The Regulatory Outlook at CBA Live

0:02 You're listening to leaders and lending from Upstart, a podcast dedicated to helping consumer lenders grow their programs and improve their product offerings. Each week, here decision makers in the finance industry offer insights into the future of the lending industry, best practices around digital transformation, and more. Let's get into the show. Welcome to the podcast. I'm joined today by Dan Smith the Consumer Bankers Association. Dan, thanks for making the time and joining us today. Thanks for having me. Yeah, we're here at the CBA Live conference. Thank you for osen us. This has been fabulous. Tell me a little bit about the conference, the goals, how it's going so far this year. It's been fantastic. Gets our second one s COVID. We're north of sixteen hundred attendees, over seven hundred bankers. It's such a great opportunity to sit down and talk and meet with people, allow them to network and learn from each other. We have some great sponsors and vendors. Your every day you see the conversations going on where people are learning from each other, sharing information.

1:06 It's such a great opportunity to freew people together and talk about banking, talking about financial services, the industry, what are the challenges they face. So we're really excited it's going. Well, I'm getting a little tired already, but you know, about a couple more days. But it's got a lot of images. Yeah, it's felt as I've talked to bankers who are here and others in the industry exceptionally timely this year given the disruptions in the market both I mean, got interest rate issues, You've got the collapse of Silicon Valley Bank. It's like everybody's trying to figure out is there contagion? Is there not? What do I do? What's the is there a recession on the Jurado I logged on my balance sheet? What am I doing about to pot? I mean, it's like a moment when people really need the community and to talk through some of the pretty substantial issues facing facing the space.

1:53 Yeah, we've had to pivot a little bit of change our agenda on the fly a couple of times to make sure we address those things as best week can and to provide the opportunity for conversation around these really important issues for thank you and our customers. Yeah, I don't even think it's the agenda. So much is just people sitting in the room, whether it's in the committee meetings or in the hallways between going hey, wait, what are you guys seeing? I was having a fascinating discussion with some of the folks from the small business can be talking about the risks of fraud with the number of inflows and outflows of deposits as people try and find what they think of as to save haven and they go last like a moment when but now I'm worried about FLAUD because I've got so much more activity in the space than it can be easier to get for fraud and activity to get lost or for people to find it's time to take advantage. So it's I think it's a fascinating time to have those conversations happening. Yeah, when we started that first weekend, we're trying to figure out how does CBA a value to its members and it's it's collaboration, it's convening. And the thing we were hearing was brought and it wasn't actually happening. It was a risk of it, right, and so we're trying to make sure that we hear what's going on, work with our regulators, try to stay on the forefront of rising issues, potential problems.

3:05 Yeah, yeah, that's great. So I want to talk a little about legislative priorities and what you mean you kind of work with legislative affairs the US government. There's a lot of questions around the future of regulation after SPB, but I feel like that's maybe an overdone topic in a little too recent to really know where the t leaves are going to settle on that. Lots of people suggesting things are going to happen, but I'm not sure that we know what to expect yet. Well, it's early. There's a lot of conversations in Washington around remedies. What was the cause? Right, the root cause of a problem? Yep? Is it isolated? We're gonna have a lot of pugressional hearings. Yeah, I think regulators are going to do some horizontal reviews particular segments of the market, some self evaluation regulatory agencies, Yeah, trying to figure out is this an issue that is systemic which we don't believe at all, is the as how do we look at this this was unique?

4:04 And how do we look at our risk management as institute? She's but also regulators to account for these type of things and the run on the bank how fast? Yeah, twenty five percent there deposits in one day. I mean that's a that's a liquidity event that almost no bank is really expecting her trying to prepare. And that's not in the range of like things that might happen, that's not really on my risk management less things to be prepared for. And she's a very difficult situation. Banks have you know, a game plan a book like if this happens, open up the book. Well, we have created a new book now, or at least at a new chapter. That's right. When somebody tweets what do we do? So the whole New world interested, But there is I mean maybe the agency that has the most going on in terms of rulemaking and to the regulators already changes is the CFPB. So talk a little about what the priorities you see coming out of the cfpbum from real hid show bro, Like, what do you expect to see and I know their specific legislation. We should dive into our rulemaking things that are going on. So just gimerally, what do you see as the priority is to starting to people dive into some specifics. So what I like to tell people is think about the clock and the calendar, and we have an election in the follows coming up. It's coming up now that the director it can be fired at will. It sort of changes how that director looks at their time there, and so that the clock starts ticking and they start working their way backwards to when what's known as the Congressional Review Acts. There's

5:38 a period of time then in Congress as his ability to review final rules, and it's roughly sixty legislative days after publishing in the Federal Register. Okay, so everybody's guessing what is that date, So it's roughly April and May of twenty four that a rule has to be fine by that point to clear the urdle of the Congressional Review Apps. So when Donald Trunk came in, they repealed the use of Congressional Review Act to repeal several rules, right, and so they want to make sure that whatever they're working on now is final by let's say March or April, so they avoid the Congressional review. A clock is ticking, clock is ticking. So you got three rules that are in in a final stage or in close enough to make this shot. Get the shot up where the clock runs out that's right, and it's a race to that clock. Right, So we have ten seventy one small business data collection.

6:38 It's going to drop in the next couple of days. It has to because of the court case in California, and they set a date. Court did by March thirty first, so we'll have ten seventy one final. The Bureau is clearly indicated ten thirty three the consumer access to final records that we will see a proposal in the fall, with a final rule likely in January February, giving him enough time before the deadline perceived it. And then the credit card late b proposal that the NPRM noticed. The proposal will make is out that a comment period on that will end roughly end of April. We are anticipating probably a final rule in the fall. The director has been pretty clear in its timing up things, which I'll give me credit. That's not a typical thing of the agency. You don't know when a rule is going to be final or where their attent is. Yep, he's been pretty clear about that. He talks about being transparent. We may not agree with some of the things he decides, what he's pretty transparent on what he's thinking on what he's thinking in the time he plants execute things. Well, gotta appreciate that. Yeah, I guess. I guess if I have to appreciate that, I'll take that one. Yeah. That's it's saying. You know, well, let's dive into these let's talk about ten seventy one. What do you what do you expect the outcome of that to be, and what do you think the impact for the industry is going to be. It's gonna be an interesting shift, enormous. It's an enormous undertaking that every institution, not

8:11 just banks, are going to go for it, and they do any small business to game changer. We're expecting the rule, as I said, to come out very soon, where we anticipate not too many changes from the post. I think it's gonna be pretty much the same. We have some serious concerns, but I think the biggest challenge will be the implementation timeline. So in the proposal they were going to give eighteen months. That will be nearly impossible, and we've been telling the Bureau of that. You think about small business lending, it's not like mortgage, where a bank will have a mortgage operation viewing it and all of the mortgages are run through that small business happens across the entire bank in different places. Yeah, So they first have to align and communicate their operating systems, and then they have to standardize the definitions of the data they're going to collect. So it's a data collection like HOMDA for borkages, and so they have to standardize how it's all defined. They have to change all their systems. They got to collect all that data, and then the heart part starts because then they start evaluating the data for what it means in terms of fair lending or in fair banking. That brings in a whole nother discussion, but that's post operational challenges. So I think that that's the big thing. You're going to rely upon your core processors. You're going to have to make an enormous amount of changes to your systems. And by the way, there's probably going to be a CRA updates to the Reinvestment

9:46 Act at the same time, which is an enormous undertaking. Another type another large technology and data undertaking in itself, the small business data collection is enormous, and we are working really hard to help the bureau understand those challenges. How do you think eighteen months is just not enough time for a lot of these institutions. What do you think the right timeline it like, how long will literally take banks to be ready, minimum twenty four months, but even then you're going to have pieces that aren't going to work great. You're going to have data collection errors and problems until you What we hope the Bureau does is if they're going to stick with the twenty four or the eighteen months, that they stagger implementation. Right. They've done this in the past where they said, Okay, the big guys you need to be ready in eighteen months, and then the middle guys you got thirty six and the little guys you got forty eight months to be or they can stagger the type of data or the disclosure of a data. So we're optimistic can hopefully they will consider this and we will continue to educate them on the challenges. They know. It's hard. Yep, there's that clock ticky. Yeah. Yeah. The other thing that I'm always curious about is what comes next in terms of to so many. One is kind of about the collection and the reporting of this data, but then there's the like, now, are we happy with what it says, if not, what do we do? What are the standards that apply to what we expect? What is the fair lending standard? Once we have this data, how do we know if we're in a good place or

11:16 a bad place? Even sense of what's going to happen on that front. That feels like the real changes we theoretically want to make come from knowing the data, not from just collecting it. It's like that kind of starts the real process of because there are changes to the industry we need to make. It will shine a light on small business lending that we've never seen before, and so that's probably the upsiders we'll be able to see that data will all be able to see. It's publicly disclosed. Yep, we can see where there's gaps that brings in regulatory risk their lending risk, for sure. But at least we know what it is, where are there gaps and how and we facilitate better lending in communities that need it the most. Are there clear standards on what the fair lending expectations will be, like how we're going to measure what's good what's bad on the space hide I mean, they're always actually to me on the consumer side. But I would say you have to look at the hum to rule. You just figure humed is the same thing small bits. It ras election for mortgages. This is data collection for small business offices. So that's how you should look at it. Now, it may not be apples to apples, but it's a really good comparison for an institution.

12:20 All right, ten to seventy one, that's going to be interesting times. Next one you meant ten thirty three, I gotta like, I don't have all the numbers the back. I got a certain numbers in the back of my head and I don't have them all. But this data aggregation concept. Talk to me about what this rule is. First for the audience members that may not be as familiar, and then where it's at sure, so section ten thirty three of the Dodd Frank GAC that's that's where the number comes from. It's a page wall, it's a readable, there's a readable. Five is now writing a rule that will probably be north of a thousand pages based on the one page is going to be a lot of fun, But only a filmal regulator to do that. It basically says the consumers ship should have access to their financial records. That makes sense, that's it. The rules will be much different than now because there are new entities in the market, data aggregators such as BLAD for example. Yeah, who can gather the information from the bank, from the credit card company, from the holder of that information, take it and provide it to third parties. And then there's the third party and that could be anybody that has the consumer's permission, So it's all consumer permission down missions information. It will change the way the market operates because it's in the concept of open banking. It's not true open banking as in Europe, but it has a lot of characteristics. What are the differences for me? I mean, I'm very familiar, not very plied,

13:52 but the concept of open banking in Europe where I really have to provide the data in a machine readable format for interoperability, that's a really interesting idea. What's the difference between what's being proposed in ten thirty three and so the people what's in your out so you don't know and she got it doesn't spell it out like they do in Europe. Right, it's as I said, access to financial records and what the bureau does, how they expand that is going to be very interesting. Uh, you know they're they're talking about establishment of epis rather than screen scraping. Yeah, so it's going to change the market in many aspects. We're concerned that the uh data that's being moved around needs to be very secure for sure. The players in that ecosystem need to have the same standards of security and oversight, which they don't have. Uh.

14:48 Uh. Data they're sending is very sensitive. Um. And if it's going to be a true open banking world, it really shouldn't incorporate financially institutions data of all kinds. Right now, the outline only covers bank transaction information and credit card information. So if you get your auto loan from a captive auto lender, let's say VW Right whoever, they are not going to have to comply with this. Interesting, So you're gonna have segments of the market that don't aren't held accountable as the banks and credit card companies quicken loans. There are non banks, this will not apply to them. A lot of mortgage has gone through and so the non bank lendingsumer is going to assume that they're getting all that their information. They're not, So it's a complex, really market shifting um rule, and there's a lot of challenges to it and risks associated with it as well. I imagine too there's the question of like how good is the compliance and security on the receiving side. Mean, just because the consumer says I want you to share my with this party does not mean the consumers done full diligence. Because I've been screaming about that for a while.

16:04 How do we know that X fintech company has the systems in place to secure that data? We don't. And there's no federal agency with oversight that can go in and look. The CFBB can't go knock on the door and say, show me how you're complying with this rule. They can do an enforcement investigation, but they can't examine active basis. So we're we've been pushing the bureau to look at that. We think it's a system that they need to think about that. Plus liability also the shift in if there's a breach, So if the bank's holding all this sense of infigation and somebody acts the bank, there's a liability there. If that same data goes to a data aggregator or to a third party, and there's a breach. Where's the consumer going to turn? Are they going to go to the data aggregator or we go to the bank exactly. Yeah, so we don't think that's the right approach to either. If you have the data all the day, help we should be responsible. We would halt accountable for Yeah, it just seems interesting to me because it's reminds me of you know, when that I want to go back to the clops BESTVB. But there was a threat of conversation that was following this. So, well, depositors deserve what they got because it was their job to look into the proper asset management of their bank, Like like the depositors were looking at the quarterly filings to figure out what kind of assets the banks have bought they were the safety and soundness oversight was going to come from depositors looking at them. So that's kind of ridiculous. And here you kind of going, well, the consumer will look in. They won't ask the bank to transfer their data to an unsafe party. It's the consumers responsibility. Will maybe the consumers it's not owning that responsibility the same way we

17:37 might think is critical and the context of this kind of information, the same way the bank would be held accountable to a regulator to do. I think that's if we think the consumer is going to be the oversight line of defense for their data not ending up in unsafe places. That's probably a bit like asking your depositors to make sure that your bank is making sound risk management dicisiences. It's really not the right oversight mechanism in place. Yes, where who? We hope that the Bureau will factor that into their rule. I guess we'll find out over the next few months. Your other area was the overdraft credit card late fees overdraft fees section of role machias. Talk a little bit about what's going on in that space. Sure, So the Bureau has proposed a rule to lower the safe harbor on credit card lea. So the Febble Reserve about a decade ago said, if you're going to charge safe harb a late Yep, We're going to establish a safe harbor that says, if you charge x amount, no matter what you do, there is no risk of being sued on that. We've we've created the safe harb. The Bureau has decided to take a fresh look at it and decided at the moment proposed to lower the safe harbor from currently a thirty one dollars down to eight dollars.

19:02 Wow, so dramatic reduction and big reduction. It will have a significant impact on the market credit card market, for sure. We believe it will have ramifications for some consumers. Certain segments of the market will be impacted more than others. They Bureau does not really address the deterrent factor of a late, so you run the risk of consumers failing to pay their monthly payment, which more commonly because they why should I have two bills do and one's got a penalty and the other doesn't. I'm gonna pay the late, But as you wait for thirty plus days, you're delinquent and you're gonna get recorded to your credit bureau, so your credit score is going to go down. But I'm not sure every consumer understands that. I'm sure they don't. At least some number of them do, right, So we believe that, you know, this should be a very thoughtful process, data driven analysis, or we're not sure the Bureau has done a very effective job at analyzing the data and accurately calculating the collection costs involved. And so we will be encouraging the bureau to take a closer look at how they're analyzing the impact on consumers. There's also, in my mind always this question of kind of second order impacts, like

20:33 what happens to the approval rates, who gets access to credit cards or the lines of credit that are issued when when these things change, it's not just like well, it's kind of like I want to get too politically here, but I guess I'm talking about leegedly, but like you see rank control, Like there's the impact that the people who are paying rent, and there's the impact on building housing, the amount of stock that becomes available because of the prices that can be charged. In an analogy, and that's tough. The balloon, when you squeeze it all one side, it's got it's gotta go out there other So what will happen? There's a lot of possible things. There could be increase in the interest rate over charge to sure right, there would be a clow scene of dormant accounts. So if you havn't used your account and shut that, shut it down, shut it down. You could decide and likely opping is you won't decide who you're going to actually extend credit to the reduced number of people you're doing credit and how much right, and if you think that group is a riskier and may not either bills may not extended them credit. Yeah. So it's a fascinating time in the credit cards Mose. Yeah. Yeah, it feels to be like so much government policy ends up not understanding the second order effects and optimizing for a first order of fact and occasionally not calculating the second order the law of unattended consequences or whatever it may be. I think regulators really shouldn't do is um combine regulatory policy and politics. It gets messy. We've seated in the penest that when you

22:10 do that can really mess things up. Yeah, so that is one of the biggest risks with regulatory interventions that day they look at it from a political as rather than a safety and sound and sewer protection at large. Yeah. So if you're talking to members bankers who are then saying, hey, there's a lot of stuff up in the end, there's a lot I'm moving parts. What should they be doing to prepare to think about how do I, you know, get ready for what may be coming down the pipe and the changes that are that are you know, possible coming both technologically business wise. What do we what do we do to adapt? I start out with, you have a rule that's going to be final. You're going to have to put significant resources on the ten seventy one small houses did. But then I also be quickly to overdraft. It is a major issue or the current administration or the current director. We believe that it was in the Unified Agenda that they're adding overdraft. It is a significant and auduct of almost every bank in the country, for sure, and you have to look at the risk of that either being highly regulated or going away in some form regulation. And how do you how do you manage that risk, not just for that product, but you are you know your revenue side, and every institution is different.

23:34 And you can see that many CPA members have pivoted on their overdraft programs in the last year or so, pivoted. How how do you see em pivoting? What's the So A lot of them have changed their under overdraft practices. Some have lowered the overdraft fee, some have put a diminimus so if you overdraft by fifty dollars or less, they won't charge, and there's no fee to have Some of them have a twenty four hour ruling off period that if you overdraft, but you cure it within twenty four hours, there's no Some have eliminated it all together, many of eliminating the non sufficient funds charge. But that is many CBA members, but that's not the entire banking ecosystems.

24:21 Many banks that happen to changes. We will see what the Bureau decides terms a rule a rule and how restrictive or what kind of approach they have. You seen motion among the members to find a more traditional lending alternative. A lot of times it's overdraft these it's like a small dollar loan in disguise slip and we're really excited about it. When I was at the CFBB, we a lot of work urged backs with it. Two of small dollar products. Yeah, it's really challenging. It's very hard to operationalize that with losing your shirt and to at least make back your Yeah. And so we've seen at least five major banks in the last six to eight months introduce small dollar loans and so far, so good. They see it as a product to help their customers so that they're not leaving the banking system rather than looking at it as a revenue center as much. Yep. It's it's okay to use this product to help your customers stay in the bank rather than go outside. So we're continuing to have conversations with regulators to encourage them to encourage our banks to do it. You think it's needed. There is a clear need for short term liquidity, yep. And if you're going to regulate overdraft, it's like the balloon they're gonna have to go. So we need the money, they need the money, they're gonna have to get it. So where they're gonna

25:51 go payday loan is worse, eighty days worse. We would prefer that they stay in the banking system. Yeah, yeah, but it is to your point. Are to operationalize a small dollar loan at a cost that is recouvable on that duration in dollar amount. I mean, it's just even at any reasonable industrate, there's not a lot of money in that. And so the handard across his hard board of a bank to support a program going into it knowing it's tend to lose money. We're not in the business of losing money. No businesses are. Let's spend x amount of money knowing that when we actually roll the product out, it's coles after the vestment. Hitles just lose money for it's not a good look. So I'm very investment the banks that have done it, Yep, they understand the need. They're evaluating what the 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 looking at it from a different lens. Retain our customers and what's the value of that versus just your revenue on this product, on overdraft and on small dollar to changing how banks are looking at it, there's more competition, so you sort of look at how do we maximize our ability to keep our bustomers and help them become the better buster. Yeah yeah. Let me ask you one last thing, which is what do you think separates institutions end up with good relationships with their regulators from those that strong I mean, I've seen it's really funny. Is it worked with a lot of banks. I'm sure you seen this. I had two banks who gave a totally polar opposite answers about how they wanted to work with their regulators, and I thought that they had the same ic, not just the same just the same regulator with the same guy walking on the doors. I don't know if you knew this. When I worked at FEAR, I managed the relationship we industry in bureau, I did not know that. So so I dealt with all of the banks, all of the financial institutions and help them navigate how do you interact with your regulator the bureau Later and the positive part of Valley speaking a positive impact and the value of having include having a yeah. And there were a couple of banks, for instance, that were rock stars at it, and I wouldn't tell them, like, you guys have the huge advantage of your better because 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 it because they're afraid of They may say something where if I go talk to this person, it may refers to dig the enforcement side, which never happened when I was there six years. I never saw like somebody talk to the markets teams, they get up call the enforcement here that the Bureau when your career step like that's your job and if you ruin that relationship. You're done, like nobody's gonna talk to you. So and plus people don't come in and disclose things that are illegal. That's not not These are conversations about markets, what they're seeing, What can we as a bank do better. I saw a lot of banks who prove of the years and their relationships. They should feel comforted talking to their regulators. It's important so that they understand how you operate because every institution is a little bit different and they don't understand all those dynamics. So the more you share with them, the different pressures you're feeling, the different dynamics within your market, it's it's critical that they understand them. Interesting so early often communication on broad topics. Yeah, it's it's just been fascinating to watch how those you kind of as an outside somebody, came from a different issue. It should just be like a consistent approach, and it feels like it's a very different sid relationships. It's fascinating to see how some navigate that to their advantage of others, to their detriment. When I was at the Bureau, I was starting thirteen in this role. I 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 don't know if it was just they were just not well connected and couldn't figure it out. But the second we actually were able to sit down, got them in front of the director, had a great conversation. They instantly saw the value and quickly turned one the best. They would come in on a quarterly basis. They bring in different people in the institution, from the CEO to the head of consumer lending. We had banks come in and get the fraud people would come come in and scare the heck out of us, but it really showed how smart they are. Yeah. Yeah, there's some of the large banks and they bring in the cybersecurity people and they scare the heck out of the bureau. But it actually shows like this is what we're doing to protect our It reminds me of this. There's a saying it silk in value when they whenever you come upon a seeminglarly stupid decision or you ask how did this decision get made? It's usually a thoughtful person making a thoughtful trade off that you haven't yet contemplated, which is like usually these things that seem not to make sense to you. Are there because of some other trade off, some other considerations you you couldn't even think about yet this I'm smart, thoughtful, well meeting person made. And the more you can make people aware of what those trade offs are, what we're seeing, why maybe we've got these extra rules in place to open a well, we're seeing a huge ticketup in fraud. Show you some examples of what fraud looks like. Oh my god, that's terrifying. Yeah, and that's why we're Be's why we're doing these things. I think the better off you are to help people understand where 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 a whole bunch of new numbers I'm gonna have to try and memorize in my head. But thanks for taking the time. Thanks for having me. Upstart partners with banks and credit unions to help grow their consumer loan portfolios and deliver a modern all digital lending experiments. As the average consumer becomes more digitally savvy, it only makes sense that their bank does too. Upstarts AI lending platform uses sophisticated machine learning models to more accurately identify risk and approve more applicants than traditional credit models. With fraud rates near zero, upstarts all digital experience reduces manual processing for banks and offers a sple and convenient experience for consumers. Whether you're looking to grow and enhance your existing personal and auto lending programs or you're just getting started, upstart can help. Upstart offers an end to end solution that can help you find more credit worthy borrowers within your risk profile. With all digital underwriting, onboarding, loan closing, and servicing, It's all possible with Upstart in your corner. Learn more about finding new borrowers, enhancing your credit decisioning process, and growing your business by visiting upstart dot com Slash four dash banks. That's upstart dot com slash foward dash banks. You've been listening to Leaders and Lending from Upstart, make sure you never miss an episode.

32:42 Subscribe to Leaders in Lending in your favorite podcast player using Apple Podcasts. Leave us a quick rating by capping the number of stars you think the show deserves. Thanks for listening. Until next time.