in response to
questions. Thank you very much.
[The prepared statement of Mr. Wilmarth can be found on
page 159 of the appendix.]
Chairman Lynch. Thank you, Professor.
Mr. Knight, you are now recognized for 5 minutes for an
oral presentation of your written testimony.
STATEMENT OF BRIAN KNIGHT, DIRECTOR, INNOVATION AND GOVERNANCE
PROGRAM, MERCATUS CENTER
Mr. Knight. Hello, Chairman Lynch, Ranking Member Emmer,
and members of the FinTech Task Force. I congratulate you all
on your leadership and thank you for the opportunity to
testimony today.
My name is Brian Knight. I am the Director of the Program
of Innovation and Governance, and Senior Research Fellow at the
Mercatus Center. Any opinions I express today are my own and do
not necessarily reflect those of my employer.
The goal of this hearing is to examine the rules governing
which firms are allowed to lend and process payments in the age
of Fintech. That is an excellent question and is both timely
and relevant. I submit for your consideration four key points.
First, the technological and economic reality has overtaken
existing law, leading to an overly burdensome regulatory
environment that harms Americans.
Second, both the OCC and the States have shown an admirable
willingness to attempt reform, but their ability to get it
right is limited under existing law.
Third, Congress can and should reform the law to allow
nondepository lenders and money transmitters, subject to
appropriate requirements, to operate on a nationwide scale.
Finally, this does not mean, however, that a Federal
license or charter should be the only option. Rather, Congress
should enable State-licensed or chartered nondepository
entities to compete nationally.
Nonbanks and tech firms have become significant competitors
in the financial services market, and Americans have embraced
these services due to a variety of factors including cost,
convenience, speed, and availability.
While these firms may take advantage of cutting-edge
technology, they are still subject to a regulatory system that
did not contemplate them.
Contrary to some assertions, Fintech firms are not
unregulated or even necessarily less regulated than traditional
banks on a line-of-business basis. In fact, these firms
frequently find themselves subject to cumbersome State-by-State
regulation that places them at a disadvantage.
For example, under Federal law, a nationally chartered bank
or an FDIC-insured State-chartered bank can lend nationwide on
the basis of its home State law governing interest. Conversely,
Fintech firms must obtain lending licenses in every State they
operate in and are subject to the laws of each State regarding
the definition and control of interest. Likewise, national
banks are not required to obtain a State money transmitter
license, and State money transmitter licenses generally exempt
State-chartered banks. Conversely, non-bank money transmitters
have to get licenses in every State.
And, finally, while banks can generally access the Federal
Reserve's payment system to help transmit payments, non-bank
Fintech money transmitters cannot. It is cumbersome and uneven
regulation, it is frequently unjustified, and it can result in
higher costs, reduced service, and competitive inequality.
Recognizing this mismatch between the regulatory
environment and the economic and technological reality, both
Federal and State regulators have shown an admirable
willingness to innovate, but the efficacy of those efforts is
questionable due to legal constraints.
At the beginning of the Obama Administration, the Office of
the Comptroller of the Currency announced a plan to offer
special purpose national bank charters to nondepository lenders
and money transmitters.
In response, State regulators announced a host of
regulatory reforms aimed at lowering the burden of State
regulation, as well as suing the OCC. The OCC plan isn't
perfect. It does, arguably, represent the best regulatory
option currently available. However, it is not at all clear
that the legal powers and burdens that come with being a
national bank are needed or appropriate for nondepository
entities.
Likewise, while the States are resorting to litigation to
stop the OCC charter for Federal, it is also understandable.
Under current law, a State cannot offer a charter or license
comparable to the OCC Fintech Charter even if it wanted to,
because of the lack of Federal enabling legislation like that
enjoyed by State-chartered depositories.
So, what should Congress do? Congress should encourage
competition by aligning regulation with technological and
economic reality. Nondepository institutions that offer credit
or money transmission services nationwide should be able to do
so without being placed under undue regulatory disadvantage.
This could include Congress making clear that both States
and the Federal Government can authorize firms, whether through
a special purpose charter or a license, to lend or facilitate
payments with relevant authority comparable to their banking
competitors.
Critically, any requirements or limitations should be
properly calibrated to the risks created by the actual
products, services, and business models rather than applied
simply because they apply to depository institutions.
The exact contours of what these rules should look like
remain to be determined, and there are important questions that
need to be answered. But first, we should acknowledge that the
current regulatory regime is outdated and should be modernized.
Congress should take advantage of its unique ability to create
an environment conducive to innovation and competition that
benefits the American people.
Thank you again for the opportunity to testify, and I look
forward to your questions.
[The prepared statement of Mr. Knight can be found on page
54 of the appendix.]
Chairman Lynch. Thank you very much, Mr. Knight.
I now recognize myself for 5 minutes for questions. I
think, taken together, the testimony of all of the witnesses
really lays out what the problem is. And when we look at the
traditional barrier between banking and commerce, it has served
us well in the past.
When you think about the special privileges we give to
banks--I know the professor mentioned the discount window, and
we have taken to bailing out banks because we see them as so
important to our economy. I think that also with FDIC
insurance, we actually have an interest on behalf the American
taxpayer to preserve the stability of banks.
Now, we have the suggestion, and I understand that Fintech
is responding to consumer preferences. I have 2 girls who are
college age, and I don't believe either one of them has ever
stepped foot in a bank. Everything is remote; everything is
mobile banking.
So I get that the model is changing, and the regulations
are, indeed, outdated, but the question is, what do we do to
fix that problem in a way that preserves the protections for
consumers, for the American taxpayers?
I think, Professor Wilmarth and Mr. Carrillo, you both
spoke to that issue regarding the separation of commerce from
traditional banking. Could you talk a little bit about, not
just the dangers of commingling those two activities, but could
you also suggest what a solution might look like?
Mr. Carrillo, you mentioned privacy and the size of some
of--if you look at tech, if you look at these massive firms, I
see too-big-to-fail Fintechs in the future in a big, big way.
And I am just very, very nervous about seeing that
concentration of power that we see in the tech world
transmitted into the banking world. That is a very real concern
that I have. So, could you take a crack at that? Thank you.
Mr. Carrillo. Thank you very much for your question,
Chairman Lynch.
I also share your concerns about eventually needing to bail
out a Facebook or an Amazon or facing public pressure to do so
if we continue to go down this road. And Professor Wilmarth's
research has very much highlighted that financial institutions
that are owned by commercial companies tend to make risky bets
or engage in imprudent activities on behalf of their parent
company.
I would also say that the added dimension here involves
economic and political power in our society. I am somewhat
disappointed that none of the other panelists addressed Big
Data or mass surveillance. We have to consider that in this new
age of banking, it is not just about extracting money. It is
about extracting information about people.
And my response, in addition to suggesting that there
should be further barriers provided by Congress and regulators
between Big Tech and high finance, is to create public options
which would introduce competitive pressure into the space and
help keep Big Tech and high finance honest in terms of building
out this understandably necessary infrastructure. Thank you.
Chairman Lynch. Thank you.
Professor Wilmarth?
Mr. Wilmarth. Thank you, Mr. Chairman. I think that you are
exactly right, that if we allow Big Tech to acquire banks, and
we can expect that if that happens, they will be very large
banks, the pressure would be unavoidable, and it's inevitable
that if any problem came, the Federal Government would bail out
the entire institution. That is exactly what happened to the
so-called shadow banks financial conglomerates during the
financial crisis.
I would point the task force's attention to the Wirecard
debacle that has just occurred in Germany. Wirecard actually
controlled a bank, and what was also very interesting is they
were trying to acquire Deutsche Bank shortly before they
collapsed. Imagine if Wirecard had controlled Deutsche Bank
before its accounting scandal was revealed?
Again, there was no regulation at the holding company
level. I think the lesson of history is that you need
consolidated, effective supervision at the holding company
level, and I very much question whether that is possible for a
major tech bank conglomerate.
If I could just make one suggestion, nobody has shown, in
my opinion, that all of these services cannot be obtained by
banks through proper contracts with proper supervision by the
Federal regulators.
I think the proper approach is to make sure that banks
enter into contracts when needed to get the technology they
need to serve their customers, but those contracts should be
carefully supervised by the regulators.
I do not see that putting the banks into the hands of Big
Tech would cause anything but major problems, and I think the
resulting conglomerates would be completely uncontrollable by
both regulators, and I am afraid even perhaps by Congress.
Chairman Lynch. Thank you very much. I see that my time has
expired.
The Chair now recognizes the ranking member of the task
force, Mr. Emmer, for 5 minutes for questions.
Mr. Emmer. Thank you, Mr. Chairman. Again, thank you for
holding this hearing.
Mr. Knight, under this Administration, you have seen a lot
of forward progress in terms of regulators understanding
technology and fostering innovation. What areas do you think
regulators should be doing more work in, to understand and to
ensure clear and consistent regulation?
Mr. Knight. Thank you, Representative Emmer. I believe that
the areas that regulators should be focusing more on are, one,
and I am surprised, given the topic of this hearing, the
implications of technology. Because while the application of
technology to financial services is not new, we are in a period
of very high technological innovation, and therefore, be it
within the traditional banking system, non-banking financial
firms or emerging startups and new competitors, the application
of a host of technologies, AI and Big Data was mentioned
earlier.
Cryptocurrencies and that sort of ledger system are all
emerging and really need to be well-understood by the
regulators so that they can do their job appropriately and
neither fall asleep at the wheel nor unduly panic.
Mr. Emmer. Thanks. Have you been following the litigation,
the SEC litigation, including the Kik and the Telegram cases?
And what do you make of Commissioner Peirce's proposed safe
harbor and express concerns regarding the Telegram enforcement
action?
Mr. Knight. Sir, I will confess that I have not followed
that as closely as I should have. I will say that--
Mr. Emmer. Let me do this, Mr. Knight. Hester Peirce said,
``Enforcement actions can be instructive to people other than
the wrongdoer but are not an appropriate mechanism to create
new law. Our regulatory integrity demands that enforcement
actions be premised on a violation of a clearly articulated
statue or rule.''
Hopefully, that helps.
Mr. Knight. Sir, Hester is, per usual, absolutely right. We
do not want regulation by enforcement. The concept of justice
and, frankly, efficiency and effectiveness indicate that we
should have clearly laid down rules before we are going to
bring an enforcement action and punish someone for a violation.
That is, I think, a core component of our concept of justice.
Mr. Emmer. Thank you.
What do you recommend, Mr. Knight? What do you recommend
Congress do, following the task force's work? Should a stronger
focus be placed on these technologies? And are there any short-
term, say, 1- or 2-year priorities that you can identify?
Mr. Knight. Thank you, sir. I absolutely believe that
Congress should continue to monitor and, in fact, increase its
interest in these topics because they are not going away, and
they cut to an essential component of a functioning life, which
is the ability to access financial services. That is a key
component.
In terms of short-term goals, as I mentioned earlier, I
think that we really should consider how we can modernize the
ability for firms to operate on an interstate basis, either
within the banking system with the caveat that there is a
debate about just whether or not banking is inherently
involving depositories, or outside of the banking system where
Congress can give the necessary powers but not be bound by the
interlocking laws that have developed over time with regard to
banks to allow nonbanks to compete.
That competition will benefit customers. It will help keep
all of the participants honest because it will give consumers
more options so that they can walk away from a service provider
who is not treating them well.
It may also help lower moral hazard to the extent that we
are not forced to engage in a federally-insured depository
environment for all transactions.
Mr. Emmer. This is focusing in on one particular area, but
would you agree that to resolve uncertainty and, quite frankly,
a patchwork of different regulations and laws, for instance,
the OCC suggesting there should be some type of national
license for money transmitters, and we have actually had a bill
along these lines, would you agree that is one of those things
that could bring certainty and clarity to the marketplace?
Mr. Knight. Absolutely. And in addition to the OCC
providing a license or special purpose charter, you could also
enable, like you would do with banks, State license
transmitters to more effectively compete interstate to maintain
a dual financial and market-preserving federalist system.
Mr. Emmer. Excellent.
Thank you, Mr. Chairman. I see my time has expired, so I
yield back.
Chairman Lynch. The gentleman yields back.
Petrina, would you handle the order of the questions? I am
not sure who is next.
Ms. Thomas. Yes, sir. Mr. Hill should be next.
Mr. Hill. Thank you, Mr. Chairman. I must say I want to
echo the comments of my good friend, Tom Emmer, that one of the
real highlights of this Congress was the decision by Chairwoman
Maxine Waters and Ranking Patrick McHenry to form our two task
forces on FinTech and Artificial Intelligence, particularly
this year in the pandemic, where legislative work has become
much more modest.
The work here will lay the groundwork for tremendous
efforts, I think, for our State regulators, our Federal
regulators, and our congressional policymakers working with
this Administration and the incoming Administration, be it
Trump or Biden, to continue to prepare America to be a leader
in Fintech.
And I appreciate the Treasury's 2017 survey and analysis on
all of these issues that we are talking about today, and it
really made for a more educated group of Members of Congress on
both sides of the aisle to work on these important topics, so
thanks for having this hearing.
I am a little shocked that you didn't schedule the hearing
for 9:00 tonight, because I think people would really be
fascinated by Fintech and the future of their country, and you
would be the star, so I am sorry about that.
Let me start and say that I introduced bipartisan
legislation, H.R. 6306, the Immediate Funds Availability Act,
which would increase the amount of funds bank customers are
able to receive, and would require them to be made available
immediately during the pandemic, and it would sunset over 3
years. My friend, Mr. Foster of Illinois, introduced that bill
with me.
And I hear from constituents pretty frequently, wondering
why it takes so long for even a U.S. check to be credited to
their account.
Mr. Knight, what are some of the current obstacles that
cause banks to not be able to provide more immediate credit to
consumers?
Mr. Knight. Thank you, Representative Hill, for that
question.
One of the existing issues is that the underlying
infrastructure, and that doesn't mean the automatic
clearinghouse system, is not a real-time system and, instead,
is a batch system that has, I believe, gone to 3 windows, 5
days a week. And so, they batch up all the payments and
transmit them during those periods.
So if your payment doesn't fall within one of those
periods, it will have to move to the next day, or sometimes it
can move--if it comes in late on a Friday, it may take until
Monday or Tuesday to get there.
That system made sense when it was created, and that is a
very efficient way to do it. It is a cheap way to do it, which
is important in a payment system, but technology has moved on
to the point where we can move to real-time payments. Other
countries have moved to real-time payments. There is a funding
system that provides real-time payments, and the Fed has
announced a move to real-time payments. So, all of those things
should allow for more expedient payment.
Mr. Hill. Thank you very much.
Mr. Sands, I really enjoyed your testimony, and I want to
congratulate you on the success of your business. I was on the
CDFI Advisory Board during the George W. Bush Administration as
the community bank representative, and I want to congratulate
you on all the good work you are doing, and thanks for
participating so vigorously for our minority community, but
also in the PPP program. I enjoyed looking at your testimony.
You mention the importance of partnerships. I assume in the
loan origination arena, that this idea of providing liquidity
to Fintech lenders through the use of a bank for balance sheet
strength, you think is a good idea if it is done right, I take
it, from your testimony?
Mr. Sands. That would be correct, sir. One of the things I
think we look at is that the U.S., right now, is effectively
losing a war at home, and let me just give you an example.
Let's take a look at the Citi report that came out last
week, entitled, ``Closing the Racial Inequality Gaps: The
Economic Cost of Black Inequality in the U.S.'', which found
that over the last 2 decades, $16 trillion in GDP could have
been created if we had closed the wealth gap. If the gaps are
closed going forward, GDP will be increased by $5 trillion over
5 years, or $1 trillion a year.
Let's just be clear about that. There are 195 countries in
the world. This will be better than 178 countries' GDP, or 2\1/
2\ times what we are doing with Chinese tariffs right now.
So I think it is very, very important that we solve some of
these things, and we figure out a constructive measure on how
we move forward.
Mr. Hill. I appreciate that, and I also took note of your
exam frequency suggestions on the CDFI loan funds. I look
forward to following up with you on that.
And let me just conclude by your constructive comment also
on cryptocurrency. Bill Foster and I really are working with
the Fed on a digital dollar and have encouraged that work, and
I am pleased to see it advancing. And we need a cryptocurrency
payment rail as a part of our payment system reforms.
I thank my friend, the chairman, and I yield back.
Chairman Lynch. The gentleman yields back.
The Chair now recognizes Mr. Davidson for 5 minutes for
questions.
Mr. Davidson. I appreciate the chairman, and I really just
want to say thanks so much to the committee for having this
hearing.
Frankly, between last week's roundtable and this week's
hearing, these are topics that I have sought to address since
joining the committee in 2017. My sincere hope is that Speaker
Boehner's saying about how Congress works which is, to sum it
up, ``very slowly until it is very fast,'' I hope that holds
true for this long-overdue area of responsibility for the House
Financial Services Committee.
To adequately regulate this area, we also need to address a
foundational principle, which is privacy--frankly, consumer
privacy. Wrongly applying existing Bank Secrecy Act provisions,
for example, to a true distributed ledger blockchain
architecture would undermine privacy, undermine the security
inherent to that technology, and undermine the efficiency that
Fintech offers our consumers, innovators, and investors,
whether it is any number of unfathomable use cases, but in
particular, as we talk about payments facilitated in bank
charters.
Mr. Carrillo laid out the challenges and opportunities
nicely. While I don't agree with his conclusion that all of
this needs to be centrally managed, particularly by the Postal
Service, his exposition on the stakes for privacy merits
primary attention for the regulatory framework and civil
liberties protections America needs.
America needs a strong law protecting consumer privacy, and
holding every company, website, app, OEM, et cetera,
accountable not just for complying with whatever they want to
put in their terms of service, but with meaningful legal
protections for an individual's personal data.
Concurrent with the development of that privacy law, we
need a more unified, not more fragmented, approach to
regulation--one prudential bank regulator rather than a bigger,
broader patchwork.
In the absence of action by Congress, some States have
already moved ahead, some with poor results like New York's bit
licensed approach, and have scared capital and innovation
offshore. And others have been much better, but no State has
worked with more precision and clarity than Wyoming.
Mr. Knight, as you look at the approach in Wyoming that
resulted in Kraken's bank charter, what are you seeing as being
the most important features for the Federal level in ensuring
that this kind of innovation takes place across the United
States?
Mr. Knight. Thank you, Representative Davidson.
When I look at that and the broader innovation picture, I
think what we need is a system that allows for interstate
competition that can involve a federally-licensed or chartered
entity, but it should also allow State-licensed and chartered
entities to have the essential powers they need to compete
interstate, and allow consumers to choose which system they
want and what laws they want to take advantage of.
And then to your point about privacy, I think you are
absolutely right, and this is something we need to think very
hard on. And, yet, as Mr. Carrillo mentioned, first of all, I
think getting rid of cash is a bad idea.
But, second, we do need to be thinking about privacy
protections balanced with the legitimate needs of law
enforcement, and that applies to private sector actors, and it
applies to public sector actors as well.
I think those are some of the essential things Congress
needs to be looking at.
Mr. Davidson. Yes. So, we are blending things here, but
when we look at the architecture of distributed ledger
technology, it goes about it in a different way.
Probably, many of the members of the committee and some of
our witnesses saw the Buzzfeed article that highlighted the
suspicious activity reports (SARs) approach that, frankly,
hasn't resulted in a real stop to money laundering. There is
still a big problem.
The Financial Crimes Enforcement Network (FinCEN)
highlights that. But, frankly, the approach is essentially the
concern I have with Mr. Carrillo. We are concerned about what
was surveillance, so why would we give the people who are doing
the most warrantless surveillance more power to do more?
Why would we go double down on Bank Secrecy Act anti-money-
laundering provisions that create a bigger black market,
frankly, that underserves the underbanked already? And that is
where I think the encouraging work in Fintech companies like
Bank U, which are banking the unbanked and creating a
transaction history, really helps build an identity for people.
They are doing that outside the United States, but are an
Austin-based company. And when you look at these kinds of
companies, before they can be regulated as a bank, they have to
raise the capital. That is why getting the certainty into the
regulatory framework as to what is a security and what is not a
security is so vital.
So, I hope our committee will take that up and notice some
of the bills in this space. As you can tell, I have more to
cover in that space than we can in this hearing, but thanks
again to the committee for the work to put this together.
Thanks, Mr. Foster and Mr. Emmer, for getting it here, and
I appreciate our witnesses.
Thanks again, and I yield back.
Chairman Lynch. The gentleman yields back. Much
appreciated.
The Chair now recognizes my friend from Michigan, Ms.
Tlaib, for 5 minutes for questions.
Ms. Tlaib. Thank you so much, Mr. Chairman.
As we all know, the pandemic and COVID-19 has exposed a
number of broken systems, not only in our healthcare system but
also the economic divide in our country. And this includes the
barriers that exist due to lack of bank branches in many low-
and moderate-income neighborhoods, and most notably, in Black
neighborhoods, like those in my district.
To me, there is no doubt, and I truly believe this, that
companies like Amazon, Facebook, JPMorgan Chase, and Venmo will
take advantage of the financial gap in the market that will
lead to exploitation of the unbanked and underbanked
communities.
I know the OCC has proceeded to move forward and really, I
believe, overstepped its authority by determining what a bank
is or removing that authority from Congress to determine
ultimately, again, what is in the best interest of the American
people.
Mr. Carrillo, do you think that the consumers should be
treated differently or be offered less protection by Fintech
companies than they are with traditional banks?
Mr. Carrillo. Thank you, Representative Tlaib. The short
answer to your question is no, I don't think that consumers
should have fewer protections, mainly because they are using a
Big Tech platform, for instance, that portends to store funds
for long periods of time but not offer corollary protections.
And to your point, I think that Congress needs to step up
here, define what a deposit is, define what banking is, and
make sure when funds are exposed and used in this manner, that
consumers have specific protections. This is especially
important when mobile payment platforms and other Fintech
technologies are being advertised to communities of color as a
way up, as a path towards upward mobility in our society.
Privacy protections are also extremely important here.
Consumer protections cannot be voided in that realm either. We
cannot ask communities of color to fundamentally sacrifice
their privacy, especially given the way the data is used for
corporations for targeted ads, et cetera, but also the way that
law enforcement agencies may intend to misuse the data that is
collected, especially from Black folks, Muslim folks, Latino
folks, indigenous folks, and people who have political dissent
with the existing government.
Thank you.
Ms. Tlaib. Given our recent negative experience with
unregulated shadow banks, which is a huge issue, regarding the
safety and soundness of privately issued mobile money, it is
really risky to allow unregulated Fintech companies to offer
critical payment services provided to moderate-income
communities. And so one of the things I want--when I am trying
to explain this to my mom, what is the worst-case scenario here
for many of our residents at home?
Mr. Carrillo. We are talking about fundamentally moving
payments towards a system that is not appropriately protected.
I agree with Mr. Knight and the other panelists that things are
changing via the pandemic, but I have actually not seen any
hard evidence that these private Fintech companies are,
``saving the day.'' In fact, I am worried about the
transactions occurring without proper protections. And if
anything, as I mentioned in my testimony, it is even more
important to make sure that we are establishing a framework in
the public interest.
Ms. Tlaib. Yes. And actually, during the pandemic, I see
them expanding their services, which seems to be more in the
vein of traditional banks right now. Do you believe that the
OCC is the best suited to have regulatory authority over
Fintech companies offering stable coin deposits, or is there an
agency more suited to deal with the coin resulting payment
system like the FDIC or the Fed?
Mr. Carrillo. Another excellent question. Thank you,
Representative Tlaib. I think that the banking regulators and
Congress need to have a discussion about extending protections.
But to your point, there is fundamentally a gap in the law
right now that allows shadow banking generally, as Professor
Wilmarth's research has shown, and as Vanderbilt Law Professor
Morgan Ricks' research has shown, and this has to be addressed
or we are not going to have coherent banking law and we are not
going to have it before Silicon Valley enters the fray and
makes it all the more necessary.
Ms. Tlaib. Yes. I am really pleased. Thank you, Mr.
Chairman, for allowing me to be part of this last task force
hearing. All of those Fintech companies may be offering new
benefits, but this type of product offered goes beyond the
reach of fair lending laws and regulations, which is what we
should be worried about the most right now. So, I hope that we
move forward in trying to create, again, some sort of way to
make sure that our residents are protected as these Fintech
companies move in towards traditional banking in our
communities.
Thank you so much, and I yield back.
Mr. Sands. Representative Tlaib, may I ask you a quick
question?
Ms. Tlaib. Sure. I have 18 seconds. Go ahead.
Mr. Sands. I think we need to be careful about defining
``underserved'' versus ``poorly served.'' One of the things I
would like to recommend this committee to do is--we constantly
are talking about the ``stick,'' but we have not talked about
the ``carrot.'' And if we can incentivize good practitioners to
come in, then States like your own and others could properly
serve. There are good institutions that are trying to do these
things.
Thank you.
Ms. Tlaib. No, I agree, and I have worked with many of the
local institutions to do that. We are just not doing enough of
it.
Chairman Lynch. At this point, I am just going to go with
one follow-up question, and, of course, I will afford Mr. Emmer
a follow-up question on the Republican side.
Mr. Sands, one of the great promises of Fintech was the
idea that it might help us to bank the unbanked, and the
evidence is really mixed. We have seen examples where the use
of certain algorithms has blocked out people; they have been an
obstacle to financial access. And I have seen areas in Nigeria
and other parts of Africa where it is the only game in town,
there has been no legacy banking system there, so it has
actually worked wonders in some of those countries. Somalia is
a particular problem, and I think the answer has to be Fintech
in some fashion or mobile banking.
How do we maximize that promise of banking the unbanked,
especially where we are looking at this shift where Fintech--
arguably, large tech firms come in, and they are the driving
force in this. How do we make sure that we fulfill that promise
of banking the unbanked in whatever the final version of our
solution might look like? You have a great perspective, in your
position, and I would love to hear your thoughts on that.
Mr. Sands. Thank you, Chairman Lynch, for the opportunity.
This is one of the things I would like to ask all of us to
consider, is that we have to be very careful about the stick
and not think about the carrot, as I mentioned before. The
modernization of laws would be very important if we enabled the
good guys to be able to do what they do in a high-quality way.
I will give you an example, Chairman Lynch. I wanted, and
Lendistry wanted, to provide PPP loans in your State, but we
were not allowed to because of the current rules. Again, the
current rules, under SBA and others, have been made to be a
form of risk management. While we respect them, there needs to
be some type of review so that the good guys aren't fighting
the fight with one hand behind their back.
Representative Tlaib just mentioned that we are not doing
things in a scaleable fashion. Part of the reason why we are
not doing them in a scaleable fashion is because we are not
allowed to.
Another example will be, we are not allowed to participate
in the Main Street Program. We are not allowed to become
members of the Federal Reserve System. I really think that if
we look and we give the good guys an opportunity to participate
in a high-quality way, you are going to see massive change, and
you are going to see massive things happen. And then, I think
the good guys will overshadow and, quite frankly, beat, from a
competitive perspective, many of the unscrupulous players.
Thank you, again, Chairman Lynch.
Mr. Emmer. Mr. Lynch, this is Tom Emmer. I let your staff
know that I had no objection to an additional question, and I
don't have one right at this moment.
Chairman Lynch. Okay. Mr. Carrillo, could you follow up on
that question? I know I have about a minute and 45 seconds
left. I thought you might have an interesting perspective as
well.
Mr. Carrillo. Just to clarify, Chairman Lynch, you would
like me to comment on how we best approach the problem of
serving the unbanked and the underbanked?
Chairman Lynch. Right. That is the big promise, that we can
bank the unbanked, and the results so far have been mixed, and
I would like to figure out, if you can just elaborate, on how
we can do better.
Mr. Carrillo. Yes, sir. I think that if providing payments
infrastructure and banking services is as important as
everybody on this panel says it is today, then we need to
establish a public option. We need to start treating this sort
of infrastructure like it is integral to the economy, as it
very much is. And I think that fundamentally, firms, no matter
how noble or altruistic they may be in their outlook, tend to
gain customers based on whether those customers are going to be
profitable to them. There is no public service mandate for
these companies, and I doubt that folks who run the companies
would welcome such a mandate.
If we do think that it is important as everybody needing to
have basic digital financial services in the 21st Century, then
we need to treat this like railroads, like canals, like telecom
infrastructure is in other countries, and provide it to
everybody as a matter of course.
Chairman Lynch. Thank you very much.
Mr. Wilmarth. If I may comment, Chairman Lynch?
Chairman Lynch. Please, go right ahead.
Mr. Wilmarth. I think that as we go forward, it is critical
not to allow nonbanks to do what banks are doing without the
same type of regulatory and public interest safeguards that we
have established for banks. And Mr. Carrillo focused on the
issue of deposits, that payments providers are essentially
holding deposits without any deposit insurance or any of the
other requirements that we impose on depository institutions.
What if one of those payment providers fail? The customers are
going to demand their money back and there is going to be no
deposit insurance.
The one other thing I would say is, I think there is good
space for partnerships between banks and Fintechs if it is done
in a legal and responsible way. And I would point the committee
task force to the recent Marlette Funding, and Avant
settlements in Colorado, where the bank that partners with a
nonbank lender has to maintain control over the lending, and
they have to comply with the 36 percent cap on interest rates.
They can't simply claim preemptive immunity and try to make 100
percent loans.
So, I think there is room for good partnerships, but we
have to maintain the integrity of banking regulation and the
public interest safeguards with which we expect banks to
comply.
Chairman Lynch. I appreciate that, and I agree. Thank you.
Mr. Emmer. Mr. Chairman, I will change my approach. I would
like to follow up, if you don't mind.
Chairman Lynch. Please, go right ahead, Mr. Emmer.
Mr. Emmer. Thank you. I appreciate it.
Mr. Carrillo, this struck me when you were speaking
earlier: Beware of the promise of helping out the unbanked.
With an open distributive ledger-type technology, I think the
promise is enormous, and I think government, quite frankly, is
putting up obstacles, and the uncertainty is getting in the way
of the idea that we have to have intermediaries in all of these
things, which is, I think, where all of you are coming from,
and that is not exactly the way all cryptocurrency works.
Mr. Knight, do you have another side of this coin where we
should be looking at the real promise that this would afford?
Not just to innovation and the ability to access capital, but
for the unbanked, the folks who just haven't been included in
the system, where there is someone on the other side of the
world because of cultural reasons, maybe it is a young woman
who isn't allowed to do this sort of thing, or hasn't been,
this would give them a lot of hope. I would appreciate your
perspective.
Mr. Knight. Thank you, Representative Emmer. Yes, I do
believe that you are perhaps giving short shrift to the value
of competition and innovation in helping to serve people. And
that is not to say that there aren't rules of the road that
should be followed, though those rules really need to be tied
to the actual risks created and not just applied holistically
across all competitors regardless of differences in business
models.
And I do think that we have seen that changes in business
models, changes in technology, more efficiencies gained, can
help make providing services to some groups, where it used to
previously not be cost-effective or feasible--it helps improve
that.
Now, the changes are often marginal, right? We don't go
from 10 percent lack of access to zero lack of access. But
marginal improvements do matter. And I think we need to be very
cautious and always bear in mind that the costs of regulation,
the costs of the foregone service, in addition to the potential
risks from a lack of regulation, it is two sides of the balance
and they both need to be considered.
Mr. Emmer. Amen.
Mr. Chairman, at this point, I would respectfully yield the
balance of my time to my colleague from Ohio, Mr. Davidson.
Mr. Davidson. I thank the ranking member. Thanks for this
extra question here.
Mr. Sands, as you spoke, I thought of so many companies
that I have met with and so many innovators I have met with who
have been frustrated by the lack of regulatory clarity or the
stigma that, frankly, bad actors have put on this innovative
space. And their plea hasn't been for no regulation. Frankly,
they have pled for some regulatory clarity. In fact, a lot of
companies have left the United States, not to avoid our laws,
but to find regulatory clarity so they can do the very things
they have promised here in the United States but, frankly, for
others.
And so, as we think about the charter that we are talking
about, or as we think about even raising capital, have you
heard about this phenomenon? And then, when you think about the
architecture that some, whether it is your firm or others in
the space, have, what are the challenges of having this
technology that maybe has a similar objective--faster payments,
for example--but a different architecture?
It seems to me that the regulatory framework has to allow
for both in States, as consumer protection, for example, to
happen, but maybe compliance is done in a different way. You
deliver the protection in the firm, but you may be able to
comply differently than somebody who maybe gets really good at
printing off some more SARs and providing surveillance services
for Federal agencies.
Mr. Sands, could you address that?
Mr. Sands. Absolutely. Thank you, Representative Davidson.
I think one of the keys to success that we are--we haven't
quite focused on, but it can't be underscored, is that, as I
mentioned, I have been regulated by eight different regulators
at a time. Even here at Lendistry, we have five different
regulators. The convergence of multiple regulators at the same
time is part of the secret to success of regulation. So I want
us to always keep that in the forefront and think about that as
we move into the future decisions.
One of the things that we do need to make sure we think
about with the OCC is that they kind of crawl, walk, run.
Because if they step out by themselves without some, what I
will call peers, it could change things. That being said, we do
need to definitely think about how do we modernize and how do
we think about the future. There is an amazing opportunity to
grow GDP, grow tax revenue, and I think it is important, if we
can do this correctly.
Thank you, sir.
Mr. Davidson. Thank you so much.
Mr. Emmer, I yield your time back that I have fully
consumed.
Chairman Lynch. Okay. That concludes our witness testimony.
I want to thank Mr. Carrillo, Mr. Sands, Professor Wilmarth,
and Mr. Knight for your contributions, and your very thoughtful
commentary.
Just in conclusion, I do want to note that, without
objection, the following letters will be placed into today's
record: the Conference of State Banking Supervisors; the
American Bankers Association; the Utah Department of Financial
Institutions; the Center for Responsible Lending; the
Electronic Transactions Association; and the National
Association of Federal Credit Unions.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
Hearing is now adjourned. Thank you, and please safe.
[Whereupon, at 1:32 p.m., the hearing was adjourned.]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]