 Welcome, and I'm really delighted to start this panel. We started this conference three years ago, and over time we have done topics on systemic risk, big data in finance, and this year we're talking about fintech. And we have six panels, and we'll be talking about a host of issues surrounding risks and opportunities in fintech. That's our conference theme this year. And our panel will be talking specifically about regulation and the contours of regulation that we should be thinking about in terms of these fintech firms. I do work in banking and finance, and when I started thinking about this topic and our conference, I reflected on the banking research of the last 100, 150 years. And if the story of banking can be told in two words, it's a story of innovation and regulation. Historically, you have had markets where there is some need, there are markets, consumers have some credit, liquidity, payment services, that kind of need. And there have been innovations always. And the new form of fintech that we're talking about today is simply yet another wave of technology affecting innovation. So what I'll do, just to sit this stage, since I'm the first moderator of the first panel to go, I'll set a broad framework, the way folks in finance and banking like to think about it. And you'll see that some of the themes that I'll be talking about will cut through various panels that we'll have today and tomorrow. So the idea about how we want to think about set this stage for our fintech regulation is that, look, we always have some missing market, some consumer needs, some demand, which some innovation comes and tries to fill. And this story goes back to when you think about the way we think about credit card or when we think about the ATMs. You obviously have some needs, you obviously have some missing markets where consumers want some payment services, consumers want liquidity. And there is technological innovation, there's some new technology that comes up. And then we have an innovation. So missing markets plus technology is a good thing for the society, it's a good thing for us when we all had this innovation in credit card business, when we had this innovation in the ATM markets, there's a lot that we have gained as consumers as society. So far the story is often told in a very positive manner, it's good, that's the opportunity, that's what we need from fintech. But often there's a flip side, there's a trade-off, there's a cost of market failure or negative externality that we start worrying about. That if we have innovation, just like we heard about credit derivatives, mortgage-backed securities, the idea that I work in a lot. And I remember way back in 2004, 2005, the whole idea was that, look, there would be a lot of risk-sharing, there would be these illiquid mortgages will be made into liquid securities, and therefore cost of funds that ultimately the homeowners are going to pay is going to come down, home ownership will go up. And to the extent that we care about consumers welfare in terms of home ownership, that's a good side. And of course, rest is history, we saw the dark side of that play out in 2008, 2009. And this is that negative market externality or market failure, that's where we start thinking about regulation. That's the basic framework that most of us in economics and finance will agree with. That look, you have innovation, you have market failure, and then you need to have regulation to make sure that that kind of market failure does not happen, or we control it, or we have a sense of how bad it can get, sure things go wrong. But again, those of us who work in the policy circuit and on the research side worry a lot about the unintended consequences of any regulation we put in place. Time and again, and I'll just take the example of a research area that's close to my work, we think about risk regulations that come out of BASL committee on banking supervision. And my way of looking at it is that you have BASL 1, BASL 2, BASL 3, and every BASL X tries to solve the problem of what happened in the past. And you come up with a new set of regulation and then there are incentives to game those regulations. There are unintended consequences. And when you have those unintended consequences or gaming going on in response to regulation, then that there's a feedback loop of a sort that that itself creates some missing markets. And often people will talk about, look, if you regulate banks too heavily, then some of the businesses will leave your regulated market, they'll find their way into shadow banking sector. And then rather than solving the problem, you have taken a bigger problem for yourself. The key issue, the key issue is that when we just hindsight is a beautiful thing, but what we need to be thinking about is that our regulation should control the problems of the past and should anticipate the new problems that it will bring about through unintended consequences. And our panel will be talking about some of those things in this broad framework. In fact, the whole two days, many sessions, you'll see this flavor regulation and innovation will be going back and forth many, many times in the next two days. So just to set this stage and then I'll introduce my panelists and we have a wonderful panel here to talk about the positives and areas of concern when we think about fintech. We want to be in terms of regulating the fintech firms. So to be precise, we'll be spending a lot of time in this panel on should we charter fintech companies as banks, right? Now historically, banks have been regulated and the regulations have changed, but we have FDIC, we have Fed, we have OCC, we have a lot of regulators and again, there's a cost and benefit of regulation itself, but coming down to fintech itself, you want to regulate and some points that people will often give you in terms of arguments for regulation would be look, we want to manage their risk, we want to manage some systemic risk implication that we might have with this mushrooming of fintech companies over the next 10, 15, 20 years. That's a good case for regulation. We want to have good coordination among regulators should something bad happen, right? When the mortgage security crisis happened and then we had all the issues that who should be in charge of orderly liquidation of these firms? And we didn't really have a good answer then. We should be thinking about this that if these fintech companies become large and if they fail, who should be liquidating it? So these are the cases for having a bank charter or other sort of regulation for these fintech companies. The second point I have on my slide, that look, you want a regulation for responsible innovation. Now there have been many episodes in the history where the innovation has not been fair, has not been equitable to different demographic groups, to different stakeholders of the society. We want to regulate, we want to be thinking about this issue so that it's more inclusive, so that consumers are not taken advantage of. The idea again goes back to what we heard in the keynote to speak that look, consumers are often relatively less informed about these products. We don't even understand all these acronyms. How do we think about what we are getting if we don't even understand that somebody is selling me some payment service that is based on some cryptocurrency? And I should sign up for that. And the third case that I'm proposing for argument for regulation is that they're really uniform standards. And that could help even these fintech companies that are going to be regulated. If I have uniform standards because of either monitoring by the regulators, because of the information I disclose to the regulators, it will help me as a fintech company contract better with the rest of the markets. So there are many ways in which we can think about positive aspects of regulation and creating these fintech companies into bank charters. But of course there's a flip side. Whenever we regulate too much, we worry about a stifling of the innovation. In fact, if you think about why did fintech companies start and took shape in the last 10 years, some argue that traditional banks, they had a lot of regulatory costs and the fintech companies, they could do some functions that traditional banks did at a lower price in terms of moving money, in terms of giving credit and things like that. We'll hear in our panel that often one of the things that you'll see about some of the fintech companies is that in the regulated markets, in the regulated banking markets, let's say if you have a ceiling on the interest rates and you as a bank, as a regulated bank could not lend to certain group of consumers because you'll be in violation of that regulation. There comes a fintech company who can bridge this gap of missing market through some sort of technological innovation. Point being that if we think about this kind of regulation, we need to be thinking ahead in terms of what kind of innovation will be stifled and combine that with the classic thing that we teach in finance, the incentives, that when you have some stifling of innovation in the regulated market, there will be incentives to make money in the unregulated market and then could there be an emergence of shadow banks, again of a different kind. So we need to worry about that. And finally, we always have to worry about, and I touched upon that already, gaming of the system. That is, if a fintech company ends up getting a bank charter and then you impose on them risk limits and liquidity limits and capital requirement limits, could that have some adverse consequences by itself? Could the regulation itself create some adverse incentive implications? These are the issues that we want to talk about. In fact, throughout the next two days, but right now, I want to hear from our panelists and they come with a lot of interesting, rich and varied background. We'll first hear from Amy, Amy Friend. She was at the OCC as their chief counsel for many years and she will share her experiences and her thoughts on what are the trade-offs involved when we think about chartering, giving bank charter to these fintech companies. And then next, we'll go to Brian, who is with the George Mason University and he has thought about it, written a lot, on these issues about regulations across federal regulation versus state regulation, issues about uniformity, consistency in regulation. Things that will become extremely important if we go ahead with chartering fintechs into banks. And finally, we'll hear from Richard, who comes from Lending Club and he will give us some view from the perspective of the industry, a firm that is one of the leading firms in terms of giving credit through fintech platform. So without any further delay, it's my pleasure to invite Amy to share her thoughts on fintech and bank charter. Thank you. All right, good morning, everyone. So the office of the controller of the currency oversees national banks and federal thrifts. So that's what I'm gonna talk about. There's also a whole system of state banks as well. We began, the OCC began to consider fintech and its implications for the federal banking system about two and a half years ago. Clearly, as you've heard and you know that innovation is absolutely not new to banks, but the speed at which we've seen changes is new and the changing customer expectations about how they're going to receive their products and services is also new. The OCC was motivated in large part to deepen our understanding of the changes and why one is because we saw it inside the banks and we needed to understand how to supervise these changes. We wanted to be a resource as well, particularly to community banks who the concern was that perhaps these innovations might bypass the community banks and we wanted to define our own risk appetite. So when we started to look at this, we said, okay, not all innovation is good. As you heard Jillian talk about, the OCC went through an incredibly searing experience with the financial crisis where we saw a lot of innovations. I think the banking agencies did not understand a lot of these innovations and so that was a huge lesson learned which is this stuff is occurring. A lot of it's occurring outside the banking system, just like a lot of the innovations that led up to the financial crisis occurred outside the banking system but ultimately was kept swept into the banking system. And so we said, we would like to be in a position of supporting innovation but responsible innovation. And the way we defined it was, it's the use of new or improved financial product services and processes to meet evolving needs of consumers, businesses and communities. But it's done in a manner that's consistent with sound risk management and aligned with the bank's overall business strategy. So there's a lot in there. When we said sound risk management, we mean that banks should not be involved in innovations that they don't understand and where they don't know how to identify and manage the risks. And that these should not be sort of one off shiny pennies that the banks would pick off but rather part of their overall business strategy. So in March of last year, 2016, we issued a white paper where we indicated that we wanted to set up a framework within the OCC to understanding innovation and to staying on top of the different innovations that we were seeing. So we said, we articulated eight principles that would guide our development of this framework. One is we wanted to support responsible innovation. So as you've heard, we defined what responsible was but the other was that we wanted to foster an internal culture that was receptive to responsible innovation. A lot of regulators are very risk averse. Of course we have to be, but we thought that along with the risk, there's opportunities and if the opportunities are understood and the risks are managed, then if it's serving a public benefit, the OCC wanted to support that. So we had to look within and the OCC is continuing to do that to educate our own examiners, to educate our policy people, our attorneys about what the opportunities are and not just the risks. We also looked across the agency and said, we have a lot of experience and expertise, maybe not in the particular innovations that we're seeing in FinTech, but certainly in modeling, we understand credit, we have legal expertise, we have policy folks, we have economists, we understand underwriting, we understand things like disparate impact and disparate treatment. And so we said, how do we look across the agency and harness the expertise? We wanted to encourage responsible innovation that provides fair access to consumers, to financial products and services and fair treatment of customers and consumers. And that is part of our mission. So the OCC is focused not only on safety and soundness of the federal banking system, but also on fair access and fair treatment. And we had seen a lot of innovations in the FinTech area that we're reaching out to serve the underserved and to provide better products and services. And we thought, hey, the banks can learn a lot. Further safe and sound operations through effective risk management, we've talked about that, identifying and controlling the risk. Encouraging banks of all sizes to think about how to incorporate responsible innovation into their strategic planning. So again, we wanted to avoid banks looking out and saying, I wanna do that, I wanna do that, I wanna do that without having it part of their core business strategy. Promote ongoing dialogue through formal outreach. So I would say that the OCC could be a fairly insular agency, a lot of agencies are. At the OCC, we sit on top of a lot of confidential information that we can't talk to the public about. So we talk to each other. We talk to the other regulators, but we don't often reach out other than through rulemaking and invite others in. And so looking at this area, we have invited a whole lot of others in, in the FinTech space, academics, we often hear from consumer groups, banks, and that has broadened our understanding and knowledge. And I think that's been excellent just for the culture of the OCC, just to look outside of itself and who it normally talks to. And then finally is collaborate with other regulators. And we at the OCC are in one space in the regulatory sphere, but there's a lot of others that occupy this regulatory sphere that oversee financial institutions. And so we felt that in order to really allow for true innovation to go forward, we needed to be talking to other regulators. And I think what you heard as well is that regulators need to talk to each other when things go bad as well, but not just when things go bad. So one of the things we heard when we sent, we put out the white paper. We didn't have all the answers. That was innovative for the OCC. We often want to get all the answers before we put something out. We said, look, this is just the beginning of our exploration. So let's put out a white paper that explains where we are. And we heard, why don't you create a center and office? Sort of an office of innovation so that folks who don't really know the OCC have a central point of contact. That's what we did. We have an office of innovation up and running headed by a chief innovation officer. The office acts largely as a clearinghouse. It disseminates information to fintechs and to banks. There's a lot of banks and fintechs that now wanna partner with each other. So it expresses the agency's expectations that when a bank partners with the fintech, they have to manage that third party. And so now we can provide information to both the banks, particularly community banks that wanna do that as well as fintechs so they understand what our expectations are. We have an office, a small office in New York, an office in San Francisco, and the main office is at headquarters in DC. We've also conducted office hours. We took a page from the Consumer Financial Protection Bureau's book. And so we have said, we're gonna be, we're come to our office in San Francisco, come to our office in New York. You can sign up and come talk to us. We also educate our own workforce through this office. Now, along the way, we were not thinking about creating a charter for fintechs, but that's actually what came out of this. When we went out for comment, we put out the white paper, we had a forum. We heard there was a real appetite for creating a charter specifically for fintechs. And so we said, okay, let's think about that. Do we have the authority, the legal authority to actually create a special purpose charter for fintechs? Do we think that it serves the public interest? Is this something that we wanna do? Do we actually, that's okay, okay. So would we know how to supervise it? So let me tell you there are multiple ways that a fintech company could come into the national banking system. So this is just an array of the different types of national banks that there are. So we all know well, full service banks, they take deposits, they make loans. We have an application now pending at the OCC by a company that wants to do mobile only banking and they want to take deposits. So they're going to get FDIC deposit insurance and we're working our way through that. There are trust banks that do fiduciary services. There are credit card banks that are limited to offering credit cards. And so we have something called a special purpose national bank and it's a 521, which is our regulation. We put that out in 2014 and we said that you can be a bank if you do one or more of three core banking services. You provide loans, you take deposits or you're involved in payments. And we said that is our authority for creating a special purpose national bank charter for fintechs. So what would a special purpose national bank charter for fintechs entail and then why again would the OCC want to pursue it? Well, it is still a bank charter. So we can't create just a special charter for fintechs and then make it look however we want. These are still going to be national banks and so they're still going to be subject to certain rules and regulations. So if a fintech wants a special purpose national bank charter, this is just proposed. I just want you to know that the OCC is being sued by the conference of state bank supervisors and by the New York Department of Financial Services. They're questioning the authority of the OCC to create this special purpose national bank charter. But so all we can do right now is we are working through the litigation but the special purpose national bank charter, if it's granted would mean that the fintech would be subject to the same standards that we impose on other types of national banks. So we laid this out in December of 2016. We put out another white paper indicated why we wanted to move forward that we thought that this was a way to further the OCC's mission. Fair treatment, fair access. We thought that this was a way to keep the federal banking system agile, nimble, adaptable to changes that it would increase competition. Where the laws do not apply, we believe that under the special purpose national bank charter, it would primarily be an institution that wanted to lend and not take deposits or get involved in the payment system. We said that we would impose certain conditions like meeting community needs, which is a challenge. Right now we have the Community Reinvestment Act that applies to any bank that takes deposits and that makes loans. And it's very geographically based because the law is quite old and it says you have to serve the community in which you're located. How do you do that when you're doing something through mobile only? How do you define your community? So the OCC proposed to create a financial inclusion plan where institutions that were providing loans or offering other consumer financial services would have to indicate what their community was, how they were going to serve it and then give us specific metrics that we would hold them accountable for. The other thing is for institutions that are not taking deposits, so they're not getting deposit insurance. So we are less concerned about the risk of failure, but we are concerned about how failure would affect consumers. So we said we might impose a condition that they have a resolution plan. How would they unwind in an orderly way without hurting their customers? Okay, the other reason that this was appealing to the OCC is that we thought it was important for the federal government to have a direct window into what was going on in the FinTech space. So right now, if a bank partners with a FinTech, we can indirectly look at the FinTech. We hold the bank responsible for overseeing its service provider, but if a bank, if a company wanted to meet the standards of the OCC, again to become a national bank, we thought this would be an excellent window for the federal government to see what is going on largely outside the banking system. So we talked about things getting forced into the shadow banking system. We said, why not do it within the banking system itself? The final thing was that when we put out, we put out a supplement to our licensing manual, which explains how we're actually going to regulate in this area. We wanted to create some certainty, so companies coming into the system knew exactly what to expect, but also an opportunity to tailor requirements because there's a lot of different FinTechs, businesses are different, so we wanted to provide some flexibility because we didn't want to stifle innovation, and that is one concern about regulation and supervision. So what we surmised is that it would take a pretty mature company that understood compliance and understood regulation to come in to the OCC and seek a national bank charter. So why would a national bank charter even appeal to a company that's a FinTech? Well, it provides for some uniformity, uniform supervision. Right now FinTechs, depending on what they're doing, they're getting licensed in different states, they're subject to different state regimes, they're subject to different types of oversight and inspection. So if you become a national bank, you have the OCC as your primary regulator, you get one license that allows you to operate nationwide, and you get a set of consistent supervisory and regulatory standards. So you operate under one license, you get uniform standards, and you also get the sort of imprimatur of the OCC, right? So recognition that you're held to the same high standards as other banks are. Now a lot of FinTechs that are interested in partnering with banks, the banks might be concerned about partnering with certain FinTechs, might even be concerned about giving basic banking services to FinTechs, which we've heard about, but if that FinTech has a national bank license, then that bank that wants to partner with it understands that this is a company that's held to the same high standards. So that's sort of the lay of the land. As I say, the OCC is being challenged for this charter, so they're not accepting applications, but they are accepting applications in other areas like a full service bank, beginning to talk to some companies about potentially a trust bank. So it's just one avenue into the system. The US has a dual banking system, so there's state banks and there's federal banks, just because a FinTech decides to be a national bank, there are so many other routes that they can go, they can stay FinTechs, there are thousands of them right now getting state licenses, they could become a state trust bank, they could become a national bank. So there's an array of things out there. Fascinating area for the OCC has really opened our eyes. Thank you. My name's Brian Knight, I'm a senior research fellow at the Mercatus Center at George Mason University. Thank you for having me. I'd like to expand on some of the comments about financial technology, chartering and licensing issues. So first, let's start with why at least to my mind for these purposes, does FinTech matter? Why has FinTech generated this discussion? And it's because FinTechs, broadly defined, have certain key characteristics that you've heard discussed today. You're talking about a use of borderless platforms, a company, if you're using the internet as your distribution channel, there's no geographic limitation as to where you can or cannot provide services. There are lower barriers to entry. One of the reasons I think, and I've read this before, that finance was sort of missed that first wave of forgive me for using this word, disruption. With the internet is because the barriers to entry, the costs, the regulatory burdens, that just the cost of doing business was very, very high and there was lower hanging fruit to pick. As technology has evolved, as society has evolved, as we've seen greater penetration of certain things like the internet or mobile technology, the barriers to entry have come down and the value proposition has changed to the point where it actually is attractive for non-incumbents to come in and try to steal some business from established financial firms. And because of those lower barriers to entry, like I said, we have increased competition, we have increased disintermediation, where instead of, and we can debate how likely this is to continue, but there was a period there where there was a discussion of the unbundling of the bank. You had a universal bank that provided all of these services and now people are trying to slice off the high value services, that the particularly profitable services and offer those on a standalone basis. And actually, we have a Federal Reserve Governor Bullard mentioned some concern about this recently that if these high value services are stripped out of banks by non-bank competitors that may make banks more fragile. So with that, what are the impacts on regulation at least as relevant to this discussion? Well, I think one of the big ones is a jurisdictional issue where in the past, and let me preface all of this by saying that this is not a binary and this is mostly a change in degree, not a change in type. So it's not that these issues didn't exist prior to fintech, but they become much more cute. And that one of those is the jurisdictional issue where there was an expectation among a lot of people that if you were, for example, a non-bank lender, you had some sort of localized business and if you had multiple branches, you had localized businesses around those branches but there wasn't the assumption of day one, we stand up and we can service the whole country. Two, because of the fact that you're seeing new non-bank players come in and compete with banks, you're starting to see discrepancies in regulation where two companies can offer functionally equivalent products but be regulated differently, both in terms of their chartering or licensing structure, their number of regulators, but also what they can and cannot do. And so this presents some issues. Just as a quick example, you can see that, you know, at the left side of the column, national banks have a lot of national consistency as Amy mentioned, state banks have a lot of national consistency, not quite as much. There are a couple of areas where you may need to go and get some sort of state license under certain circumstances but most states tend to exempt other state chartered banks. But for a non-bank, it is a state by state world, right? If you wanna lend, you have to get a lending charter. You don't get to export your home state interest rate the way banks do. You have, if you wanna do money transmission, you need a state license. So you're dealing with 50 plus regulators on that front if you want to offer national services. And of course if you're a fintech and you're based on the internet, you can otherwise offer national services. And I would argue that this creates several problems, inefficiency, competitive inequality, and in some cases, political inequality. Inefficiency is somewhat obvious, right? Having to comply with numerous different rule sets, having to go and spend the money to get numerous licenses, maintain numerous licenses is costly and those costs get pushed down. There's also the issue of the large search and monitoring costs because all of those laws can change. So you have to have a 50 state survey going at all times. And it can make certain markets economically unviable because you're not getting economies of scale and you're not being able to offer a consistent product. And we had a very striking example of this, I would argue, in the wake of the Madden versus Midland funding decision, which very briefly was a decision out of the Second Circuit that held that a loan that was valid when the bank made it in terms of interest rates because it was made by a Delaware bank could become invalid, could become usurious if it was sold to a non-bank because then once it was sold, the law of the borrower, in this case New York, applied. While this case did not directly impact the fintech lender, it was a credit card debt gone bad. It obviously has implications for fintech lenders who leverage bank partnerships, which is very common. And what we saw is, and this is some research from Konigsberg, Jackson and Squire, that if you compare New York and Connecticut loans and they have a note in their paper where they also looked at Vermont, the third state covered by Second Circuit, Vermont's usury laws are a little bit different, but they ran them anyway and there was not a material change, but this chart just reflects New York and Connecticut versus outside the Second Circuit. If you look at the far left of the chart, the relatively good credit, there's very little difference in loan origination because those borrowers are gonna be charged, the market rate for them is under New York's limit. You go all the way to the left and you see that there's actually a significant contraction inside the Second Circuit whereas there's growth on the outside of the Second Circuit because people are concerned about the validity of those loans, right? Why would you fund a loan if it's gonna be declared usurious? And so we're seeing this sort of contraction. The next issue is competitive inequality. And so to flip back to this chart, let's note that if a bank made those loans, there's no question it's valid, right? Left side, right side, no question, valid loan. So this gives the bank an advantage over the non-bank lender in the sense that they can make loans that the non-banks cannot. It means that they can operate with a more consistent rule set, they can offer a consistent product, they can treat borrowers like borrowers alike based on their home state interest law. On the money transmission side, they're not having to deal with 50 state licenses, 50 state regulators, 50 state examinations. This can drive markets in directions that they wouldn't otherwise go. I mean, one of the reasons we see marketplace lenders partner with banks to do loan origination is that consistency where they are able to go and say, we don't need to worry about managing 50 state laws. We are gonna let the market drive pricing because this bank out of Utah or New Jersey or wherever is able to offer loans consistently nationwide then we'll purchase them. That's not the only reason you see bank partnerships but it's a significant one. So you're driving markets in a way to comply with regulation that otherwise consumer need wouldn't necessarily drive it. It also really protects the incumbent, right? If you are an established player and you have this positive regulatory environment and some new means of business comes along that potentially threatens you but you have this significant regulatory advantage due to greater consistency, that is a barrier to competition and a barrier to you being knocked off that probably shouldn't exist, right? If a new model comes along that's better we should probably let that new model displace the old one. Finally, there is an issue of political inequality among the citizens of different states because the truth is that not every state is equally important for these purposes. Some states are sufficiently large, some states have sufficiently important markets, some states are sufficiently important just by sort of happenstance chance that a player that wants to make a go as a large, high scale player is going to have to conform to those states laws. You have to do California. You have to do New York. You don't necessarily have to do Wyoming or Hawaii and we see cases where players will pull a small state like Wyoming or Hawaii will make a change in their law or their regulator will come in and say, look, we don't think you're necessarily compliant and instead of the company like Coinbase being an example saying, oh, well let's work with you or they just pull out. Then they might come back in over time but their first reaction is this is not worth it. So they're just gonna pull out. So this quote is from the lawsuit by the NYDFS against the OCC over the charter and New York Department of Financial Services says, New York is a global financial center and as a result, the FS is effectively a global financial regulator and they're not wrong but the problem is they're not subject to global political accountability. If you don't have a representative in Albany you have precious little leverage over NYDFS and that presents a problem. So what can be done? And here's the part where I'm gonna try to be both provocative and quick. So where you see this inefficiency, this competitive or political inequality, like let's start talking about what we do to the regulations to make this work. And again, it's a spectrum not a binary so there may be cases where some of this issue exists and it's still worth it to maintain the old system because the benefits outweigh the costs. I would argue with regards to interest rate export or money transmission licensing, that is not the case and actually we should move to more consistency. And so here are a few options. We have the OCC charter and the advantage of it is that the OCC has the authority to do this on their own unless they don't, in which case Congress is gonna have to step in. And the real advantage is this taps into existing law. There is a body of law there, hey, you're a national bank. We know how this works. There are all these powers go. But there are problems there in that it taps into existing law. And so you don't get to go through bankruptcy. We have to resolve you. But I'm not a depository. If I could have gone through bankruptcy last week, too bad. So there are those problems. There are also the problems of can you create something within the bounds of the law because the OCC's hands are tied by existing law that really makes sense for these firms or is it sort of a second best solution? And I'm all about second best solutions if the first best solution isn't available. But we need to ask that. The other option that is available right now today is that the states could all get together and coordinate and say, you know what? We are gonna allow for exportation. We're gonna allow for passporting. You have a state money transmitter license. We'll recognize it, reciprocity. And that would be great. And I'd love to see that happen. Probably isn't. But here's the challenge. Even if that happens for one bright shining moment that everyone gets together and sings Kumbaya, you still have to keep monitoring because year after year after year, that can break apart, that can drift. And there will be efforts at the various state capitals from in-state incumbents saying, well, look. Like, yes, Michigan, of course, our banks are great or our non-bank lenders are great. But those guys in Ohio, I mean, just thieves. Like, we need to exclude, you need to raise these limits a little bit. They need to have X amount of Wolverine gear in their office or else. And so things are gonna drip, there's a risk that things are gonna drift apart. So now let's talk about the things Congress could theoretically do. Bear with me. First, Congress could create some sort of non-bank charter or license thing. The advantage to that is it could be tailored. It could be bespoke. We could sit down, think about what really needs to happen, what makes sense, what doesn't, and build that. The downside is, well, one, and this is the downside for everything, the devil's gonna be in the details, right? A good idea done poorly is a bad idea. But the other issue is politics. Because as I was sure you've noticed, we are not in a high national unity environment and things are controversial. But you know what, maybe FinTech can bring us all together. Another option that Congress has is they could amend the law to allow states to experiment more. Because while the OCC totally, absolutely has the authority it needs, totally. Or not. The issue is the states are in a different position because state charter banks only get export if they're depositories. So if a state charter is a non-depository bank, they don't get that big benefit. And while Congress has been asking the states to harmonize their money transmission licenses for years, they haven't. So this may be a case where Congress has to come in and say either we're gonna let states issue non-depository banks with the big benefits, or we're gonna come in and say states, you have to accept another state's lending or money transmission license for at least some elements of the law. I mean, we should note that even national banks are subject to state law in certain areas, consumer protection and discrimination, land use, contract, all of those issues there. So it's not like you have to completely wipe the slate clean of state law, but figure out the elements that really present the problems and say, well, we're gonna allow exportation, passport, whatever in these areas. So these are some things we could do to create greater harmonization and hopefully we'll get something along these lines, but we'll have to see. And with that, I'm gonna leave a little time on the table so that Richard can do it. Thank you. All right. Well, thank you. I am really truly honored to be participating in this panel and especially the way you've positioned it as the first speech, as the first panel after Gillian's really remarkable in frame setting remarks, because what we're challenged by every day is how have we learned? What have we learned from the past? How does it shape policy? How does it shape regulation? How does it impact consumers and small businesses? I also feel very fortunate that there are not many times in your life when you get to draw upon all of your prior background and experience. And so I've seen these issues from many related, very various perspectives, often conflicting. I started my legal career out of law school as an attorney at the control of the currency in Washington. I served as a state regulator as the superintendent of banks in New York from 07 through 11 through the crisis and served on the congressional tarp oversight panel during that same period and then served in-house at a number of institutions including a city and TD, also through a disruptive period in our financial history as general counsel to TD Waterhouse that's now known as TD Merit Trade. So I think we're gonna touch on a lot of these issues and I'm really looking forward to the questions at the end. So a little bit about where I'm working now as head of regulatory and government affairs for Lending Club I joined three years ago. So Lending Club is no longer a startup. We've been around for a decade. I guess we're one of the seniors, the old fellow in this industry, but I can tell you having been there three years, they haven't lost the energy of the startup feel. You feel that immediately when you enter these offices, people running around with laptops and jeans and it's, it really is invigorating especially for someone who's been around as long as I have. But what you have seen, and I've seen it over the last three and I'm sure it's been over the last five to seven, the makeup has changed of the staff. It's no longer just computer scientists though they make up a third of the company. You see people have joined from risk and compliance and governance and nonprofits. There's a whole wide range of institutions, of backgrounds that really show how this industry and our company in particular has matured. So we are an online credit marketplace. So think eBay, Amazon for personal and business credit. We actually started as the first financial app on Facebook. This was when we envisioned that individual friends would be lending to other friends. And that was when this industry was called peer to peer. That has evolved as we've expanded out the investor base to include not only retail, but to include institutional investors of all types, including banks, 45% of our investors are banks themselves, but also foundations, universities, asset managers in a wide range. Bottom line is we use technology and a low-cost operating model to operate fully online. And we transform those savings onto borrowers in the form of lower rates and into the investors in the form of attractive returns. If you go on our site, you can either be a borrower or an investor. Borrowers are mostly borrowing to pay off higher price credit cards and they're doing it in a responsible fashion of equal installment payments, amortized payments, fixed rate, no prepayment penalties and over a three or five-year period. If you're an investor, you can invest in both retail and institutional investors. Retail investors can invest in denominations as well as $25. Loans are rated A to G in five subcategories and you can pick the risk and the return that matches your investment profile. Most banks in our portfolio are investing in the A, Bs and Cs, the lowest risk categories. No loan exceeds 36% and our average personal loan is 14%. We've originated over $31 billion of loans and that's on a run rate of as of the last quarter of over $2 billion a quarter. Our products, and I mentioned, are both personal loans, small business loans and auto-refi. The way I like to think of these is that we are filling market gaps or failures. We've seen, and that's really the hub of this model, is that we've identified gaps or failures and if you think about each of these product offerings, you can see what I mean. So on the personal loan side, the business model understands that banks who very well could be offering installment loans to pay off high-priced credit cards do not wanna cannibalize their revenue flow from a very profitable business line being credit cards. On the small business lending side, it's a different conflict. It involves just the costs of underwriting small business loans, particularly loans under a million dollars. The underwriting costs to underwrite a million dollar and certainly even a $250,000 loan is the same as a $10 million loan. So when you look at the Fed data, the large banks have actually pulled back are not even where they were pre-recession in terms of lending to small businesses in amounts of under $100,000. And then the conflict in the auto loan is really a channel conflict. Here's where banks are providing indirect financing to auto dealers who are putting a markup, often a discriminatory markup, on top of the rates offered to those dealers by banks and the banks are just disinclined to disrupt this relationship they have with the auto dealers. Back to thinking about on the personal lending side, we are having an impact because now you're seeing and may even have received offers from some of the credit card banks, like Discover saying we will now offer you an installment loan to pay off a credit card. They see it's happening, they say all right, if someone else is gonna make the loan, why can't we do that as well? Even if they risk some cannibalization. Beyond just filling these gaps, we are also expanding financial inclusion and there's some interesting statistics, a report this summer from the Federal Reserve Banks of Chicago and Philadelphia used, looked at FinTech and they used our data because of the volume of data on our website. When you go on our website, and particularly through the investor side, every loan ever approved or denied and every credit characteristic considered is on that website. So we are the largest filer with the SEC because all these red notes, member dependent notes that investors may invest in via these $25 denominations are on that site. The Fed study was really interesting so it used our data as kind of a proxy for FinTech. We provided on the website, when you look at loans, we only have three digit zip codes. We don't want anybody using it in any type of reverse red lining. But we provided the Fed a five digit zip codes and they identified that over 70% of our lending was concentrated where traditional banks are closing branches. And even more interestingly, over 40% was in those areas where banks had closed the most branches. It also highlighted that we are providing borrowers with better rates than credit cards. And this may be obvious. A credit card is a terrific transaction vehicle in order to make purchases. It is a lousy credit vehicle. That's why banks are not competing on rates in offering credit cards. They compete on points and mileage programs. And I think that this competition here is really critical and it provides us an opportunity to provide lower rates. We're saving borrowers on average five to seven percentage points by providing them the ability to refinance a credit card. And then we're providing improved credit decisioning that reaches borrowers that traditional banks overlook or overprice. And this is interesting because it shows in the report that our credit underwriting models have the correlation to FICO has been declining dramatically over the years. Over the last 10 years has declined from 80% to 35%. And it allows us to offer lower rates, put subprime borrowers that banks would have charged a higher rate. We can put them into a lower grade and charge them a lower rate. And I would encourage you to take a look at that Fed study. So now I just wanna turn to, what are the regulatory frameworks? Brian touched on some as did Amy. So how do these companies that were engaged in online marketplace lending operate nationwide? So there are currently two existing models. One is a direct lending model through state licenses. And this is an area I know pretty well as being the New York banking superintendent. But I also now understand how challenging that can be to offer a nationwide product. It's very hard to compete with higher cost credit cards. And if you are subject to the specific user rates of every state, some states have very outdated laws. Some require physical branches. Others may require that you be incorporated in the state. Some still use the term telegraph. So you can imagine when those laws were drafted. And there's wide diversity in the interest rate of fee restrictions. Eight states have caps under 18%. So you can envision if you're capped at 18%, it's very hard, it would be impossible to offer a 18% product to a consumer where their credit card vastly exceeded that amount. The second model is really working through partnerships with banks, originating banks, where the platform acts as a service provider to facilitate the origination and marketing and servicing of those loans. This is a process that has been widely used by a number of platforms because of the ability to compete with credit card banks utilizing the same levels of preemption. But also it provides an enhanced regulatory oversight at a national level with a federal regulator. Most often the FDIC, but I'll show you it's even extended to the OCC. So here I will show, we start with Lending Club. We operate through an originating bank called Web Bank. Web Bank brings along its regulators, the FDIC and state regulator, in this case the state of Utah, and enforcement lines by the CFPB, authority by the CFPB with respect to enforcement. The FDIC has the authority through the Bank Service Company Act to directly supervise, examine any third party service providers of the bank and therefore have the authority and have actually exercised that authority with respect to Lending Club in terms of examination. We also have banks, many community banks who either purchase loans on our platform or who utilize through a private label our platform to offer consumer loans to their consumer base. So think about community banks used to dominate consumer finance 20 years ago. They had over 80% of the consumer finance market. There are now a small fraction of that because of the scale of the large national retail banks. By partnering with a platform, it provides a community bank an opportunity not only to gain an asset in this consumer space, but also to fill a consumer need in terms of offering a consumer product. They don't have to build their own platform and they can leverage the platform with provided by a company like Lending Club. And therefore, as a result of those partnerships, you can see now you have, if the bank is a national bank, you have the OCC also examining the bank who is partnering with us through this private label or purchasing, the OCC asks questions and has the authority to examine us as a third party service provider. Same thing if the bank was a state member bank, you would have the Federal Reserve Board. And then, you don't stop there. Because all our notes are registered, we have the SEC as the primary regulator on the investor side, as well as state regulators, additional state regulators because of other capacities in which we act. Beyond the origination, states also require licenses if you are servicing, collecting, sometimes acting as a broker, money transmitter. So you have to analyze every state law to determine in which other capacities is your platform operating that would require a state license. So we have examinations from multiple states on an ongoing basis. All right, now we're waiting for the third option. The third option would be a regulatory model proposed by the OCC. And this is a very, and I could say this, having worked at the state level, I understand the importance of consumer protections at the state level. But you can also see the logic of having a national framework to be able to provide these benefits and offer a nationwide standardized product. There is clearly a need to focus on responsible innovation. It provides the OCC an opportunity to think about a modernized CRA and the public benefits test that will go along with such a charter. It would clearly improve the simplicity of supervision and management. It would provide assurance of equal regulation like any other bank to assure. When you hear banks talking about this industry, their language has changed when you talk about language. They used to talk about some of the platforms used to say we're gonna kill the banks. We're gonna disrupt. I think now you're seeing a much more milder language in talking about partnerships. And that's really what you will see in the future. It clearly provides lower cost than the originating bank model enabling better rates for borrowers. And it really would encourage these partnerships. I think there's still some uncertainty about buy banks, particularly smaller banks as to how the regulators view these partnerships. And I think having a designated federal regulator as a, especially one as respected as the OCC would provide a great deal of confidence for banks as they consider utilizing a platform. I would encourage you all to look at the comment letter. We submitted to the OCC. We spent a lot of time, it's a 20 page letter. We had some specific recommendations and fully supported the proposal to have a strategic plan for financial inclusion with measurable goals, community input. We really think this is an opportunity for the OCC to establish a charter that would require that financial institutions lead the market in terms of financial inclusion and not lag the market. I think this is one way to think about this is to create a virtuous cycle so that there's a race to the top as opposed to a vicious cycle where you could have a race to the bottom. So I think this is really at a crossroads and a great opportunity. We also think there's an opportunity here for the OCC to address some of the regulatory gaps in small business lending. This is an area where we are very proud of as a particular company and part of a coalition of responsible business lenders. We created two years ago something called the Borrower Bill of Rights and the Responsible Business Lending Coalition to require small business lenders to disclose annualized interest rates, APRs as well as other responsible business practices. We encourage the OCC to consider a 36% rate cap to assure that these banks, these new banks would not be a vehicle for high priced or predatory or payday lenders. And we also encourage them to consider the safety and soundness requirements that they be tailored to the model. We are a marketplace, we don't have balance sheet risk and therefore there should be a little different approach in addressing capital and liquidity. And then lastly, another favorite topic of mine is what should the states be doing? And this is really an opportunity for the states to show some innovation just as the OCC showed a great deal of innovation in their proposal. They just, CSBS, the Conference of State Bank Supervisors recently created a FinTech task force of 33 platforms we are participating in that. Our hope is that this task force looks at modernizing the laws, removing, updating the laws across the country to move them into the century. Develop some model laws that can be utilized by states as they do these revisiting, expanding the national mortgage licensing system. This is something that's already underway to provide an efficient means by which entities can utilize a standardized system for licensing and filing officers and directors. This concept of a home host passporting that Brian mentioned, the use of multi-state exams. Sounds very logical, but the devil will be in the detail. It is really something so that we are not subject to 50 different state exams on an ongoing basis. And then finally, to think about a state FinTech charter. I expect that the OCC will win this lawsuit, that they have authority. I don't think they would have proceeded this far if they weren't confident of their authority to issue that proposal. But I do think once that is accomplished, the states will then be forced to think about, all right, how do we under a dual banking system create our own FinTech charter with similar powers? I think Brian pointed out the difficulties because the current laws would only apply state exportation powers if they were, they accepted insured deposits. But just as the state banks went to Congress in 1981 following the market decision that allowed national banks to export home state laws, I anticipate that the states would be doing the same thing and I think they should be starting now to think about a FinTech charter to be able to compete with the OCC charter. So I'll stop there and I'm sure there'll be a lot of questions. So thank you very much. Thank you, thank you all. And we have some time for a few questions. Well, I think there have been lessons learned by entrepreneurs. Now, entrepreneurs do start very quickly. I mean, if you look at the Uber example, there must have been a debate at some point. Do we go out across the country and negotiate and understand every state and local law around taxis? Or do we just go out and wait to be sued? But at the same time, garner enough public support that when we are challenged, we have the consumers behind us. Finance is different than taxis, even though both are regulated. There is clearly a greater exposure and I think as a result of the action, one, both the outcomes and the regulatory enforcement actions, I think there is a much greater understanding on the FinTech side. I think this culture has evolved. Sure, 10 years ago, you would not have found people with my type of experience within the company. You would not have had the same level of focus on compliance and risk. But I think that clearly has changed, particularly over the recent years. And in order to, I think people are starting to revisit as to if we can use technology to enhance, provide benefits and enhance the consumer experience on the lending side and the investing side, why can't we use technology and innovation to improve the compliance and risk controls? So I think it clearly has changed and will continue to evolve particularly, and maybe more slowly in those who are still in the startup stage, but clearly it has been adopted on the more mature firm. So I'm Yesha Yadav from Vanderbilt Law School. This was a fascinating and very informative presentation. And one question I had for both Amy and Richard, is in relation to the fact that many of these new FinTech businesses are brand new, lacking data and a history of their sort of business model and how it works and the effects of that, what's your process for thinking through some of the unintended consequences of what can happen and the risks that can be created? And particularly, I was very surprised by the recent Fed study, the Cleveland Fed study, that looked at the P2P industry and thinking through some of the sort of unintended costs that can arise in that context. So I guess from the public standpoint, what's your process for thinking through the effects and anticipating these effects and safeguarding and creating mechanisms against these effects? And I guess from Richard's perspective, given that you have seen both sides, how do you guard against the potential for suboptimal behavior by borrowers as we saw during the financial crisis, a lack of financial literacy, a desire to take on credit? How do you safeguard against that, particularly as you are setting up your business and seeking to capture some market share? So I'm gonna address that. I know Brian's chopping at the bit to respond to the comment about Cleveland study. He's written a lot about it. So I'll let Brian touch on that first. Oh yeah, so I think we should all be very, very cautious about the Cleveland study. It was written, they used the term peer-to-peer. They did their analysis through the prism of peer-to-peer. They took a cheap shot at Prosper in a footnote. And then it came out that their data sample did not separate peer-to-peer. They don't, at this stage of the game, it is unclear what their universe of firms they looked at is. It's unclear what their control is because they say, well, we compare these to traditional financial firms. Does that mean banks? They don't explicitly say banks. There's a table that they hold for as a non-exhaustive list of firms doing platforms offering these loans. USAA is on there. They're my bank. There are credit unions on there. So I think we should all put a pin in the Cleveland study for a while. And the Cleveland Fed at least has apologized to American Banker for their use of the terminology. I think we should all put a pin in that study for a while and let them rework it and be a bit more transparent about what it is. Which is not to say that their econometrics are wrong. I don't know. But at this point, there's so much opacity to this study and we know that they've gotten it wrong at least once. So maybe we put a pin. Yeah, that was not a peer-to-peer study. There's been some updated news coverage. As of yesterday, you'll see in that American Banker story it was updated with a statement from TransUnion. It said they don't break out peer-to-peer lending. They don't know where this data came from. This was data they sent to the Fed several years ago for a different study. And therefore they were questioning how they could draw those conclusions. So I would hold off. I think you asked a kind of a broader question as to how do we assess the impact on consumers? And I think our focus is around, even more broadly than that, how are our products impacting the financial health of the consumer, of our borrowers. And thinking about it in terms of a number of metrics, where they are in the credit spectrum, where they are in terms of credit underwriting, has their credit scores improved? Have they extended additional? Have they incurred additional credit? We're looking at all of those types of issues. We seek input from a number of, I spend a lot of time not only dealing with people in Washington on the hill and the agencies, but also with the consumer advocates. Consumer advocates, we want to be assured that we understand their issues. They understand our business. There are so many different products, names of companies with silly spellings out there, different products, different levels of transparency, some using the issuing bank model, which we feel should be addressed by bank regulators if it is an irresponsible product and not disclosing rates or abusing consumers. So this is a real opportunity for companies to really look inward as to how their products are utilizing, doing disparate impact, recognizing that fair lending, that's another misconception out there that platforms are not subject to the same level of oversight or laws that apply. Fair lending applies whether you're a platform operating through a bank or not. And that is important data to demonstrate when we did this analysis, we saw that we were lending a majority, over 50% into LMI communities and to LMI individuals. That was helpful information. City used us two years ago to offer a subsidized loan product across the country because they didn't have a branch network, a nationwide branch network with enough scale to identify those type of underserved communities. So I think there's a lot that is being done and more that can be done. So I think you asked about how the OCC as well would look at a company that didn't have a robust history or data. So I think that the answer is in two parts. One is for a bank that's going to partner with a fintech that's relatively new, we would expect a bank as it would with any other partner to do due diligence, to monitor because they're going to be responsible for the products and services that they may be offering through this fintech to their customers. So that's one thing. For us, if the institution applied for a bank charter, then we would expect them to have a robust business plan. We would look at history and that's why I think that it's unlikely for a startup to apply for any kind of bank charter because they're just not gonna have the history to demonstrate that they have a reasonable likelihood of success or that they have the experience to move forward as a bank. In the ball saying, I come out of the Connecticut Hedge Fund Bridgewater and now focused on reg tech. I think you all described a situation where we can describe regulation or the regulatory landscape as undefined or messy today. And so for those of us that are interested in pursuing down a reg tech path or in the middle of it, whether it be the CSBS and Vision 2020 suing the OCC in question of jurisdiction or the Senate and their bipartisan efforts at changing the CFPB cap from 10 billion to 50 billion, it's really hard to shoot at a target as somebody trying to serve the space. So given the land is shifting underneath us, what's the guidance where reg techs care to help the situation, but it's hard to make a bet today? So with the understanding that if I knew the answer, I would be working on this project in my spare time. This answer is probably gonna be unsatisfying. There are going to be movements in numbers and stuff like that. We're gonna move thresholds. It's highly unlike we're just gonna take things away. I don't think we're gonna see the end of, which is a disappointment to me, the end of like the SIFI designation or something like that, we're just gonna move the needle. And there are ever present problems like know your customer. That's gonna be an issue that's gonna be around forever. And it's a problem and the current system doesn't work very well. And so coming up with a better mousetrap for know your customer that Fin sends okay with and all the other regulators are okay with and it's easier on the customer, they'll beat a path to your door. Underwriting and disparate impact and fair lending, those issues are not gonna go away. And if you can come up with a better way to do it, that's gonna be a great thing to do. So I guess my bit of advice that you should, for the love of God, not take is actual advice. Like if you put money against this and it doesn't work out for you, I don't wanna hear about it, cause I warned you. Is focus on the sort of ever present social problems and come up with better incremental ways to solve them rather than try to like guess at some like future issue or future problem where like, well, what if the world just dramatically shifts under us? It's probably not going to. But then again, you know, 2016 happened. So who knows? So I agree with the sort of Brian's take which is. Thank God. Okay. At least right now for here. That things like the BSA, AML, know your customer. I mean, those are not going to change and it doesn't matter what the designation is the threshold under section 165 or where the CFPB actually has supervisory authority and not just regulatory authority. And I think if you're trying to provide products that banks ultimately would use to solve their regulatory issues, then clearly the banks have got to understand what goes into and what's coming out of that secret sauce because they're gonna have to explain it to their regulator and the regulator's gonna have to feel comfortable. So that is, I think Jillian said, you know, when companies get involved in things they don't understand and nobody can understand it, that's a problem and we've learned that. And so a bank has to understand if they're gonna use your secret sauce, does it work? How does it work? They need to figure that out to explain to their regulator. Yeah, I mean, you saw from my chart of the various regulators that we're currently subject to. This is, you would never have created a system if we were starting from scratch. But we are dealing with our existing system, these models have developed within our existing system. Some will need to be changed in tweaks. That's why it's, I commend the OCC for thinking even more broadly in terms of more fundamental change. Other jurisdictions have gone about this differently. In the UK, they developed a new regulatory approach model for peer-to-peer lending as it's still called there with even the obligation with investments by the government into these platforms requiring in one case that if a traditional bank was to deny a small business loan application, they are required to provide the names of three other platforms. So there's things that we could learn from that system. China took a different approach. China said, we're just gonna let this whole market develop and we'll see where the problems are. The fraud and the problems did arise and now they're trying to address those through regulation. We've taken this other approach of operating within our existing system, which is quite complicated. And I think there's gonna be clearly a need for innovation to be able to offer a nationwide product, but also a high degree. We have to set our expectations that we're not gonna be making dramatic changes to our dual banking system, but that will require a much higher level of coordination among the various agency. Thank you, thank you all. One thing is very clear that we have many more questions right now than we can answer them. And hopefully conferences like this over time will develop a deeper understanding of some of these issues as we go through this new exciting fintech world that we have in front of us. So let's thank our panelists for a wonderful discussion. Thank you.