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The Regulatory Outlook at CBA Live · Leaders in Lending

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You're listening to leaders and lending from Upstart, a podcast dedicated to helping consumer
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lenders grow their programs and improve their product offerings. Each week, here decision
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makers in the finance industry offer insights into the future of the lending industry,
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best practices around digital transformation, and more. Let's get into the show.
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Welcome to the podcast. I'm joined today by Dan Smith the Consumer Bankers Association.
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Dan, thanks for making the time and joining us today. Thanks for
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having me. Yeah, we're here at the CBA Live conference. Thank you
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for osen us. This has been fabulous. Tell me a little bit about
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the conference, the goals, how it's going so far this year. It's
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been fantastic. Gets our second one s COVID. We're north of sixteen hundred
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attendees, over seven hundred bankers. It's such a great opportunity to sit down
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and talk and meet with people, allow them to network and learn from each
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other. We have some great sponsors and vendors. Your every day you see
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the conversations going on where people are learning from each other, sharing information.
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It's such a great opportunity to freew people together and talk about banking, talking
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about financial services, the industry, what are the challenges they face. So
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we're really excited it's going. Well, I'm getting a little tired already,
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but you know, about a couple more days. But it's got a lot
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of images. Yeah, it's felt as I've talked to bankers who are here
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and others in the industry exceptionally timely this year given the disruptions in the market
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both I mean, got interest rate issues, You've got the collapse of Silicon
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Valley Bank. It's like everybody's trying to figure out is there contagion? Is
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there not? What do I do? What's the is there a recession on
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the Jurado I logged on my balance sheet? What am I doing about to
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pot? I mean, it's like a moment when people really need the community
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and to talk through some of the pretty substantial issues facing facing the space.
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Yeah, we've had to pivot a little bit of change our agenda on the
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fly a couple of times to make sure we address those things as best week
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can and to provide the opportunity for conversation around these really important issues for thank
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you and our customers. Yeah, I don't even think it's the agenda.
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So much is just people sitting in the room, whether it's in the committee
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meetings or in the hallways between going hey, wait, what are you guys
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seeing? I was having a fascinating discussion with some of the folks from the
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small business can be talking about the risks of fraud with the number of inflows
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and outflows of deposits as people try and find what they think of as to
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save haven and they go last like a moment when but now I'm worried about
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FLAUD because I've got so much more activity in the space than it can be
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easier to get for fraud and activity to get lost or for people to find
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it's time to take advantage. So it's I think it's a fascinating time to
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have those conversations happening. Yeah, when we started that first weekend, we're
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trying to figure out how does CBA a value to its members and it's it's
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collaboration, it's convening. And the thing we were hearing was brought and it
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wasn't actually happening. It was a risk of it, right, and so
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we're trying to make sure that we hear what's going on, work with our
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regulators, try to stay on the forefront of rising issues, potential problems.
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Yeah, yeah, that's great. So I want to talk a little about
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legislative priorities and what you mean you kind of work with legislative affairs the US
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government. There's a lot of questions around the future of regulation after SPB,
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but I feel like that's maybe an overdone topic in a little too recent to
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really know where the t leaves are going to settle on that. Lots of
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people suggesting things are going to happen, but I'm not sure that we know
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what to expect yet. Well, it's early. There's a lot of conversations
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in Washington around remedies. What was the cause? Right, the root cause
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of a problem? Yep? Is it isolated? We're gonna have a lot
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of pugressional hearings. Yeah, I think regulators are going to do some horizontal
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reviews particular segments of the market, some self evaluation regulatory agencies, Yeah,
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trying to figure out is this an issue that is systemic which we don't believe
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at all, is the as how do we look at this this was unique?
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And how do we look at our risk management as institute? She's but
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also regulators to account for these type of things and the run on the bank
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how fast? Yeah, twenty five percent there deposits in one day. I
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mean that's a that's a liquidity event that almost no bank is really expecting her
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trying to prepare. And that's not in the range of like things that might
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happen, that's not really on my risk management less things to be prepared for.
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And she's a very difficult situation. Banks have you know, a game
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plan a book like if this happens, open up the book. Well,
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we have created a new book now, or at least at a new chapter.
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That's right. When somebody tweets what do we do? So the whole
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New world interested, But there is I mean maybe the agency that has the
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most going on in terms of rulemaking and to the regulators already changes is the
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CFPB. So talk a little about what the priorities you see coming out of
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the cfpbum from real hid show bro, Like, what do you expect to
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see and I know their specific legislation. We should dive into our rulemaking things
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that are going on. So just gimerally, what do you see as the
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priority is to starting to people dive into some specifics. So what I like
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to tell people is think about the clock and the calendar, and we have
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an election in the follows coming up. It's coming up now that the director
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it can be fired at will. It sort of changes how that director looks
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at their time there, and so that the clock starts ticking and they start
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working their way backwards to when what's known as the Congressional Review Acts. There's
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a period of time then in Congress as his ability to review final rules,
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and it's roughly sixty legislative days after publishing in the Federal Register. Okay,
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so everybody's guessing what is that date, So it's roughly April and May of
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twenty four that a rule has to be fine by that point to clear the
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urdle of the Congressional Review Apps. So when Donald Trunk came in, they
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repealed the use of Congressional Review Act to repeal several rules, right, and
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so they want to make sure that whatever they're working on now is final by
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let's say March or April, so they avoid the Congressional review. A clock
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is ticking, clock is ticking. So you got three rules that are in
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in a final stage or in close enough to make this shot. Get the
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shot up where the clock runs out that's right, and it's a race to
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that clock. Right, So we have ten seventy one small business data collection.
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It's going to drop in the next couple of days. It has to
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because of the court case in California, and they set a date. Court
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did by March thirty first, so we'll have ten seventy one final. The
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Bureau is clearly indicated ten thirty three the consumer access to final records that we
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will see a proposal in the fall, with a final rule likely in January
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February, giving him enough time before the deadline perceived it. And then the
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credit card late b proposal that the NPRM noticed. The proposal will make is
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out that a comment period on that will end roughly end of April. We
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are anticipating probably a final rule in the fall. The director has been pretty
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clear in its timing up things, which I'll give me credit. That's not
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a typical thing of the agency. You don't know when a rule is going
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to be final or where their attent is. Yep, he's been pretty clear
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about that. He talks about being transparent. We may not agree with some
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of the things he decides, what he's pretty transparent on what he's thinking on
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what he's thinking in the time he plants execute things. Well, gotta appreciate
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that. Yeah, I guess. I guess if I have to appreciate that,
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I'll take that one. Yeah. That's it's saying. You know,
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well, let's dive into these let's talk about ten seventy one. What do
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you what do you expect the outcome of that to be, and what do
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you think the impact for the industry is going to be. It's gonna be
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an interesting shift, enormous. It's an enormous undertaking that every institution, not
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just banks, are going to go for it, and they do any small
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business to game changer. We're expecting the rule, as I said, to
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come out very soon, where we anticipate not too many changes from the post.
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I think it's gonna be pretty much the same. We have some serious
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concerns, but I think the biggest challenge will be the implementation timeline. So
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in the proposal they were going to give eighteen months. That will be nearly
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impossible, and we've been telling the Bureau of that. You think about small
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business lending, it's not like mortgage, where a bank will have a mortgage
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operation viewing it and all of the mortgages are run through that small business happens
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across the entire bank in different places. Yeah, So they first have to
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align and communicate their operating systems, and then they have to standardize the definitions
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of the data they're going to collect. So it's a data collection like HOMDA
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for borkages, and so they have to standardize how it's all defined. They
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have to change all their systems. They got to collect all that data,
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and then the heart part starts because then they start evaluating the data for what
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it means in terms of fair lending or in fair banking. That brings in
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a whole nother discussion, but that's post operational challenges. So I think that
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that's the big thing. You're going to rely upon your core processors. You're
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going to have to make an enormous amount of changes to your systems. And
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by the way, there's probably going to be a CRA updates to the Reinvestment
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Act at the same time, which is an enormous undertaking. Another type another
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large technology and data undertaking in itself, the small business data collection is enormous,
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and we are working really hard to help the bureau understand those challenges.
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How do you think eighteen months is just not enough time for a lot of
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these institutions. What do you think the right timeline it like, how long
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will literally take banks to be ready, minimum twenty four months, but even
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then you're going to have pieces that aren't going to work great. You're going
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to have data collection errors and problems until you What we hope the Bureau does
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is if they're going to stick with the twenty four or the eighteen months,
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that they stagger implementation. Right. They've done this in the past where they
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said, Okay, the big guys you need to be ready in eighteen months,
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and then the middle guys you got thirty six and the little guys you
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got forty eight months to be or they can stagger the type of data or
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the disclosure of a data. So we're optimistic can hopefully they will consider this
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and we will continue to educate them on the challenges. They know. It's
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hard. Yep, there's that clock ticky. Yeah. Yeah. The other
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thing that I'm always curious about is what comes next in terms of to so
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many. One is kind of about the collection and the reporting of this data,
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but then there's the like, now, are we happy with what it
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says, if not, what do we do? What are the standards that
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apply to what we expect? What is the fair lending standard? Once we
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have this data, how do we know if we're in a good place or
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a bad place? Even sense of what's going to happen on that front.
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That feels like the real changes we theoretically want to make come from knowing the
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data, not from just collecting it. It's like that kind of starts the
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real process of because there are changes to the industry we need to make.
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It will shine a light on small business lending that we've never seen before,
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and so that's probably the upsiders we'll be able to see that data will all
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be able to see. It's publicly disclosed. Yep, we can see where
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there's gaps that brings in regulatory risk their lending risk, for sure. But
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at least we know what it is, where are there gaps and how and
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we facilitate better lending in communities that need it the most. Are there clear
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standards on what the fair lending expectations will be, like how we're going to
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measure what's good what's bad on the space hide I mean, they're always actually
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to me on the consumer side. But I would say you have to look
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at the hum to rule. You just figure humed is the same thing small
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bits. It ras election for mortgages. This is data collection for small business
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offices. So that's how you should look at it. Now, it may
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not be apples to apples, but it's a really good comparison for an institution.
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All right, ten to seventy one, that's going to be interesting times.
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Next one you meant ten thirty three, I gotta like, I don't
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have all the numbers the back. I got a certain numbers in the back
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of my head and I don't have them all. But this data aggregation concept.
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Talk to me about what this rule is. First for the audience members
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that may not be as familiar, and then where it's at sure, so
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section ten thirty three of the Dodd Frank GAC that's that's where the number comes
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from. It's a page wall, it's a readable, there's a readable.
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Five is now writing a rule that will probably be north of a thousand pages
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based on the one page is going to be a lot of fun, But
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only a filmal regulator to do that. It basically says the consumers ship should
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have access to their financial records. That makes sense, that's it. The
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rules will be much different than now because there are new entities in the market,
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data aggregators such as BLAD for example. Yeah, who can gather the
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information from the bank, from the credit card company, from the holder of
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that information, take it and provide it to third parties. And then there's
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the third party and that could be anybody that has the consumer's permission, So
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it's all consumer permission down missions information. It will change the way the market
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operates because it's in the concept of open banking. It's not true open banking
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as in Europe, but it has a lot of characteristics. What are the
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differences for me? I mean, I'm very familiar, not very plied,
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but the concept of open banking in Europe where I really have to provide the
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data in a machine readable format for interoperability, that's a really interesting idea.
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What's the difference between what's being proposed in ten thirty three and so the people
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what's in your out so you don't know and she got it doesn't spell it
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out like they do in Europe. Right, it's as I said, access
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to financial records and what the bureau does, how they expand that is going
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to be very interesting. Uh, you know they're they're talking about establishment of
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epis rather than screen scraping. Yeah, so it's going to change the market
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in many aspects. We're concerned that the uh data that's being moved around needs
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to be very secure for sure. The players in that ecosystem need to have
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the same standards of security and oversight, which they don't have. Uh.
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Uh. Data they're sending is very sensitive. Um. And if it's going
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to be a true open banking world, it really shouldn't incorporate financially institutions data
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of all kinds. Right now, the outline only covers bank transaction information and
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credit card information. So if you get your auto loan from a captive auto
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lender, let's say VW Right whoever, they are not going to have to
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comply with this. Interesting, So you're gonna have segments of the market that
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don't aren't held accountable as the banks and credit card companies quicken loans. There
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are non banks, this will not apply to them. A lot of mortgage
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has gone through and so the non bank lendingsumer is going to assume that they're
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getting all that their information. They're not, So it's a complex, really
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market shifting um rule, and there's a lot of challenges to it and risks
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associated with it as well. I imagine too there's the question of like how
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good is the compliance and security on the receiving side. Mean, just because
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the consumer says I want you to share my with this party does not mean
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the consumers done full diligence. Because I've been screaming about that for a while.
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How do we know that X fintech company has the systems in place to
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secure that data? We don't. And there's no federal agency with oversight that
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can go in and look. The CFBB can't go knock on the door and
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say, show me how you're complying with this rule. They can do an
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enforcement investigation, but they can't examine active basis. So we're we've been pushing
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the bureau to look at that. We think it's a system that they need
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to think about that. Plus liability also the shift in if there's a breach,
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So if the bank's holding all this sense of infigation and somebody acts the
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bank, there's a liability there. If that same data goes to a data
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aggregator or to a third party, and there's a breach. Where's the consumer
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going to turn? Are they going to go to the data aggregator or we
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go to the bank exactly. Yeah, so we don't think that's the right
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approach to either. If you have the data all the day, help we
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should be responsible. We would halt accountable for Yeah, it just seems interesting
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to me because it's reminds me of you know, when that I want to
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go back to the clops BESTVB. But there was a threat of conversation that
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was following this. So, well, depositors deserve what they got because it
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was their job to look into the proper asset management of their bank, Like
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like the depositors were looking at the quarterly filings to figure out what kind of
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assets the banks have bought they were the safety and soundness oversight was going to
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come from depositors looking at them. So that's kind of ridiculous. And here
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you kind of going, well, the consumer will look in. They won't
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ask the bank to transfer their data to an unsafe party. It's the consumers
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responsibility. Will maybe the consumers it's not owning that responsibility the same way we
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might think is critical and the context of this kind of information, the same
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way the bank would be held accountable to a regulator to do. I think
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that's if we think the consumer is going to be the oversight line of defense
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for their data not ending up in unsafe places. That's probably a bit like
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asking your depositors to make sure that your bank is making sound risk management dicisiences.
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It's really not the right oversight mechanism in place. Yes, where who?
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We hope that the Bureau will factor that into their rule. I guess
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we'll find out over the next few months. Your other area was the overdraft
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credit card late fees overdraft fees section of role machias. Talk a little bit
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about what's going on in that space. Sure, So the Bureau has proposed
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a rule to lower the safe harbor on credit card lea. So the Febble
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Reserve about a decade ago said, if you're going to charge safe harb a
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late Yep, We're going to establish a safe harbor that says, if you
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charge x amount, no matter what you do, there is no risk of
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being sued on that. We've we've created the safe harb. The Bureau has
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decided to take a fresh look at it and decided at the moment proposed to
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lower the safe harbor from currently a thirty one dollars down to eight dollars.
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Wow, so dramatic reduction and big reduction. It will have a significant impact
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on the market credit card market, for sure. We believe it will have
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ramifications for some consumers. Certain segments of the market will be impacted more than
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others. They Bureau does not really address the deterrent factor of a late,
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so you run the risk of consumers failing to pay their monthly payment, which
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more commonly because they why should I have two bills do and one's got a
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penalty and the other doesn't. I'm gonna pay the late, But as you
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wait for thirty plus days, you're delinquent and you're gonna get recorded to your
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credit bureau, so your credit score is going to go down. But I'm
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not sure every consumer understands that. I'm sure they don't. At least some
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number of them do, right, So we believe that, you know,
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this should be a very thoughtful process, data driven analysis, or we're not
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sure the Bureau has done a very effective job at analyzing the data and accurately
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calculating the collection costs involved. And so we will be encouraging the bureau to
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take a closer look at how they're analyzing the impact on consumers. There's also,
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in my mind always this question of kind of second order impacts, like
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what happens to the approval rates, who gets access to credit cards or the
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lines of credit that are issued when when these things change, it's not just
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like well, it's kind of like I want to get too politically here,
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but I guess I'm talking about leegedly, but like you see rank control,
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Like there's the impact that the people who are paying rent, and there's the
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impact on building housing, the amount of stock that becomes available because of the
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prices that can be charged. In an analogy, and that's tough. The
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balloon, when you squeeze it all one side, it's got it's gotta go
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out there other So what will happen? There's a lot of possible things.
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There could be increase in the interest rate over charge to sure right, there
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would be a clow scene of dormant accounts. So if you havn't used your
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account and shut that, shut it down, shut it down. You could
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decide and likely opping is you won't decide who you're going to actually extend credit
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to the reduced number of people you're doing credit and how much right, and
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if you think that group is a riskier and may not either bills may not
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extended them credit. Yeah. So it's a fascinating time in the credit cards
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Mose. Yeah. Yeah, it feels to be like so much government policy
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ends up not understanding the second order effects and optimizing for a first order of
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fact and occasionally not calculating the second order the law of unattended consequences or whatever
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it may be. I think regulators really shouldn't do is um combine regulatory policy
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and politics. It gets messy. We've seated in the penest that when you
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do that can really mess things up. Yeah, so that is one of
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the biggest risks with regulatory interventions that day they look at it from a political
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as rather than a safety and sound and sewer protection at large. Yeah.
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So if you're talking to members bankers who are then saying, hey, there's
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a lot of stuff up in the end, there's a lot I'm moving parts.
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What should they be doing to prepare to think about how do I,
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you know, get ready for what may be coming down the pipe and the
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changes that are that are you know, possible coming both technologically business wise.
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What do we what do we do to adapt? I start out with,
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you have a rule that's going to be final. You're going to have to
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put significant resources on the ten seventy one small houses did. But then I
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also be quickly to overdraft. It is a major issue or the current administration
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or the current director. We believe that it was in the Unified Agenda that
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they're adding overdraft. It is a significant and auduct of almost every bank in
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the country, for sure, and you have to look at the risk of
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that either being highly regulated or going away in some form regulation. And how
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do you how do you manage that risk, not just for that product,
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but you are you know your revenue side, and every institution is different.
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And you can see that many CPA members have pivoted on their overdraft programs in
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the last year or so, pivoted. How how do you see em pivoting?
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What's the So A lot of them have changed their under overdraft practices.
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Some have lowered the overdraft fee, some have put a diminimus so if you
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overdraft by fifty dollars or less, they won't charge, and there's no fee
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to have Some of them have a twenty four hour ruling off period that if
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you overdraft, but you cure it within twenty four hours, there's no Some
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have eliminated it all together, many of eliminating the non sufficient funds charge.
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But that is many CBA members, but that's not the entire banking ecosystems.
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Many banks that happen to changes. We will see what the Bureau decides terms
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a rule a rule and how restrictive or what kind of approach they have.
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You seen motion among the members to find a more traditional lending alternative. A
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lot of times it's overdraft these it's like a small dollar loan in disguise slip
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and we're really excited about it. When I was at the CFBB, we
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a lot of work urged backs with it. Two of small dollar products.
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Yeah, it's really challenging. It's very hard to operationalize that with losing your
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shirt and to at least make back your Yeah. And so we've seen at
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least five major banks in the last six to eight months introduce small dollar loans
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and so far, so good. They see it as a product to help
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their customers so that they're not leaving the banking system rather than looking at it
25:25
as a revenue center as much. Yep. It's it's okay to use this
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product to help your customers stay in the bank rather than go outside. So
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we're continuing to have conversations with regulators to encourage them to encourage our banks to
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do it. You think it's needed. There is a clear need for short
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term liquidity, yep. And if you're going to regulate overdraft, it's like
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the balloon they're gonna have to go. So we need the money, they
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need the money, they're gonna have to get it. So where they're gonna
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go payday loan is worse, eighty days worse. We would prefer that they
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stay in the banking system. Yeah, yeah, but it is to your
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point. Are to operationalize a small dollar loan at a cost that is recouvable
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on that duration in dollar amount. I mean, it's just even at any
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reasonable industrate, there's not a lot of money in that. And so the
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handard across his hard board of a bank to support a program going into it
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knowing it's tend to lose money. We're not in the business of losing money.
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No businesses are. Let's spend x amount of money knowing that when we
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actually roll the product out, it's coles after the vestment. Hitles just lose
26:26
money for it's not a good look. So I'm very investment the banks that
26:32
have done it, Yep, they understand the need. They're evaluating what the
26:37
true potential boss is versus maybe they'll make a profit in the long run.
26:44
They look at it a little differently. It's sort of like overdraft. They're
26:47
looking at it from a different lens. Retain our customers and what's the value
26:52
of that versus just your revenue on this product, on overdraft and on small
26:56
dollar to changing how banks are looking at it, there's more competition, so
27:03
you sort of look at how do we maximize our ability to keep our bustomers
27:08
and help them become the better buster. Yeah yeah. Let me ask you
27:15
one last thing, which is what do you think separates institutions end up with
27:18
good relationships with their regulators from those that strong I mean, I've seen it's
27:22
really funny. Is it worked with a lot of banks. I'm sure you
27:25
seen this. I had two banks who gave a totally polar opposite answers about
27:30
how they wanted to work with their regulators, and I thought that they had
27:32
the same ic, not just the same just the same regulator with the same
27:36
guy walking on the doors. I don't know if you knew this. When
27:38
I worked at FEAR, I managed the relationship we industry in bureau, I
27:42
did not know that. So so I dealt with all of the banks,
27:45
all of the financial institutions and help them navigate how do you interact with your
27:51
regulator the bureau Later and the positive part of Valley speaking a positive impact and
27:56
the value of having include having a yeah. And there were a couple of
28:02
banks, for instance, that were rock stars at it, and I wouldn't
28:06
tell them, like, you guys have the huge advantage of your better because
28:10
strong relationships, you've become a trusted entity. When you speak, the Bureau
28:15
listens to you, right. And then there's those that just sort of dodge
28:18
it because they're afraid of They may say something where if I go talk to
28:21
this person, it may refers to dig the enforcement side, which never happened
28:26
when I was there six years. I never saw like somebody talk to the
28:30
markets teams, they get up call the enforcement here that the Bureau when your
28:36
career step like that's your job and if you ruin that relationship. You're done,
28:41
like nobody's gonna talk to you. So and plus people don't come in
28:44
and disclose things that are illegal. That's not not These are conversations about markets,
28:51
what they're seeing, What can we as a bank do better. I
28:56
saw a lot of banks who prove of the years and their relationships. They
29:02
should feel comforted talking to their regulators. It's important so that they understand how
29:10
you operate because every institution is a little bit different and they don't understand all
29:15
those dynamics. So the more you share with them, the different pressures you're
29:18
feeling, the different dynamics within your market, it's it's critical that they understand
29:25
them. Interesting so early often communication on broad topics. Yeah, it's it's
29:30
just been fascinating to watch how those you kind of as an outside somebody,
29:33
came from a different issue. It should just be like a consistent approach,
29:37
and it feels like it's a very different sid relationships. It's fascinating to see
29:40
how some navigate that to their advantage of others, to their detriment. When
29:42
I was at the Bureau, I was starting thirteen in this role. I
29:45
started the office and I could not get one of the top four banks to
29:49
engage with us for nine months at all at all. That's crazy. I
29:55
don't know if it was just they were just not well connected and couldn't figure
30:00
it out. But the second we actually were able to sit down, got
30:06
them in front of the director, had a great conversation. They instantly saw
30:10
the value and quickly turned one the best. They would come in on a
30:14
quarterly basis. They bring in different people in the institution, from the CEO
30:18
to the head of consumer lending. We had banks come in and get the
30:23
fraud people would come come in and scare the heck out of us, but
30:26
it really showed how smart they are. Yeah. Yeah, there's some of
30:30
the large banks and they bring in the cybersecurity people and they scare the heck
30:34
out of the bureau. But it actually shows like this is what we're doing
30:37
to protect our It reminds me of this. There's a saying it silk in
30:41
value when they whenever you come upon a seeminglarly stupid decision or you ask how
30:45
did this decision get made? It's usually a thoughtful person making a thoughtful trade
30:48
off that you haven't yet contemplated, which is like usually these things that seem
30:53
not to make sense to you. Are there because of some other trade off,
30:56
some other considerations you you couldn't even think about yet this I'm smart,
31:00
thoughtful, well meeting person made. And the more you can make people aware
31:03
of what those trade offs are, what we're seeing, why maybe we've got
31:06
these extra rules in place to open a well, we're seeing a huge ticketup
31:08
in fraud. Show you some examples of what fraud looks like. Oh my
31:11
god, that's terrifying. Yeah, and that's why we're Be's why we're doing
31:14
these things. I think the better off you are to help people understand where
31:17
you're coming from. Excellent, Dan, I really appreciate you for making the
31:19
time to come by and talk to us. This was fascinating. I learn
31:22
a whole bunch of new numbers I'm gonna have to try and memorize in my
31:25
head. But thanks for taking the time. Thanks for having me. Upstart
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