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The CFPB, Financial Regulation and Generative AI… Oh My! · Leaders in Lending

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  Speaker 1: You're listening to Leaders in Lending from Upstart, a podcast
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  Speaker 1: dedicated to helping consumer lenders grow their programs and improve
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  Speaker 1: their product offerings. Each week, here, decision makers in the
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  Speaker 1: finance industry offer insights into the future of the lending industry,
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  Speaker 1: best practices around digital transformation, and more.
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  Speaker 2: Let's get into the show, all.
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  Speaker 3: Right, welcome to another episode of Leaders in Lending. This episode,
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  Speaker 3: I'm joined by Arman Meyer. Arman, welcome to the show.
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  Speaker 2: Thank you for having me. It's great to see you
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  Speaker 2: again and chat live. I know we've had a little
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  Speaker 2: bit of.
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  Speaker 3: Time getting on each other's calendars. We've been chatting a
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  Speaker 3: little bit about the recent CFPB ruling and the Supreme
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  Speaker 3: Court's take on you know, it's funding and legality of that.
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  Speaker 3: So I'm interested to hear your perspective on that even
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  Speaker 3: a few weeks after that, if anything's changed, or maybe
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  Speaker 3: we should start by just going in to the case
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  Speaker 3: a little bit.
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  Speaker 2: And you know, who brought the suit, why did they
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  Speaker 2: have reason to bring in? What happened? Well?
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  Speaker 4: Sure, the good news on this topic is no matter
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  Speaker 4: when we discuss it, it's a gift that keeps giving.
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  Speaker 2: There will always be challenges at CFPB.
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  Speaker 4: Like since we last spoke, two new arguments against the
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  Speaker 4: CFPB have arisen in public forums.
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  Speaker 2: Will probably see them make their way into litigation.
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  Speaker 4: So just because we're talking about something that was ruled
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  Speaker 4: on a couple of weeks ago doesn't mean it's not
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  Speaker 4: gonna be relevant for in my view, unfortunately, many more years.
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  Speaker 4: But this particular case was an extension of other efforts
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  Speaker 4: to kind of, i'm gonna say, almost blow up the CFPB.
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  Speaker 4: This was the latest version came from a trade association
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  Speaker 4: of higher price shorter term lenders who did not like
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  Speaker 4: a particular rule which affects payday lenders defined as those
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  Speaker 4: who make loans with the duration that's a full repayment
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  Speaker 4: under forty five days, and higher price long term lenders
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  Speaker 4: those whose loans extend over forty five days but their
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  Speaker 4: rate exceeds thirty six percent. You can imagine why some
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  Speaker 4: in industry would be okay with this. You can also
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  Speaker 4: imagine why some in some sets of industry would hate this.
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  Speaker 4: So that was the origin was taking on this rule
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  Speaker 4: and making one of many claims. The typical claims you
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  Speaker 4: make in these cases, are you exceeded your satutory authority,
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  Speaker 4: You didn't follow the Administrative Procedures Act.
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  Speaker 2: You were arbitrarying and rule making. But this one in
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  Speaker 2: past we've seen and your.
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  Speaker 4: Structure is horrible because you should be a board and
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  Speaker 4: not an individual leader. We've seen those in the past
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  Speaker 4: and that's been decided. We'll get back to that later perhaps,
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  Speaker 4: but in this case, the argument was and the CFPD
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  Speaker 4: shouldn't be getting money anyway because it's unconstituently funded, despite
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  Speaker 4: the fact that Congress laid out the law for how
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  Speaker 4: it should get funded. The idea is that that's unconstitutional
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  Speaker 4: because of violate the appropriations caused the Constitution. And I'll
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  Speaker 4: spare getting into the legalities of that, but that was
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  Speaker 4: the thrust of it. And what we saw, of course,
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  Speaker 4: was the Supreme Court rejected that argument pretty heavily. I
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  Speaker 4: think Clarence Thomas wrote the opinion, and I think a
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  Speaker 4: reason it was rejected, and I think it's good at
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  Speaker 4: what's rejected.
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  Speaker 2: But a reason was rejected is.
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  Speaker 4: Because the implications of such a finding that Congress is
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  Speaker 4: not going to interpret its own appropriations clause and we're
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  Speaker 4: going to decide that the structure of the CFPD, where
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  Speaker 4: it's funded through the federal Reserve rather than directly from Treasury,
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  Speaker 4: therefore makes the whole thing not constitutional and essentially gone.
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  Speaker 2: I can go to more details on what that means.
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  Speaker 4: It's a pretty uncomfortable position to be in because you
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  Speaker 4: can it's not even a slippery slope, just right adjacent
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  Speaker 4: to that. It's almost hard to distinguish is blowing up
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  Speaker 4: many many other agencies who are funded not through appropriation.
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  Speaker 2: There's a thing called the Federal Reserve.
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  Speaker 4: A lot of people hate it, but a lot of
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  Speaker 4: people recognize, wow, COVID could have been a lot worse,
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  Speaker 4: and we got out of the potential serious depression because
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  Speaker 4: the facility is the FED created. Or Wow, that thing
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  Speaker 4: called the financial crisis could have been a lot worse.
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  Speaker 4: We thought it was potentially the end of financial capitalism
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  Speaker 4: if you talk to bankers back in two thousand and
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  Speaker 4: nine and how bad that was.
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  Speaker 2: But the Federal Reserve was a huge part of getting
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  Speaker 2: out of it.
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  Speaker 4: So you can see why a court might be uncomfortable
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  Speaker 4: ruling in favor of the plaintiffs here at CFPB. The
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  Speaker 4: slippery slope is not very slippery, nor much of a slope.
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  Speaker 4: It's right there to other agencies, and I could list
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  Speaker 4: many more.
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  Speaker 2: I don't want to bore your audience.
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  Speaker 3: Yeah, well, you're right, there are lots of rabbit holes
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  Speaker 3: we could go down. And I started in preparation for
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  Speaker 3: our conversation doing a little research. And like you said,
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  Speaker 3: on the appropriations clause, it's interesting how some of these
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  Speaker 3: suits can you know, you're trying to find like any foothole.
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  Speaker 3: Maybe it's tangential to your real beef with with someone
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  Speaker 3: in a case that you find any reason to try
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  Speaker 3: to bring a suit to bring them down. But it
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  Speaker 3: was I think ruled seven to two, so pretty pretty
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  Speaker 3: unanimous almost you know, considering the court's makeup, might think
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  Speaker 3: you're right.
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  Speaker 2: Most most people found.
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  Speaker 3: Reason for for affirming the CFPBS funding in this case,
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  Speaker 3: which which is good.
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  Speaker 2: And I think it is. It is important.
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  Speaker 3: I think maybe hit on a little bit on the
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  Speaker 3: appropriations calls because they're the Fed does have oversight, they
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  Speaker 3: are I think maybe some of the argument was about
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  Speaker 3: the independence of the CFPB or could they just run wild,
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  Speaker 3: But it seems that it fit within the appropriation's clause
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  Speaker 3: that there was clear delineation around, you know, how how.
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  Speaker 2: They could use their funds or how they could operate.
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  Speaker 4: Yeah, I think it's also important, though, to be pragmatic
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  Speaker 4: here as well. Besides the legal arguments, I think those
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  Speaker 4: of us who had businesses to run have to do
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  Speaker 4: things and serve customers and make big decisions and invest
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  Speaker 4: in very big decisions what our productal look like if
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  Speaker 4: we listen. I mean, just like taking like now three
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  Speaker 4: steps back, like do we really want to be in
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  Speaker 4: a world and frankly, we're entering this world and it's
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  Speaker 4: a scary place to be. Do we really want to
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  Speaker 4: be in a world where we're constantly taking institutions on
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  Speaker 4: and blowing them up? Where I mean, if you're if
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  Speaker 4: you believe that you need government for capitalism to work,
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  Speaker 4: because we've seen a world where there's unregulated capitalism before
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  Speaker 4: there was regulation, we.
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  Speaker 2: Saw what that did to people.
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  Speaker 4: But if you go to the other extreme, we've also
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  Speaker 4: seen command economy say you know, we don't trust you capitalists,
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  Speaker 4: so we're gonna do it ourselves. It's super boring, but like,
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  Speaker 4: let's be a little moderate. I mean, I know it's
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  Speaker 4: not cool. I know my position is not cool here,
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  Speaker 4: but the idea that I'm going to keep trying to
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  Speaker 4: blow up agencies.
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  Speaker 2: Or we're gonna we're gonna.
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  Speaker 4: Look for the next selection for to get our way
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  Speaker 4: leads to an unlasting piece where we can win victories
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  Speaker 4: today as an industry, but they're going to be lost
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  Speaker 4: as tomorrow. And there are plenty examples of winning a
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  Speaker 4: rule and then seeing it get repealed on both sides.
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  Speaker 4: And if we could work a little more together and
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  Speaker 4: focus less on blowing up the agency and focus more
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  Speaker 4: on what's the rule of the road that protects consumers
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  Speaker 4: and allows growth and creates continuity and allows us to invest,
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  Speaker 4: we've been a lot better place and there's a lot
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  Speaker 4: of brain damage if you ask me on how the
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  Speaker 4: CFB is ruining our lives when in fact, there are
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  Speaker 4: ways in which it has been aggressive and we should
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  Speaker 4: talk about that, But there are ways is which has
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  Speaker 4: been quite moderate and it's been helpful to the market
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  Speaker 4: and to consumers. We can talk about those two. Not
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  Speaker 4: all regulation is bad and we kind of should get
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  Speaker 4: out of our corners and the cf you come like
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  Speaker 4: the lightning rod of this macro argument regulation and we
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  Speaker 4: should stop post China CFB and we should kind of
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  Speaker 4: be a little more adult. I think about regulation and
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  Speaker 4: what it can do for our bitsiness to grow and
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  Speaker 4: not just how is the source of imposition.
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  Speaker 3: Yeah, that's a great point, and I think sometimes regulation
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  Speaker 3: is viewed maybe in this adversarial lens, but I think
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  Speaker 3: you bring up great points around you know, balance or
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  Speaker 3: stability and let's find the middle ground here, because I
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  Speaker 3: think in any system there's going to be bad actors
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  Speaker 3: and people trying to exploit weaknesses or for their own
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  Speaker 3: gain or take advantage of consumers. But you know, I
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  Speaker 3: think there are also groups out there trying to lay
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  Speaker 3: that common groundwork or find fair rules for everyone to
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  Speaker 3: play by, and there's still spots for innovation within that
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  Speaker 3: if everyone agrees to what's best.
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  Speaker 4: One example, if I could, I mean, I was chiefest
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  Speaker 4: staff of New York's bank regulator and during that time
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  Speaker 4: we were diagnosing the France crisis. I went over there
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  Speaker 4: during the crisis to see if I could be of
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  Speaker 4: some help and that was kind of my entry point
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  Speaker 4: from broad economic policy with some franch services into full
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  Speaker 4: blown and financial service policy about fifteen years ago. And
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  Speaker 4: a thing that came out of Dot Frank that we
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  Speaker 4: could all agree to was regulation that was not just
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  Speaker 4: good for the consumer, but was good for the economy
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  Speaker 4: and good for the banks and good for the lenders.
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  Speaker 2: So that the.
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  Speaker 4: One example I'll make of this, which I think is
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  Speaker 4: probably best for a lending audience, but I believe is
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  Speaker 4: our audience, and there are many, is of course, the
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  Speaker 4: qualified mortgage rule, which basically says we need regulation that
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  Speaker 4: ends this idea of opacity and non transparency to consumers
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  Speaker 4: because it's not just bad for a consumer.
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  Speaker 2: We end up having to have a race to the bottom.
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  Speaker 4: We have to compete on grounds we in industry don't
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  Speaker 4: want to compete on because someone else is going to
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  Speaker 4: obfuscate or mislead. So let's just create a mortgage product
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  Speaker 4: that is qualified to get out of this liar loan
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  Speaker 4: scenario and other scenarios that ended up being erased to
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  Speaker 4: the bottom increase sales. But it was all short term,
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  Speaker 4: and it's one of many reasons, but it is an
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  Speaker 4: important reason why the French has happened, that we were
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  Speaker 4: selling loans p that they couldn't afford industry with doing that,
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  Speaker 4: and it didn't have to be. And I think that
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  Speaker 4: what came out of the crisis was, Wow, we do
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  Speaker 4: need rules that stop these races at the bottom and
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  Speaker 4: that then allow investment in a more firm landscape so
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  Speaker 4: that you don't have to change your investment over time
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  Speaker 4: because others are cutting corners. You can actually stick to
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  Speaker 4: that good product and then products actually get better. So
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  Speaker 4: those are two reasons if you ask me why we
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  Speaker 4: want regulation and why if the CFV was if this
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  Speaker 4: rule went down under this theory, in this case with
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  Speaker 4: the petty lending rule, you would have seen all sorts
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  Speaker 4: of other rules go down. And I can make the
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  Speaker 4: same argument for why the pety lending rule itself is
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  Speaker 4: a good thing. But the mortgage one, I think is
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  Speaker 4: a bigger one that really I saw firsthand when I
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  Speaker 4: was at the New York Banking Department now called the
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  Speaker 4: Partner Fan Services.
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  Speaker 3: Yeah great, and you read my mind kind of tying
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  Speaker 3: the connection to maybe some of your other earlier experience
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  Speaker 3: in your career. What about as a co founder of
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  Speaker 3: the American Fintech Council up starts a member of that
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  Speaker 3: as well, what was some of the need you saw
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  Speaker 3: that arose to bring that to life?
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  Speaker 2: You no, thanks, thanks for raising that.
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  Speaker 4: And Upstart is a member and and and an important member.
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  Speaker 2: It's you know, it's a similar theme in matter respects.
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  Speaker 4: I think the American fit a council when a few
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  Speaker 4: us got together and created it.
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  Speaker 2: We were thinking about how.
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  Speaker 4: You can exploit regulatory gaps, which we've seen some businesses do,
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  Speaker 4: or you can fill them yourself with higher standards than
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  Speaker 4: what currently exists, so that you're paving the regulatory road
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  Speaker 4: for the regulators, for the enforcement agencies. And that's a
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  Speaker 4: good thing to do as you grow up as an
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  Speaker 4: industry because if you don't and you don't paint it
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  Speaker 4: for them, it will get painted for you one way
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  Speaker 4: or another. And if it's not the CFPB because it
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  Speaker 4: magically blows up because of litigation, it's going to be
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  Speaker 4: in a trade general, it's going to be the FTC.
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  Speaker 4: So there's no avoiding it. You are much better off
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  Speaker 4: figuring out for yourself what's good for consumers and good
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  Speaker 4: for your business. To delay that foundation for your investment
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  Speaker 4: to prevent those races to the bottom, then you are
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  Speaker 4: leaving it up to an agency that is now reacting
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  Speaker 4: to customer harm. So we want to get on our
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  Speaker 4: front foot, and that was a major reason to start
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  Speaker 4: the American Fintech Council. It was also a great way
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  Speaker 4: of bringing companies together who really believed in doing good
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  Speaker 4: for customers, not just through rhetoric, but through actions and data.
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  Speaker 4: And I think actions and data is the way you
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  Speaker 4: distinguish yourselves from those who just say things. And I
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  Speaker 4: think the American Fintech Council members, including the board members,
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  Speaker 4: like I've started, I've done a great job walking the
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  Speaker 4: walk on some issues. I'm sure the regulators would disagree
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  Speaker 4: with AFC on several things, but they certainly have to
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  Speaker 4: concede that we've walked the walk on several issues and
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  Speaker 4: have pushed regulatory landscape forward and have ourselves obviated some
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  Speaker 4: risks of bad role making because we got on our
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  Speaker 4: front foot with some good rolemaking.
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  Speaker 3: Yeah, that's great. Did you find it was easier bringing
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  Speaker 3: a disparate group of companies together under an umbrella or
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  Speaker 3: getting regulator's attention or did you find maybe describe some
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  Speaker 3: of the challenges or opportunities in that experience.
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  Speaker 2: No?
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  Speaker 4: Sure, I think at first, when you tell people what
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  Speaker 4: you're trying to do, they think you're crazy. To be honest,
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  Speaker 4: why are you going to raise standards?
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  Speaker 2: Are you nuts? And then what I.
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  Speaker 4: Found was maybe we didn't get everyone we wanted in
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  Speaker 4: the beginning, back in twenty early twenty twenty one. But
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  Speaker 4: as the Biden administration came in and they started creating
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  Speaker 4: the standards by enforcment actions that weren't always visible or
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  Speaker 4: by behind the scenes supervision. I always said, if we
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  Speaker 4: build the umbrella of people who are pushing yambot and
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  Speaker 4: crazy standards together, others will join us as opposed to
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  Speaker 4: be repulsed by us, because they're going to see the
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  Speaker 4: value of being in a group that is forward thinking
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  Speaker 4: and they're going to be a part of us. So
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  Speaker 4: as twenty twenty one went on, we did find our
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  Speaker 4: membership increase by folks who were feeling the impact of
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  Speaker 4: the new administration and needed help getting on their front
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  Speaker 4: foot and telling their product story because it's too easy
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  Speaker 4: without some help to leave value on the table in
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  Speaker 4: terms of the good you're doing and to just allow
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  Speaker 4: the regulators to see the bad. So I think we
• 14:23
  Speaker 4: were able to bring folks in. And then we also
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  Speaker 4: wanted I mean Lending Club where I was at at
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  Speaker 4: the time, we didn't want to just create an umbrella
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  Speaker 4: of actors who wanted to push the envelope. We wanted
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  Speaker 4: to create an ecosystem. We started very very early on
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  Speaker 4: in the Legacy organization one of the legacy groups of
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  Speaker 4: the AFC as just lenders, non bank lenders. But as
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  Speaker 4: fintech evolved and fintech started doing more and more different things,
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  Speaker 4: Lending Club, for instance, bought a bank. We saw and
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  Speaker 4: banks were now part of the fintech in a lot
• 14:53
  Speaker 4: of new ways that weren't just focused on landing. So
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  Speaker 4: this whole bass banking thing that unfortunately some there have
• 15:00
  Speaker 4: been some there's been some negative headline, but some not
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  Speaker 4: awesome conduct which is now staining those that are actually
• 15:06
  Speaker 4: doing greed for consumers and doing great partnerships. Anyway, we
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  Speaker 4: wanted to bring some of those folks together because the
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  Speaker 4: ecosystem was evolving and we wanted to create the synergies
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  Speaker 4: between folks who work together to advance better policy and
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  Speaker 4: work with partners who are more responsible and to kind
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  Speaker 4: of help create that ecosystem.
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  Speaker 2: And I think we succeeded there. And I want to
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  Speaker 2: really command our management, our current management for what we're doing.
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  Speaker 3: Yeah, absolutely, definitely important work. And so you mentioned London Club. Yeah,
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  Speaker 3: a lot has changed since the Great Financial Crisis, the
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  Speaker 3: CFPB that we've talked about, American Fintech Council, the introduction
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  Speaker 3: to more FinTechs and partnerships, or fintech's becoming banks, any
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  Speaker 3: other major trends that you've noticed and that.
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  Speaker 4: I mean to me, what's so exciting is the regulatory
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  Speaker 4: technology trend hastened by generative AI.
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  Speaker 2: And I know you know, AI a very big word.
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  Speaker 4: And just like fintech, everyone wanted to be a fintech
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  Speaker 4: seven eight years ago when when fintech started, suddenly everyone
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  Speaker 4: was a fintech. Right now we're seeing everyone wants to
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  Speaker 4: be AI. But regardless, I don't mean to jump into hype.
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  Speaker 4: Generative AI creating content or analyzing on structured data and
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  Speaker 4: structuring it in ways that humans have not really been
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  Speaker 4: good at and in ways that machines have been horrible at.
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  Speaker 4: This new technology is the basis of a huge regulatory
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  Speaker 4: technology and supervisor technology framework, if you ask me, and
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  Speaker 4: we're going to see really interesting companies emerge more and
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  Speaker 4: more that are going to figure out how to meet
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  Speaker 4: regulatory standards. And I know it's scary, it sounds scary
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  Speaker 4: in the beginning, but think of AI as your junior
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  Speaker 4: compliance officer to take that first cut. It has to
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  Speaker 4: all be supervised, but we're really going to be able
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  Speaker 4: to automate and improve and a lot of compliance heard
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  Speaker 4: which are going to better for consumers, going to do
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  Speaker 4: it better, and it's going to be better for smaller
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  Speaker 4: entities who can now compete more and create a more
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  Speaker 4: competitive market because they're not throwing.
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  Speaker 2: So much at compliance costs. So I am super excited by.
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  Speaker 4: Regulatory technology and the use genera AI, and I hope
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  Speaker 4: we don't ruin it by having folks be a little
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  Speaker 4: cavalier and use generator AI a little avant garde without
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  Speaker 4: the proper controls in place. It is on us in
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  Speaker 4: industry often to see the value of our work by
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  Speaker 4: being incremental and by communicating the regulators what we're doing
• 17:33
  Speaker 4: and not starting with the most risky area. So I
• 17:36
  Speaker 4: hope we're not going to take our GENI and start underwriting.
• 17:39
  Speaker 4: I don't think people will do that, or start or
• 17:43
  Speaker 4: engaging with customers directly and leading to bad outcomes. This
• 17:47
  Speaker 4: is risky stuff that people are too smart to do.
• 17:49
  Speaker 4: And I think we educate regulators and policy makers on
• 17:53
  Speaker 4: the great use case of GENI which are not going
• 17:55
  Speaker 4: to be customer facing, which can be heavily supervised, which
• 17:58
  Speaker 4: we have great model wors and and over what you're
• 18:01
  Speaker 4: actually going to make ecoremy a lot better and empower
• 18:03
  Speaker 4: small banks and small.
• 18:04
  Speaker 2: Entities who grow.
• 18:06
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• 18:46
  Speaker 2: Thanks and now back to the show. Yeah.
• 18:49
  Speaker 3: I totally agree, and I think again like the themes
• 18:52
  Speaker 3: around transparency or explainability and using these keeping the human and.
• 18:57
  Speaker 2: The loop so to speak, I think are really important.
• 18:59
  Speaker 3: And these are early days, super exciting times and lots
• 19:02
  Speaker 3: of use cases and technology and companies coming up right now.
• 19:06
  Speaker 2: But I think you're right.
• 19:07
  Speaker 3: I think it could be used a lot proactively doing
• 19:10
  Speaker 3: research or the way it's enriched and helped search anytime
• 19:14
  Speaker 3: there's a huge body of work you're trying to sort through.
• 19:16
  Speaker 3: It can accelerate the degree of which we can comprehend
• 19:20
  Speaker 3: or just get a handle on something as complex as regulation.
• 19:24
  Speaker 2: So definitely excited to see what comes out of that.
• 19:28
  Speaker 2: You know, a lot of work to do, but a
• 19:29
  Speaker 2: lot of opportunity.
• 19:30
  Speaker 4: And I'm normally one of these people who is skeptical
• 19:32
  Speaker 4: on these things. And I think you put your head
• 19:37
  Speaker 4: in your sand if you're overly skeptical on the potential here,
• 19:39
  Speaker 4: But you're putting your head of sand if you're not
• 19:42
  Speaker 4: looking at the risks that you just laid out that
• 19:44
  Speaker 4: we have to get a grasp both.
• 19:46
  Speaker 2: So I guess we've talked about this a little bit.
• 19:47
  Speaker 3: But would you say the CFPP has been successful in
• 19:50
  Speaker 3: the decade and a half since it's been around, like
• 19:52
  Speaker 3: overall all things considered.
• 19:55
  Speaker 2: I was reading some stats.
• 19:56
  Speaker 3: It looks like they know they've taken in maybe four
• 19:58
  Speaker 3: million complaints the last figure I end of last year,
• 20:02
  Speaker 3: billions of dollars in funds back to consumers.
• 20:05
  Speaker 2: Like, how would you judge its success?
• 20:09
  Speaker 4: Yeah, I mean, I think those are important metrics, they're
• 20:12
  Speaker 4: not the ones that I would focus on first. I
• 20:14
  Speaker 4: guess I like to look at how as a CFPB
• 20:17
  Speaker 4: made the market more stable.
• 20:19
  Speaker 2: And improved almost the thing you can't see. Have we
• 20:24
  Speaker 2: seen companies.
• 20:26
  Speaker 4: Emerge and grow up because of a more stable environment
• 20:31
  Speaker 4: that protected consumers.
• 20:33
  Speaker 2: That these companies weren't age out.
• 20:36
  Speaker 4: Of existence or force out of existence, but there were
• 20:39
  Speaker 4: rules of the world that allowed them to thrive that
• 20:42
  Speaker 4: were reasonable enough and out of consumers so that the
• 20:46
  Speaker 4: product was long lasting. And I think, like that metric boy,
• 20:51
  Speaker 4: hasn't a lot of great stuff happened in the last
• 20:52
  Speaker 4: fifteen years. I mean, I take issue with something that
• 20:56
  Speaker 4: CFP has done. And I think any one that like
• 21:00
  Speaker 4: loves the CFPB every action is going to UH. I
• 21:06
  Speaker 4: think it's hard to pick any agency, including the cfp
• 21:08
  Speaker 4: B and love everything they've done. But I'll actually let's
• 21:11
  Speaker 4: lament on two things I think are not the greatest
• 21:15
  Speaker 4: and that we should UH ask for more from a
• 21:17
  Speaker 4: cfp B and from government on. One is going back
• 21:21
  Speaker 4: to the seesaw. You know, I like the initial five
• 21:27
  Speaker 4: year structure where the where the there's independence of the
• 21:31
  Speaker 4: cfp B, where the director was in for five years. Unfortunately,
• 21:36
  Speaker 4: some in industry in an effort to blow up the
• 21:38
  Speaker 4: CFP be similar to this case, we started all talking
• 21:40
  Speaker 4: about with the PATI lending rule when at the CFB
• 21:43
  Speaker 4: hoping to blow it up, and what they got was
• 21:46
  Speaker 4: the end of the five year structure and instead serve
• 21:49
  Speaker 4: at the pleasure to president.
• 21:51
  Speaker 2: Why is this bad?
• 21:52
  Speaker 4: Because we just reinforced the idea of short termism and
• 21:56
  Speaker 4: partisanship in regulatory bodies. And that's bad because now we
• 22:01
  Speaker 4: are seeing people who just want to survive the next
• 22:05
  Speaker 4: election in terms of a certain regulatory regime and not
• 22:08
  Speaker 4: actually pushing for law and lasting regulation. And I think
• 22:11
  Speaker 4: we're going to see more and more partsnership and our regulators,
• 22:15
  Speaker 4: and we are seeing it and to see if it
• 22:16
  Speaker 4: be as unfortunately in that lightning rod. So I really
• 22:19
  Speaker 4: do lament that we have lost that five year structure.
• 22:22
  Speaker 4: I think it creates more parts of it than necessary
• 22:24
  Speaker 4: and it's a rotten apple on all of our regulators.
• 22:28
  Speaker 2: The other thing I lament is I thought i'd see.
• 22:31
  Speaker 4: If you did under quadarie to allow companies not to
• 22:37
  Speaker 4: get out of regulation, which is how some critics who
• 22:39
  Speaker 4: I disagree with but call it these no action letters
• 22:42
  Speaker 4: or these sandboxes. But let's be honest, regulation can be vague,
• 22:46
  Speaker 4: and sometimes that clarity is needed to.
• 22:51
  Speaker 2: Invest and grow and serve customers.
• 22:55
  Speaker 4: And I don't think ending a program that created clarity
• 23:00
  Speaker 4: to allow companies to grow was the best idea, but
• 23:04
  Speaker 4: then replacing it saying and saying frankly rhetoric, we don't
• 23:08
  Speaker 4: pick winners on losers, so we're not going to do
• 23:10
  Speaker 4: that with some of the rhetoric got to CFP at
• 23:12
  Speaker 4: that time ending it's no action letter prior programs ending
• 23:15
  Speaker 4: its sandbox programs. I think then to replace that with
• 23:19
  Speaker 4: but we're going to pick winners and losers for risk
• 23:22
  Speaker 4: based supervision.
• 23:24
  Speaker 2: That's a little alarming.
• 23:25
  Speaker 4: I wish to see I FPB would rethink those approaches,
• 23:28
  Speaker 4: because you can't say you're not picking winners and losers,
• 23:31
  Speaker 4: but then pick winners and losers.
• 23:33
  Speaker 2: And I think it's.
• 23:34
  Speaker 4: Important to focus on how the economy can grow and
• 23:39
  Speaker 4: regulation of that nature rather than just saying, oh, we
• 23:43
  Speaker 4: want to learn more about this company or this industry,
• 23:45
  Speaker 4: so we're taking for supervision.
• 23:47
  Speaker 2: That's a little scary to me.
• 23:48
  Speaker 4: And we've seen that movie with the financial stability Overside
• 23:50
  Speaker 4: Council when Dot Frank created a body to do just that,
• 23:54
  Speaker 4: and I think there was a lot more reason to
• 23:58
  Speaker 4: do it then, because we're talking a very, very large
• 24:00
  Speaker 4: organizations that could bring the whole system down, and there
• 24:02
  Speaker 4: were many, many votes involved, not just one agency. I'm
• 24:05
  Speaker 4: a little uncomfortable with the current regime on that. But
• 24:08
  Speaker 4: other than some of those examples where I do think
• 24:09
  Speaker 4: the cfp's overreached, overall, I would say it's been quite successful.
• 24:14
  Speaker 4: We haven't seen anything like a crisis. We've seen the
• 24:16
  Speaker 4: alignment of consumer protection and safety and soundness. We prevented
• 24:21
  Speaker 4: some of those races at the bottom that I was
• 24:22
  Speaker 4: talking about. But yeah, we have an overreach issue, and
• 24:25
  Speaker 4: that's just life, right. We need to push background and
• 24:28
  Speaker 4: seepeople relentlessly when we think they're overreaching, But we also
• 24:31
  Speaker 4: need to not be potshotters on the sidelines criticizing everything.
• 24:35
  Speaker 3: Absolutely, yeah, I think fair to criticize, but also important
• 24:38
  Speaker 3: to be a part of the solution as well.
• 24:40
  Speaker 2: So again it comes back to the balance and.
• 24:42
  Speaker 3: Like you said, you know, painting the picture before someone
• 24:45
  Speaker 3: else paints it for you, it's important to be a
• 24:47
  Speaker 3: part of that.
• 24:49
  Speaker 2: Any other trends you're seeing.
• 24:50
  Speaker 3: I think one of the things I'm anxious about lately
• 24:53
  Speaker 3: is kind of the regional banks and how they're faring
• 24:56
  Speaker 3: through some of the collapses recently capital requirements, and how
• 25:00
  Speaker 3: they maintained competitiveness in their space.
• 25:05
  Speaker 2: Yeah. Well, two thoughts there.
• 25:06
  Speaker 4: One is it's such a tragy that Silicon Valley Bank
• 25:10
  Speaker 4: went down. Yes, we can say they were poorly risk managed,
• 25:14
  Speaker 4: and we wouldn't be wrong. What's interesting by Silicon Valley Bank, though,
• 25:18
  Speaker 4: is what brought them down wasn't the thing you would
• 25:20
  Speaker 4: have thought would have brought them down. And banks and
• 25:23
  Speaker 4: banks similar to it. In other words, you're making loans
• 25:27
  Speaker 4: to risky businesses, but the underwriting worked out. It wasn't
• 25:32
  Speaker 4: that the loans scaled to the startup culture in San Francisco.
• 25:36
  Speaker 4: Who failed was the connectivity of the deposits to venture capitalists.
• 25:43
  Speaker 2: That's what failed.
• 25:44
  Speaker 4: You know, some people will want to blame their risk management,
• 25:48
  Speaker 4: But if any of us had a bunch of depositors
• 25:51
  Speaker 4: connected to a dozen or a few dozen people who
• 25:54
  Speaker 4: could get on the phone to talk and decide to
• 25:56
  Speaker 4: pull our money, any bank would be in a lot
• 25:58
  Speaker 4: of trouble. You don't and you don't need these arguments
• 26:01
  Speaker 4: of oh it's because of the Internet.
• 26:03
  Speaker 2: Oh it's because of like able to pull your money quickly.
• 26:08
  Speaker 4: This was unfortunately a shot in the foot of the
• 26:12
  Speaker 4: venture capital industry to the venture capital industry, and that
• 26:16
  Speaker 4: then exposed, of course, the decline these bond prices. And
• 26:21
  Speaker 4: so now we have banks that are working their way
• 26:24
  Speaker 4: out of the decline of bond prices because of rising
• 26:26
  Speaker 4: interest rates. But they're different from Silicon Valley Bank because
• 26:31
  Speaker 4: of the deposit base, and that is I think one
• 26:33
  Speaker 4: of the major stingcation features that we don't focus on enough.
• 26:36
  Speaker 4: So the crisis is it is somewhat contained, but there
• 26:39
  Speaker 4: is trouble. But I'll go back to where we started.
• 26:41
  Speaker 4: I think that the mark of success for regulators and
• 26:44
  Speaker 4: the CFPB and US as an industry will be can
• 26:49
  Speaker 4: smaller entities thrive or do we keep having to consolidate
• 26:52
  Speaker 4: To your point in our regional banks. We want these
• 26:54
  Speaker 4: smaller banks to be able to invest in technology, whether
• 26:58
  Speaker 4: it's the right tech conversation already had, or an ability
• 27:02
  Speaker 4: to reach consumers partnering with and upstart partnering with other providers,
• 27:07
  Speaker 4: because if they can't then they got to buy the
• 27:10
  Speaker 4: tech or building in the house themselves, these smaller regional players,
• 27:14
  Speaker 4: and it's just not realistic.
• 27:15
  Speaker 2: In this world.
• 27:16
  Speaker 4: The big banks have gotten so big they have an
• 27:20
  Speaker 4: infinite tech budget compared to I don't know, the bottom
• 27:23
  Speaker 4: one thousand, two thousand banks one versus two thousand. Of course,
• 27:28
  Speaker 4: they're going to need to outsource some tech because if
• 27:31
  Speaker 4: they don't.
• 27:32
  Speaker 2: They're going to lose and keep losing the big banks.
• 27:34
  Speaker 4: So we can't, on one hand say they got out
• 27:36
  Speaker 4: to preserve the small banks and the regional bank, so
• 27:38
  Speaker 4: we don't want to take solide about regionals. But then say,
• 27:41
  Speaker 4: but if you partner, we're going to look really dis
• 27:44
  Speaker 4: favorably on that with technology companies. But then let the
• 27:47
  Speaker 4: big tech companies go ahead, and if that's all they
• 27:51
  Speaker 4: wanted technology, it's just it's an obvious cycle, and I
• 27:54
  Speaker 4: want the big tech companies invest, but I want the
• 27:56
  Speaker 4: smaller company. They're sorry, the big banks daily to the
• 27:58
  Speaker 4: vast attach one of the smaller banks and the regional
• 28:01
  Speaker 4: banks we invest as well, and you can't all investment
• 28:04
  Speaker 4: is an equal in a world where one has a
• 28:06
  Speaker 4: ton of money and one doesn't after years and years
• 28:08
  Speaker 4: and years in consolidation. So that's kind of my worry
• 28:11
  Speaker 4: for the regional banks and in the more medium long term,
• 28:15
  Speaker 4: but we do have to get through the present situation,
• 28:17
  Speaker 4: you know.
• 28:17
  Speaker 2: It's like add one more thought.
• 28:18
  Speaker 4: This brings us kind of the Open Banking Rule, which
• 28:20
  Speaker 4: is the same idea, and it's another source where I
• 28:23
  Speaker 4: hope the CFV gets it right and I'm glad they
• 28:26
  Speaker 4: finally issued it. And basically what it does is if
• 28:30
  Speaker 4: the economy has highways that allow infrastructure allows.
• 28:35
  Speaker 2: Companies to grow.
• 28:36
  Speaker 4: One of those, of course a financial system and money
• 28:39
  Speaker 4: in finance, but the and there are others and the
• 28:41
  Speaker 4: other of his data. And what the CFPV is doing
• 28:44
  Speaker 4: with its Open Banking Rule, which is pending right now,
• 28:47
  Speaker 4: hopefully is allowing data to flow more. How does this
• 28:51
  Speaker 4: relate to the conversation on big banks and medium sized banks,
• 28:54
  Speaker 4: because again, we've allowed big banks to get so big
• 28:58
  Speaker 4: that they have monopoly on this data. So either we
• 29:01
  Speaker 4: use regulation. There's another example, I have good regulation I
• 29:04
  Speaker 4: mentioned too earlier, ability to invest and not have to
• 29:07
  Speaker 4: raise the bottom. A third one, which I'm glad to
• 29:10
  Speaker 4: see if he's doing, is creating an infrastructure that allows competition.
• 29:14
  Speaker 4: And in this case, the infrastructure is not payment rails,
• 29:17
  Speaker 4: but it's data rails and free flow of data, because
• 29:21
  Speaker 4: if we don't have this free flow of data and
• 29:23
  Speaker 4: the customer can't own its own data, then all we're
• 29:26
  Speaker 4: doing is reinforcing was the trend for decades, which is
• 29:29
  Speaker 4: big banks using their power in this case data power,
• 29:32
  Speaker 4: not market power, to grow faster and hoard and put
• 29:37
  Speaker 4: us at a disadvantage. So we need the open Data
• 29:39
  Speaker 4: Banking rule to allow other entities access that data to
• 29:44
  Speaker 4: underwrite better, to provide better products, to transfer funds sorry,
• 29:48
  Speaker 4: to transfer accounts from customer customer easily, and that's going
• 29:52
  Speaker 4: to really open up competition. So going back toward start
• 29:55
  Speaker 4: on success a CFPB, if this rule comes out the
• 29:57
  Speaker 4: way it should, I would get the CFPB huge credit
• 30:01
  Speaker 4: for doing what a regulator should do, which is create
• 30:03
  Speaker 4: a foundation for great you can on a prosperity while
• 30:05
  Speaker 4: kind the customers, and I really hope they can be
• 30:07
  Speaker 4: balanced right here as they finalize this.
• 30:09
  Speaker 3: Yeah, great point, and maybe we'll have to put a
• 30:12
  Speaker 3: pin in that and come back and talk after that's
• 30:15
  Speaker 3: been settled on a future episode and see see how
• 30:18
  Speaker 3: that's landed. I guess selfishly, one of the things I
• 30:22
  Speaker 3: like to ask guests, especially as this continues to increase
• 30:25
  Speaker 3: in complexity. Is there a thought leader you follow, a
• 30:28
  Speaker 3: source of information, maybe a recent book you've read, or
• 30:31
  Speaker 3: a podcast, like how do you stay abreast of everything
• 30:35
  Speaker 3: going on in this space?
• 30:36
  Speaker 4: Well besides Upstarts podcast, of course. You know, if you
• 30:41
  Speaker 4: haven't read him, I think he's really making a name
• 30:43
  Speaker 4: for himself, and he's been really deep on a lot
• 30:45
  Speaker 4: of the issues in ways that almost no one else is.
• 30:48
  Speaker 4: Jason mccoolaugh who issues Fintech Business Weekly. It is subscription only,
• 30:53
  Speaker 4: but he does give you tidbits to get a sense
• 30:55
  Speaker 4: of what he covers for free. But I do recommend
• 30:58
  Speaker 4: a subscription, don't. I'm not like his agent or anything,
• 31:01
  Speaker 4: but I've been so impressed. I want to give credit
• 31:03
  Speaker 4: where credit is due on someone who can really dig
• 31:06
  Speaker 4: on some of the big fintech issues in a way
• 31:08
  Speaker 4: that I haven't seen others be able to do.
• 31:11
  Speaker 2: There's a lot of.
• 31:11
  Speaker 4: Credit, and you know, broadly, I just want to credit
• 31:15
  Speaker 4: the reporters. I mean, you know, we trash reports a
• 31:20
  Speaker 4: lot in the public media and in government, but maybe
• 31:23
  Speaker 4: we in industry can pay some respect to the way
• 31:27
  Speaker 4: we just so quickly learn about Road Schoprah's latest speech
• 31:31
  Speaker 4: or whatever from a really amazing reporter network in the
• 31:34
  Speaker 4: business and finance space that I'm constantly impressed by. But Jason,
• 31:38
  Speaker 4: I don't think we'll call him some reporter is more
• 31:39
  Speaker 4: of a deep diver and I'll keep I'll make those
• 31:42
  Speaker 4: two points here.
• 31:43
  Speaker 2: Awesome.
• 31:43
  Speaker 3: Yeah, that's new to me, so I'll have to add
• 31:45
  Speaker 3: him to my regular reading. I think you're right, Like
• 31:50
  Speaker 3: it seems like journalism isn't dead in this age of
• 31:52
  Speaker 3: social media and everyone kind of pretends to be a
• 31:55
  Speaker 3: journalist or can get their opinion out there. It's good
• 31:57
  Speaker 3: that we have people still out there searching for the
• 31:59
  Speaker 3: true and researching it.
• 32:03
  Speaker 2: Yeah.
• 32:03
  Speaker 3: I've been a big fan lately of the podcast Acquired
• 32:06
  Speaker 3: if you haven't found that one, But they take you
• 32:08
  Speaker 3: a three to four hour deep dive into company's foundings
• 32:13
  Speaker 3: or acquisitions, and you know, largely to subscribe to the
• 32:17
  Speaker 3: theory there's nothing new under the sun, so it's always
• 32:19
  Speaker 3: good to go back and hear how companies have faced
• 32:22
  Speaker 3: similar challenges to we're seeing today at different times, or
• 32:25
  Speaker 3: how they've gotten through.
• 32:27
  Speaker 2: Well, I'll check that out.
• 32:28
  Speaker 4: Thanks, I've heard of it, and I think I might
• 32:29
  Speaker 4: listen to once, but I'm not connecting it, so I'm
• 32:31
  Speaker 4: gonna double check that.
• 32:32
  Speaker 2: Thanks for mentioning acquired awesome.
• 32:35
  Speaker 3: Well thanks for the time, Armin. Always great to catch up,
• 32:37
  Speaker 3: but appreciate it.
• 32:39
  Speaker 2: No, thank you, great talking again.
• 32:40
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