JULY 2018

U.S. D E PARTM E NT O F TH E TR EAS U RY

A Financial System That Creates Economic Opportunities Nonbank Financials, Fintech, and Innovation

JULY 2018

U.S. D E PARTM E NT O F TH E TR EAS U RY

A Financial System That Creates Economic Opportunities

Nonbank Financials, Fintech, and Innovation

Report to President Donald J. Trump Executive Order 13772 on Core Principles for Regulating the United States Financial System

Steven T. Mnuchin Secretary

Craig S. Phillips Counselor to the Secretary

MENT OF THE

1789

THE DEPART

TREASURY

Staff Acknowledgments

Secretary Mnuchin and Counselor Phillips would like to thank Treasury staff members for their contributions to this report. The staff's work on the report was led by Jessica Renier and W. Moses Kim, and included contributions from Chloe Cabot, Dan Dorman, Alexandra Friedman, Eric Froman, Dan Greenland, Gerry Hughes, Alexander Jackson, Danielle Johnson-Kutch, Ben Lachmann, Natalia Li, Daniel McCarty, John McGrail, Amyn Moolji, Brian Morgenstern, Daren Small-Moyers, Mark Nelson, Peter Nickoloff, Bimal Patel, Brian Peretti, Scott Rembrandt, Ed Roback, Ranya Rotolo, Jared Sawyer, Steven Seitz, Brian Smith, Mark Uyeda, Anne Wallwork, and Christopher Weaver.

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A Financial System That Creates Economic Opportunities ? Nonbank Financials, Fintech, and Innovation

Table of Contents

Executive Summary

1

Nonbank Financials, Fintech, and Innovation 4

Emerging Trends in Financial Intermediation 6

Summary of Issues and Recommendations 9

Embracing Digitization, Data, and Technology

15

Digitization17

Consumer Financial Data 22

The Potential of Scale 44

Aligning the Regulatory Framework to Promote Innovation

61

Challenges with State and Federal Regulatory Frameworks 63

Modernizing Regulatory Frameworks for National Activities 66

Updating Activity-Specific Regulations

81

Lending and Servicing 83

Payments144 Wealth Management and Digital Financial Planning 159

Enabling the Policy Environment

165

Agile and Effective Regulation for a 21st Century Economy 167

International Approaches and Considerations 177

Appendices

Appendix A: Participants in the Executive Order Engagement Process 187

Appendix B: Table of Recommendations 195 Appendix C: Additional Background 213

A Financial System That Creates Economic Opportunities ? Nonbank Financials, Fintech, and Innovation iii

Acronyms and Abbreviations

Acronym/Abbreviation Term

ABA

American Bankers Association

ACH

Automated Clearing House

AI

Artificial Intelligence

AMC

Appraisal Management Company

AML

Anti-Money Laundering

API

Application Programming Interface

APR

Annual Percentage Rate

AQB

Appraiser Qualifications Board

ASB

Appraisal Standards Board

ATM

Automated Teller Machine

AVM

Automated Valuation Model

BHC

Bank Holding Company

BHC Act

Bank Holding Company Act

BSA

Bank Secrecy Act

Bureau

Bureau of Consumer Financial Protection

CEG

Cybersecurity Expert Group

C.F.R.

Code of Federal Regulations

CFT

Countering the Financing of Terrorism

CFTC

U.S. Commodity Futures Trading Commission

CHAPS

Clearing House Automated Payment System

CHIPS

Clearing House Interbank Payments System

CMA

Competition and Markets Authority (U.K.)

CRA

Community Reinvestment Act

CROA

Credit Repair Organizations Act

CSBS

Conference of State Bank Supervisors

Cyber Apex

Next Generation Cyber Infrastructure Apex Program

DARPA

Defense Advanced Research Projects Agency

DHS

U.S. Department of Homeland Security

DIUx

Defense Innovation Unit Experimental

iv A Financial System That Creates Economic Opportunities ? Nonbank Financials, Fintech, and Innovation

DLT DOD Dodd-Frank DOJ DOL Education EMV ESIGN E.U. FATF FBIIC FCA FCA FCC FCRA FDCPA FDIC FedACH FFIEC FHA FHA-HAMP FHFA FHLB FICO FIL FinCEN FINRA Fintech FIRREA FlexMod FPS

Distributed Ledger Technology U.S. Department of Defense Dodd-Frank Wall Street Reform and Consumer Protection Act U.S. Department of Justice U.S. Department of Labor U.S. Department of Education Europay, Mastercard, and Visa Electronic Signatures in Global and National Commerce Act European Union Financial Action Task Force Financial and Banking Information Infrastructure Committee False Claims Act U.K. Financial Conduct Authority Federal Communications Commission Fair Credit Reporting Act Fair Debt Collection Practices Act Federal Deposit Insurance Corporation Federal Reserve Banks' Automated Clearing House Federal Financial Institutions Examination Council Federal Housing Administration FHA Home Affordable Modification Program Federal Housing Finance Agency Federal Home Loan Bank Fair Isaac Corporation Financial Institutions Letter Financial Crimes Enforcement Network Financial Industry Regulatory Authority Financial Technology Financial Institutions Reform, Recovery, and Enforcement Act GSE Flex Modification Faster Payments Service (U.K.)

A Financial System That Creates Economic Opportunities ? Nonbank Financials, Fintech, and Innovation

v

FRB FRBNY FSB FS-ISAC FTC G-7 G20 GAO GDP GDPR GLBA GRC GSE HUD IaaS IRS ISO IT LOA MAS MBA MBS MCSBA MERS MMIF MPL MSB MTRA NACHA NAIC NBA

Board of Governors of the Federal Reserve System Federal Reserve Bank of New York Financial Stability Board Financial Services Information Sharing and Analysis Center Federal Trade Commission Group of 7 Group of 20 U.S. Government Accountability Office Gross Domestic Product General Data Protection Regulation (E.U.) Gramm-Leach-Bliley Act Governance, Risk and Compliance Government-Sponsored Enterprise U.S. Department of Housing and Urban Development Infrastructure as a Service Internal Revenue Service International Organization for Standardization Information Technology Levels of Assurance Monetary Authority of Singapore Mortgage Bankers Association Mortgage-Backed Securities Maryland Credit Services Business Act Mortgage Electronic Registration System Mutual Mortgage Insurance Fund Marketplace Lender Money Services Business Money Transmitter Regulators Association National Automated Clearinghouse Association National Association of Insurance Commissioners National Bank Act

vi A Financial System That Creates Economic Opportunities ? Nonbank Financials, Fintech, and Innovation

NCUA NFC NIST NMLS

NSF NSS OBIE OCC OFX P2P PaaS PCI-DSS PII PIN PLS PSD2 PSP RTP SaaS SAFE Act SEC SIFMA SRO SWIFT SWIFT GPI

TCH TCPA TFFT

Treasury

National Credit Union Administration Near Field Communication National Institute of Standards and Technology Nationwide Mortgage Licensing System or Nationwide Multistate Licensing System National Science Foundation National Settlement Service Open Banking Implementation Entity (U.K.) Office of the Comptroller of the Currency Open Financial Exchange Person-to-Person or Peer-to-Peer Platform as a Service Payment Card Industry Data Security Standard Personally Identifiable Information Personal Identification Number Private-Label Securities Revised Payment Services Directive (E.U.) Payment Service Provider Real Time Payments Software as a Service Secure and Fair Enforcement for Mortgage Licensing Act U.S. Securities and Exchange Commission Securities Industry and Financial Markets Association Self-Regulatory Organization Society for Worldwide Interbank Financial Telecommunication Society for Worldwide Interbank Financial Telecommunication Global Payments Innovation The Clearing House Telephone Consumer Protection Act Basel Committee on Banking Supervision's Task Force on Financial Technology U.S. Department of the Treasury

A Financial System That Creates Economic Opportunities ? Nonbank Financials, Fintech, and Innovation vii

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