U . S . D E P A R T M E N T O F T H E T R E A S U R Y A Financial System That Creates Economic Opportunities Nonbank Financials, Fintech, and Innovation 7 JULY 2018 2018-04417 (Rev. 1) • Department of the Treasury • Departmental Offces • www.treasury.gov O F 1 T H E T R E A A Financial System That Creates Economic Opportunities Nonbank Financials, Fintech, and Innovation TREASURY S U R Y T H E D E P A T R M E N T 9 8 U . S . D E P A R T M E N T O F T H E T R E A S U R Y 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 7 F O 1 T H E T R E A S U R Y T H E D E P A T R M N E T 9 8 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, Alexan- dra 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. ii 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 Digitization 17 Consumer Financial Data 22 Te 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-Specifc Regulations 81 Lending and Servicing 83 Payments 144 Wealth Management and Digital Financial Planning 159 Enabling the Policy Environment 165 Agile and Efective 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 Artifcial Intelligence AMC Appraisal Management Company AML Anti-Money Laundering API Application Programming Interface APR Annual Percentage Rate AQB Appraiser Qualifcations 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 Distributed Ledger Technology DOD U.S. Department of Defense Dodd-Frank Dodd-Frank Wall Street Reform and Consumer Protection Act DOJ U.S. Department of Justice DOL U.S. Department of Labor Education U.S. Department of Education EMV Europay, Mastercard, and Visa ESIGN Electronic Signatures in Global and National Commerce Act E.U. European Union FATF Financial Action Task Force FBIIC Financial and Banking Information Infrastructure Committee FCA False Claims Act FCA U.K. Financial Conduct Authority FCC Federal Communications Commission FCRA Fair Credit Reporting Act FDCPA Fair Debt Collection Practices Act FDIC Federal Deposit Insurance Corporation FedACH Federal Reserve Banks’ Automated Clearing House FFIEC Federal Financial Institutions Examination Council FHA Federal Housing Administration FHA-HAMP FHA Home Afordable Modifcation Program FHFA Federal Housing Finance Agency FHLB Federal Home Loan Bank FICO Fair Isaac Corporation FIL Financial Institutions Letter FinCEN Financial Crimes Enforcement Network FINRA Financial Industry Regulatory Authority Fintech Financial Technology FIRREA Financial Institutions Reform, Recovery, and Enforcement Act FlexMod GSE Flex Modifcation FPS Faster Payments Service (U.K.) A Financial System That Creates Economic Opportunities • Nonbank Financials, Fintech, and Innovation v FRB Board of Governors of the Federal Reserve System FRBNY Federal Reserve Bank of New York FSB Financial Stability Board FS-ISAC Financial Services Information Sharing and Analysis Center FTC Federal Trade Commission G-7 Group of 7 G20 Group of 20 GAO U.S. Government Accountability Ofce GDP Gross Domestic Product GDPR General Data Protection Regulation (E.U.) GLBA Gramm-Leach-Bliley Act GRC Governance, Risk and Compliance GSE Government-Sponsored Enterprise HUD U.S. Department of Housing and Urban Development IaaS Infrastructure as a Service IRS Internal Revenue Service ISO International Organization for Standardization IT Information Technology LOA Levels of Assurance MAS Monetary Authority of Singapore MBA Mortgage Bankers Association MBS Mortgage-Backed Securities MCSBA Maryland Credit Services Business Act MERS Mortgage Electronic Registration System MMIF Mutual Mortgage Insurance Fund MPL Marketplace Lender MSB Money Services Business MTRA Money Transmitter Regulators Association NACHA National Automated Clearinghouse Association NAIC National Association of Insurance Commissioners NBA National Bank Act vi A Financial System That Creates Economic Opportunities • Nonbank Financials, Fintech, and Innovation NCUA National Credit Union Administration NFC Near Field Communication NIST National Institute of Standards and Technology NMLS Nationwide Mortgage Licensing System or Nationwide Multistate Licensing System NSF National Science Foundation NSS National Settlement Service OBIE Open Banking Implementation Entity (U.K.) OCC Ofce of the Comptroller of the Currency OFX Open Financial Exchange P2P Person-to-Person or Peer-to-Peer PaaS Platform as a Service PCI-DSS Payment Card Industry Data Security Standard PII Personally Identifable Information PIN Personal Identifcation Number PLS Private-Label Securities PSD2 Revised Payment Services Directive (E.U.) PSP Payment Service Provider RTP Real Time Payments SaaS Software as a Service SAFE Act Secure and Fair Enforcement for Mortgage Licensing Act SEC U.S. Securities and Exchange Commission SIFMA Securities Industry and Financial Markets Association SRO Self-Regulatory Organization SWIFT Society for Worldwide Interbank Financial Telecommunication SWIFT GPI Society for Worldwide Interbank Financial Telecommunication Global Payments Innovation TCH Te Clearing House TCPA Telephone Consumer Protection Act TFFT Basel Committee on Banking Supervision’s Task Force on Financial Technology Treasury U.S. Department of the Treasury A Financial System That Creates Economic Opportunities • Nonbank Financials, Fintech, and Innovation vii U.K. United Kingdom U.S. United States UDAAP Unfair, Deceptive, or Abusive Acts or Practices UDAP Unfair or Deceptive Acts or Practices UETA Uniform Electronic Transactions Act URPERA Uniform Real Property Electronic Recording Act U.S.C. United States Code USDA U.S. Department of Agriculture USPAP Uniform Standards of Professional Appraisal Practice VA U.S. Department of Veterans Afairs ZB Zettabyte viii A Financial System That Creates Economic Opportunities • Nonbank Financials, Fintech, and Innovation Executive Summary