How consumers borrow, invest, store, and send money is changing more rapidly than ever before, and the pace of that change is only set to accelerate.
State regulators have always been responsive to changes in the industry, responding to innovations in banking in finance for over 100 years.
But the changes affecting financial services in the past several years are different. Companies and transactions are becoming faster, more complex, and more interconnected than ever before.
So, state regulators adopted a more dynamic and collaborative approach to supervision they call “Networked Supervision.” Networked Supervision is designed to not just respond to changes in the industry, but to proactively improve supervisory tools before they are needed.
Today, I talk to the head of CSBS, the organization tasked with helping states stay ahead of the curve. We discuss what states have been doing the last few years to meet the needs of a changing industry, what companies and consumers can expect out of their regulator in the coming year, and how supervisors are changing their approach to tech to work harder, better, faster, stronger.
How consumers borrow, invest, store and send money is changing more rapidly than ever before. And the pace of that change is only set to accelerate. Now, state regulators have always been responsive to change in the industry. They've been responding to innovations in banking and finance for over 100 years. But the changes affecting financial services in the past few years have been very different. companies and transactions are becoming faster, more complex and more interconnected than ever before. So, state regulators are adopting a more dynamic and collaborative approach to supervision. They're calling it Networked Supervision. Networked Supervision is designed to not just respond to changes in the industry, but to proactively improve supervisory tools before they're needed. Today, I talked to the head of CSBS, the organization tasked with helping states get ahead of the curve. We discuss what states have been doing the last few years to meet the needs of a changing industry, what companies and consumers can expect out of their regulator in the coming year, and how supervisors are changing their approach to tech to work harder, better, faster, stronger. All right, well, once again, I am joined by the CSBS President and CEO John Ryan. Thank you so much for joining me today, John.John Ryan:
Thank you, Matt. Great to be here.Matt Longacre:
So today we're talking about something that is a new concept, but not really, more the word is a new concept. So I wanted to I wanted to talk about network supervision. But to get there, I wanted to talk first about something we covered in great depth over the last three years, which is Vision 2020. So over three years ago, CSBS and states launched Vision 2020. As the year 2020 came to a close, can you talk about what we've learned?John Ryan:
Well, we've made a lot of progress. And our goal from several years ago, as you mentioned back in 2017, when we launched Vision 2020. And its progress around harmonizing state regulation. With evolving technology, we learned a great deal. So, a first ever, we established the FinTech industry advisory panel, and their report helped inform a lot of our priorities, that industry feedback can be really productive. They made recommendations back in February of 2019. And we've been acting on those. We have taken an initiative that started with one state, Washington, and made it a national priority for CSBS. And that's the MSB Multistate Licensing Agreement. 29 states have agreed to that, and that's reduced in half the time that it takes an MSB to be licensed, we've through that set benchmark standards for MSB supervision to increase state collaboration and joint exams. So something that we refer to at CSBS is "One Company, One Exam," we've gone from pilot to program. On that meeting, we started with just one company and working towards among all the states that we could get to one exam for that one company over the course of the year, through either coordination or states accepting that exam from that now, in the fall, we launched for 2021. In the planning is well underway to have every company that operates in more than 40 states subject to One Company, One Exam. So we have 75 of those exams scheduled for 2021. We deployed and updated the 50-State Consumer Finance Survey, which includes a comprehensive catalog of state usury laws. So there's one place to go, that was a request from the industry. And multi-state harmonization has been such a part a core part of our Vision 2020 initiative for nonbanks, that we're expanding the concept to all areas that our members supervise. And as Matt noted, we've given it a name. So Vision 2020 that goes beyond 2020 and is Networked Supervision.Matt Longacre:
What does Networked Supervision mean? And why is it so important?John Ryan:
So Networked Supervision is a new strategic approach. And I have a new strategic approach for non-depository supervision, but a new strategic approach towards finding a balance the interests of companies who want to operate in a multi-state basis and consumers and that accountability that is such a prominent feature of state supervision. It expands the use of technology platforms for faster, more efficient, streamlined licensing and supervision. And it facilitates greater connectivity with industry and consumers. So as an example, through our State Examination System platform operated through CSBS, developed by the states in consultation with industry, states can now share consumer complaints with each other, and use and track those complaints to look for trends and developing risks. And down the road, consumers will be able to submit their claims directly into a portal. Consumers will be better protected, regulatory burden will be reduced, and state and local economies will really benefit from this level of coordination. So it is a marked change from the past of how state regulation and non-depositories has occurred. I can't overemphasize that.Matt Longacre:
So we've talked about this as a as a new approach. But I know you and I have talked plenty of times over the years about these very same concepts, maybe not mentioning them as network supervision, but a lot of these same concepts from before. And you've reminded me plenty of times that state supervisors have had a long history of being responsive to change. So can you just give me some examples of previous times where where state regulators, you know, took the leadership or took charge of a change that was needed, and were really proactive in their approach towards changes in the industry.John Ryan:
What really started with banking, and many listening probably weren't even around at the time, the banking looked like this. But you don't have to go back very far to the 90s and late 90s, before banking fundamentally changed. The the original network approach was on a regional basis, with some states coming together with compacts to facilitate interstate banking and branching at the time, banks. If you had a bank, it was chartered and regulated in that state, whether it was a state-chartered bank or a national bank. So this was a an agreement that started out on a regional basis in the southeast and mid-atlantic, the went national, and the Nationwide Cooperative Agreement was the first Networked Supervision model in the States. And it wasn't easy to get there. But the States did. And now we have a seamless system of multi-state operations for banks, state chartered or national banks. The states led the way on that. We also then have further innovation on the non depository side with the NMLS. And as I said, this is part of the evolution of technology. The NMLS did a lot to create at the state level and then working with Congress to create national standards, but there was a lot of it that was just automating existing processes, as opposed to where we're going now with Networked Supervision and fundamentally rethinking the NMLS. But in 2008, the NMLS launched the concept of it started earlier, back in 2004. We started development in 2006, and the NMLS launched in 2008. And then most recently, Vision 2020 really conceived of a networked approach between states to create efficiencies and greater harmonization. And now we get Networked Supervision. It's really putting words to a concept, but then deepening the meaning. And again, as I said, you know, the mirror to the face and seeing how does this system function in the next 10 years? How do we sustain the important elements of our system of federalism, and that accountability at the local level?Matt Longacre:
We're talking a lot about how states interact with companies. Do federal regulators play a role in Networked Supervision?John Ryan:
Absolutely. So something that gets really lost in the conversation that we're having about the role of the federal government and the state government... It sounds so often when you read the headlines in the articles, and you see some of the litigation, you know, the we're involved in, it sounds so us/them. And it shouldn't be. And this is where I think we're wise to look back at our founding fathers and what they attempted to achieve. In creating a constitution that linked together all these states, it's, it's an "and." And there's certain things that are retained by the states, there are certain things for the federal government, there are federal interests or state interests. And we see that evolving to an "and," there are federal there clear Federal Interests here, and they're evolving and changing. So, for instance, the Bank Secrecy Act, the states regulate more institutions subject to the Bank Secrecy Act than the federal government does, and transactions, global transactions. We have a strong relationship with them. We can build towards an even better information sharing relationship and transparency through this networked approach to supervision with technology at a foundation. Cybersecurity is a critical risk at both the state and the federal level. And we can share and link up the information that we have... supervisory practices and interests that the federal government identifies. This is all deeply linked. Prudential standards that the states have been developing and lead the way in seeing the need for them for large mortgage servicers. The federal government has recognized this interest. The Systemic Oversight Council, so led by the Treasury Department, states are a member of, have identified a need as servicing has migrated from the largest banks to large nonbanks. And so coordination with Ginnie Mae, FHFA, around our supervision towards standards is critical. With consumer protections, the CFPB has examination of not a lot of, but really big players, not a lot of institutions, but really big players. We coordinate around that. But we have the ability to share information, reach and data, and trend analysis as we evolve with the CFPB. We do this already. It's just going to get better and more tech-enabled with our model of Networked Supervision.Matt Longacre:
If I'm trying to coalesce all of this together, so I'm imagining, you know, if someone from the industry is potentially listening to us right now, you've shown what we've been doing over the last several years, you've shown how our history led up to that point. You've talked a good bit about what we're currently working on and how states and the federal government are working together. What is the end result for for someone in the industry, when you think to the future? What do you envision as the ideal state for licensing, chartering, examinations, supervision? What is that gonna look like?John Ryan:
I think a lot more of leveraging technology, the ability to conduct offsite supervision, that in-person is still needed, but really efficient, greater efficiencies around data collection, sharing exam reports, transparency into the examination process. Those are all things, whether it's licensing or examination, that I think you can expect, that you have a single portal that the states have developed through CSBS, around that licensing around that supervision, you know, where things stand at all time. There's not a black hole, where you wonder where your application is, ease of communication, effectively communicating with multiple jurisdictions, coordination behind the scenes of those multiple jurisdictions around that licensing and supervision. It's just much more seamless and easier to understand process. And I would say the same is true on the consumer side is an easier to understand process. It's been 15 years since I first started working on some of the concepts around greater transparency for consumers, you don't know who regulates you. If you have a problem, where do you go to? This predates the CFPB. Just a much easier to navigate, more seamless, more transparent system.Matt Longacre:
So it sounds like to me that the idea is for consumers and for industry, just having a better user experience when working with their regulator or when they have an issue.John Ryan:
Yes, I think the things that seem complex get worked out behind the scenes. And the interface is much more user-friendly.Matt Longacre:
If we just look ahead just for this year, because there's a lot of steps to get to this ideal end state. What do you see happening in the year ahead with Networked Supervision?John Ryan:
We have Networked Supervision priorities for 2021. And those include taking the One Company, One Exam concept, which has now become a program for MSBs. And the goal of all 50 states or all jurisdictions, depending on whether they have authority or not. But all jurisdictions that license and regulate MSBs will either participate in or accept One Company, One Exam. So it truly is one company, one exam. A pilot One Company, One Exam for mortgage that we believe will have the same success with that functions in all 50 states. The goal is 50 states participate or accept this and that we're able to roll that out into a program, not in 2021, but probably 2022. Nationwide adoption of the MMLA. Approving prudential supervision standards for mortgage servicers, and that there's a coordinated approach. So you link up that concept of One Company, One Exam for mortgage and apply the standards so that they're consistently applied. And you have one prudential examination report, if you're a non-bank mortgage servicer. You've got one cyber exam if you're a mortgage lender service or one cyber exam if you're an MSB. So these are the things we think are foundational for 2021. Also, we're in the process of investing a lot of money and rebuilding the NMLS. And as I said, a lot what it did was automating existing processes. We're taking this Networked Supervision approach, and more single standard and the board is supporting building rebuilding the NMLS to that concept, building in those standards, so we're effectively automating nationwide standards, some of the concepts that are being developed in our model laws and regs into a new NMLS. So there's a lot more upcoming, but I think what you're seeing is more specific time-bound priorities for Networked Supervision.Matt Longacre:
So like you said, all of these things together, summarized sound like faster, better, more efficient licensing and chartering; faster, better, more efficient examination; and consistent data and tools available to regulators. So you know, you talk about Vision 2020 and Networked Supervision fitting together and that network supervision is a continuation of this approach. That must mean that many states have been making significant progress on a lot of these technological changes. Where are states with these steps that you've described now?John Ryan:
We have made tremendous progress. And, you know, I don't think we would commit to all 50 states doing some of these things in 2021 if we weren't making a lot of progress. But that focus that prioritization, there are a lot of things that we have out there initiatives that can advance Networked Superivsion. What we're doing now is prioritizing those, making sure we're successful learning those lessons, and then applying them to other areas or other industries. So a perfect example was that focus that took place around the One Company, One Exam pilot for MSBs. We a lot of learning in that process. But it allowed us to take this out to from one to 75. And now the goal is to focus that conversation with the states on how can you participate in this or accept this exam. So that's where they are, but we're very close. It's going to take us this year to get there on some of these concepts. But we took the learning from that, and now we're applying it to the mortgage industry. With this one pilot, then I'm sure will expand significantly. The tools provided in SES have a common technology platform for these exams is going to be critical to that success. We launched it last year. And we're continuing to build out that functionality to support this multi-state model. So where we are right now is there are varying degrees of states getting on to the State Examination System, which is going to be the platform for a lot of this coordination. There's other work in terms of developing consistent examination standards for cybersecurity, as I said, for prudential standards for servicing, there's incredible communication going on between and among the states, and a commitment to working together. So this is the next phase. And we're really just getting started.Matt Longacre:
You're describing states working together, coming up with similar standards, making these agreements, leveraging technology to be more efficient. Someone who's listening to this might come to a conclusion that, oh, this sounds like you're moving more towards a federal system. What is the benefit here? Why are we still leaving these responsibilities with the States? Why is it so important, that states still supervise these non bank entities and these state charter banks, and they're the ones who are making these agreements and building these platforms?John Ryan:
So this balance between state and federal over creation of corporate existence, and the protections around that was a major discussion at the time of our founding in our Constitution. And that is, because coming as a British colony, where charters were given out by the king, and had great benefit associated with them, there was a lot of distrust and skepticism about that kind of centralization. That's still true. And I see that I see the distrust that exists in the broad public around our banking system sometimes, and the lack of accountability of our largest players, and who, their regulator, mostly the largest players are our large national banks, chartered by the Comptroller of the Currency, who's taken a position of preempting state laws and state accountability, and creating kind of a one-stop shop for these entities. And you can understand why that's appealing, it's very efficient, but those efficiencies gained are at the expense of our democracy, and our democratic processes. And these issues evolve this accountability evolves the importance to our public evolves. And we need to preserve that. So what we're talking about is, I think, very foundational and fundamental. It is a federated system, without always the need of federalizing everything at the expense of the state. So we're trying to maintain that balance of accountability, which has resulted in a community banking system. We have had a lot of consolidation, but we still have more banks in the US than most, really anywhere else in the world. And those local institutions are the lifeblood of local economies. And you look at just recently, the PPP program launched by the federal government, the community banks had an outsized level of participation in that because they serve small business at at their core. So these kind of foundational pieces of serving small business, Innovation and evolution of consumer protections at the state level, privacy laws, all sorts of things that have all started the state level and continue to evolve. We don't want to freeze this at one point in time. And I don't think we want a system that's accountable, sometimes doesn't even feel accountable to Congress, but a sin le regulator. So I really think it's about innovation in the system, maintaining an innovative structure that allows new competition, both bank and non-bank, that whole non-bank world is a creature of the state system, that you don't have to have the approval of the federal government to create these new types of business models. And the risk of failure at the federal level. The reason we've had so few banks charter in the last decade, is the risk of failure can be very expensive. They're treated banks are treated differently than any other type of businesses, not subject to the bankruptcy courts. And that creates stability, but as well as risks for the federal government to the FDIC fund, that creates a lot of risk. So this consolidated industry, risk to the taxpayers, all your eggs in one basket, lack of accountability probably prevents innovation and gives advantage to a handful of players. I just don't see that as a great future in a democratic society and a system that has historically been so innovativeMatt Longacre:
So to sum it up local accountability for for supervisors and for institutions is better for the consumer and better for democracy?John Ryan:
And better for the economy.Matt Longacre:
All right. I think that's a good way to close this off. That's a really helpful summary of what network supervision is and where we're going. John, I really appreciate your time. And I hope everyone learns a little bit from this just like I did.John Ryan:
Thank you, Matt. It's always fun.