Federal: AFC Letter to Governor, Michelle Bowman

The Honorable Michelle Bowman
Governor
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue NW
Washington, DC 20551

Dear Governor Bowman,

On behalf of the American Fintech Council (AFC), I want to thank you for your friendship and collaboration and formally congratulate you on your nomination for Vice Chair for Supervision of the Board of Governors of the Federal Reserve System (FRB or the Board). AFC fully supports your nomination for the Vice Chair position and encourages the Senate to a prompt confirmation process.

As you know, AFC’s mission is to promote an innovative, transparent, inclusive, and customer-centric financial system by fostering safe and responsible innovation in financial technology (Fintech) and encouraging sound public policy. AFC members, made up of fintech companies and innovative banks, are at the forefront of fostering competition in financial services and pioneering ways to better serve underserved consumer segments and geographies. AFC and its members strongly support the development and implementation of regulatory frameworks that encourage the responsible development of innovative financial products and services.

During your time as a Governor at the FRB, you embodied the principles of AFC’s advocacy by showing a steadfast commitment to adopting a transparent, tailored approach towards innovation and developing a sound regulatory framework for innovative products and services within the banking sector.  These perspectives, when combined with your significant first-hand experience in banking, lead AFC to believe that you are uniquely qualified to be Vice Chair for Supervision and ensure the banking system remains resilient while also providing important opportunities for it to meet the modern consumer demands through responsible innovation.

Overall, the FRB has consistently maintained a proactive approach towards encouraging responsible innovation. Over the past several years, there has been a concerted effort across the Federal Reserve System and at the Board to engage with innovative products, services, and business models and find ways to encourage the continued responsible development of these industry endeavors. Specifically, from a supervisory standpoint, the establishment of the FRB’s Novel Activities Supervision Program (NASP) presents an encouraging step by the Board towards ensuring responsible innovation can flourish in the U.S. financial services industry. As you move forward in your confirmation process, AFC respectfully requests your consideration of the key policy priorities listed below. Once confirmed, AFC encourages you to pursue the swift implementation of several agency endeavors that will ensure the continued success of innovative banks and their fintech partners:

• Further Develop a Regulatory Framework to Encourage Responsible Innovation: Over the past several years, bank-fintech partnerships have incurred increased regulatory scrutiny and engagement from both federal and state banking regulators. AFC has consistently advocated for clear “rules of the road” that will encourage further responsible innovations in the financial services industry. To that end, AFC believes that the FRB should engage in several efforts to provide regulatory clarity for industry participants. Namely, the FRB should engage in a

o Interagency True Lender Regulation: AFC has long advocated for clarity and a unified regulatory approach to the determination of who constitutes the “True Lender” within a bank-fintech partnership. AFC has consistently ascribed to the common understanding that the “True Lender” of a loan in a bank-fintech partnership is bank, as they are the institution listed on the loan’s origination documents. In 2020, the OCC sought to remedy this issue through a formal legislative rulemaking.  Unfortunately, due to timing and partisan politics, the final rule was invalidated by the 117th Congress in 2021.  In the intervening years, innovative banks and their fintech partners have faced a patchwork of state laws that pursued novel interpretations of which entity functions as the “lender” within a bank-fintech partnership. These state laws have unfortunately disregarded long-standing practice that recognized the institution listed on the loan origination documents as the “lender”. To address the patchwork regulatory framework existing in the “True Lender” issue, AFC respectfully requests that once confirmed as Vice Chair for Supervision of the FRB, in coordination with the other prudential regulators, you reengage on the “True Lender” issue by pursuing an interagency legislative rulemaking to provide certainty to the fintech lending market.

o Activity Specific Guidance: Given the significant impact that responsible bank-fintech partnerships have had across the financial services industry, particularly in lending, payments, and deposit taking activities, it is important to ensure that both regulated entities and their regulators have clear supervisory expectations. Clear supervisory expectations are a crucial aspect to ensuring responsible innovation can thrive in any regulatory framework. Since many of the existing laws and regulations governing the financial services industry were promulgated prior to the development of the modern bank-fintech partnership business model, it seems necessary for the FRB to review its regulations and issue agency guidance for products, services, or other activities that operate in a distinct manner within bank-fintech partnerships from traditional offerings. Thus, AFC respectfully requests that once confirmed as Vice Chair for Supervision of the FRB, you engage with staff to provide additional activity specific guidance where appropriate.

o Tailored Supervision based on Accurate Risk Profiling: AFC recognizes the importance of ensuring that the supervision of bank-fintech partnerships is tailored to the specific risk profile associated with a given partnership. Simply put, not all bank-fintech partnerships are created equally. Thus, it is important to recognize the impact that the facts and circumstances of a given partnership may have on the revenue structures, risk profiles, and business operations of both the financial institution and the fintech company. To that end, it is crucial that the FRB, in its supervisory capacity, ensures that the application of its regulations and compliance requirements are properly tailored to match the actual risk profile of the regulated entity and its partnership(s). Therefore, AFC respectfully requests that once confirmed as Vice Chair for Supervision of the FRB, you review the regulations and compliance requirements under your authority and ensure that they are properly tailored where appropriate.

• Redouble FRB’s Internal Innovation Efforts: AFC has consistently supported the efforts of federal banking regulators to build agency infrastructure that encourages the development of responsible innovation and assists agency staff in understanding the nuances associated with bank-fintech partnerships. To that end, AFC has been supportive of the FRB’s internal efforts to encourage responsible innovation, namely, the development of the NASP.

As the supervisory functions of the FRB continue to develop and engage with innovative products, services, and business models, AFC believes that the Board should consider leveraging the experience of innovation-focused agency staff to assist in its efforts to effectively regulate innovative products, services, and business models. Specifically, these innovation-focused agency staff could help front-line examiners and the examination process by creating and implementing new supervisory and examination materials that will help examiners across the Federal Reserve System become more knowledgeable of the nuances of the innovative activities pursued by the financial institutions they regulate. Further, these innovation-focused agency staff can develop or procure supervisory technology (suptech) tools that will help improve the efficiency of FRB examinations. Therefore, AFC respectfully requests that once confirmed as Vice Chair for Supervision of the FRB, you engage with existing innovation-focused FRB efforts and staff to find ways to further their efforts.

Again, I would like to congratulate you on your nomination for Vice Chair for Supervision of the Board of Governors of the Federal Reserve System. As you move forward in your confirmation process, AFC provides its full support. Upon your confirmation, we look forward to continuing our collaboration to promote and develop policies that encourage responsible innovation and pragmatic regulation of the modern financial services industry.

Sincerely,

Hon. Phil Goldfeder, CEO
American Fintech Council

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[1]American Fintech Council’s (AFC) membership spans EWA providers, lenders, banks, payments providers, loan servicers, credit bureaus, and personal financial management companies.
[2]  Michelle W. Bowman, "Innovation in the Financial System", speech at the Salzburg Global Seminar on Financial Technology Innovation, Social Impact, and Regulation: Do We Need New Paradigms?, Salzburg, Austria, (Jun. 17, 2024); and Michelle W. Bowman, “Opening Remarks”, speech at the Eighth Annual Fintech Conference, Philadelphia, Pennsylvania, (Oct. 23, 2024).
[3]Office of the Comptroller of the Currency, “National Banks and Federal Savings Associations as Lenders”, Fed. Reg. 85, no. 211 (Oct. 30, 2020): 68742.
[4]Office of the Comptroller of the Currency, “Acting Comptroller Statement on the Vote to Overturn OCC True Lender Rule”, (Jun. 24, 2021).

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