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The Examiner

If you dig it, do it. If you dig it a lot, do it twice.
- Jim Croce, born on this day in 1943

Banker Sentiment Remains Positive as Profit Concerns Emerge

By Michael L. Stevens, CSBS Senior Executive Vice President

The fourth quarter Community Bank Sentiment Index (CBSI) had a slight uptick to 123, reflecting an overall positive outlook for the economy and community banks. This quarter 208 bankers from 43 states participated in the survey, providing a good geographic mix.
The index, first calculated in the second quarter of 2019, has been in a narrow band of 121 to 123.  Absent a significant economic shock, we expect modest changes to the overall index from quarter to quarter. The real story lies in the change of the components and their impact on the index.

Banks continue to project strong levels of capital spending and operations expansion. Future business conditions are viewed more neutral and less of a drag on the index.  This positive movement was offset by a large downward change in the monetary policy component wherein community bankers foresee a more stable, and less uncertain, monetary policy by the Federal Reserve.

CSBI Q4 graphic

One area worth watching is the declining trend of the outlook for profitability, with the overall score approaching neutral. As we dive deeper into the data, we will determine if this is more pronounced in certain areas of the country. The industry has had strong financial performance for several years, so a neutral outlook is not necessarily bad.  However, there is no bottom to a negative trend, so this is worth watching in the 2020 quarterly surveys.

The CBSI was created in 2019 to capture what bankers are thinking about the future and is a direct result of the work CSBS has done with the Federal Reserve and FDIC on the Community Banking Research and Policy Conference.  This local perspective has the opportunity to be an important indicator of economic activity for policy makers, bankers, and the market.
The Community Bank Sentiment Index is an index derived from quarterly polling of community bankers across the nation. As community bankers answer questions about their outlook on the economy, their answers are analyzed and compiled into a single number. An index reading of 100 indicates a neutral sentiment, while anything above 100 indicates a positive sentiment, and anything below 100 indicates a negative sentiment.
The index is calculated based on community banker expectations in seven key areas:

1.    Business conditions
2.    Monetary policy
3.    Regulatory burden
4.    Capital expenditures
5.    Operations expansion
6.    Profitability
7.    Franchise value

The next data collection will kick-off on March 2. Any bankers interested in participating in this five-minute survey should email

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CSBS issues Accountability Report on Fintech Initiatives

CSBS released an accountability report charting progress made on a series of initiatives to streamline state licensing and supervision of financial technology companies. This work is part of CSBS Vision 2020, a bundle of initiatives driving toward a networked system of nonbank licensing and supervision.

The CSBS Fintech Industry Advisory Panel was convened more than two years ago to identify challenges and make recommendations to strengthen and streamline state regulation. In February 2019, CSBS publicly released those recommendations and committed to concrete actions. Today’s report details progress on initiatives identified by the industry panel.

John Ryan, CSBS president and CEO: “This process of reimagining nonbank financial services regulation creates a stronger supervisory system where innovation can thrive while consumer protection is paramount. Today’s report demonstrates state regulators’ commitment to accountability and transparency through these systemic changes.”

The 11 commitments largely fit into four focus areas:


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A Philadelphia Fintech Discussion

By John Ryan, CSBS President & CEO

I recently participated in the annual fintech conference of the Philadelphia Federal Reserve Bank. I enjoy these kinds of events because, in addition to representing the state regulatory system, they give me an opportunity to learn the latest about financial technology developments. 

And here, the attendees did not disappoint. They represented an impressive mix, ranging from start-up executives to international bank regulators. I was particularly impressed with the openness that the deputy governor of the Bank of Canada, Timothy Lane, expressed in experimenting with blockchain and digital currency. (You can view videos from the sessions here.) 

John RyanNow, most fintechs operate in the nonbank financial services sector because they perform financial transactions but do not take federally-insured deposits. And there is no question that nonbanks are growing their market share and they are adopting fintech business models more rapidly. From the data that state regulators collect, we have developed a good profile of this situation. 

For instance, mortgages used to be the almost exclusive domain of depositories. But today, nonbanks represent two-thirds of annual originations and manage roughly half of the mortgage servicing rights in the United States. In money services, fintech businesses models — i.e., those without agents — are used by 75 percent of all companies and support more than half of all transaction volume. 

So one question I discussed at the Federal Reserve conference: how do financial regulators supervise the growing sector of nonbanks that utilize fintech business models?

I bring to the dialogue the perspective of a state financial regulators who charter roughly four of every five U.S. banks and license and supervise the vast majority of nonbanks, including many fintech firms. This broad mandate leads me to believe that nonbank and fintech regulation should accomplish a balanced set of goals. 

At its core, regulation should enable market competition and innovation but operate consistent with strong consumer protections. Regulation should create an environment where banks are not the only source of financial innovation. At the same time, we must not tilt the regulatory environment towards fintechs such that they gain competitive advantages and hollow out the banking sector. 

In the U.S., the traditional bank still performs vital roles of lending in the communities in which they operate as well as the providing the financial security gained from federal deposit insurance. 

So how do we place fintechs into a regulatory model? At the state level, where most nonbank fintechs are regulated, regulators do not focus on technology per se. Instead, they look at the firm’s business activities. For instance, if a fintech originates a mortgage, regulators apply mortgage lending laws. If a fintech sends money from Point A to Point B, regulators apply money transmission laws. Thus, the business model of many fintechs can be placed in the contest of existing state laws. 

While existing laws can address most fintech activity, there are still gaps in the regulatory process:

  • Regulators are looking for more information with firms that deploy new business models and distribution channels
  • The desire of fintechs to scale quickly puts pressure on the state-by-state approach to regulation and requires a more holistic view of large, multistate nonbanks
  • And the sheer number of nonbanks, which dwarf the number of U.S. banks, creates the need for regulatory efficiency

State regulators see these needs and are responding in a few ways. Here is what I told the audience at the Federal Reserve conference. 

For efficiency, state regulators are leveraging a common technology platform, the Nationwide Multistate Licensing System (NMLS) that CSBS operates. Federal and state laws require nonbank mortgage originators to be licensed through NMLS. But, in addition to all states using NMLS in mortgages, we see 44 states using NMLS for money transmission and 33 for consumer finance. 

As you can imagine, substantial benefits emerge from regulators using a single technology platform for an expanding set of nonbank sectors: the ability to move new applicants through the licensing process faster and more uniformly. 

To gather more information about fintechs that regulators need, NMLS plays a role here, too. NMLS data is used to develop standardized Call Reports for mortgages and money service businesses (MSBs). These Call Reports, available nowhere else, give us valuable information about key nonbank sectors. For instance, NMLS data informed us that 55 percent of money transmitters used a fintech business model in 2018.

Important findings such as this are one reason why CSBS has information sharing agreements with several federal agencies, including the CFPB, Federal Reserve, FDIC and FinCen. Operating from the same data facilitates networked regulation among state and federal regulators, which produces more coordinated actions for fintechs and other nonbanks. 

Regulatory efficiency. Information gathering. NMLS provides an effective platform for both. But more fintechs want to scale their business operations regionally or nationally. To address this need, CSBS and state regulators have worked to develop a more holistic view of large, multistate fintechs and, in the process, launched a suite of initiatives we collectively refer to as Vision 2020. 

Over the past few years, we have been working to better harmonize multistate licensing and supervision for fintechs and other nonbanks. We believed that we could eliminate unnecessary pain points for industry while, at the same time, improve the quality of supervision among regulators. Our plan has been to seek industry input, develop a next generation technology platform, support multistate agreements, and tap data analytics to produce more predictive outcomes for regulators. 

A sampling of Vision 2020 at work:

  • In 2018, we formed a Fintech Industry Advisory Panel of 33 firms. In 2019, the panel gave us recommendations to improve the multistate experience. And we are implementing just about all of them (14 of 19).
  • We just deployed a one-of-its-kind State Examination System to move that process online nationwide, share information across states, and better identify which cases need more attention
  • We are training more than 800 state examiners on how to supervise and monitor cybersecurity operations at nonbanks
  • More than two dozen state regulators, representing a majority of Americans, have been coordinating their nonbank licensing processes – one state collects the information and other states accept the results – that so far has slashed approval times for MSBs by two-thirds
  • Similarly, on the examination side, in 2019 an MSB with nationwide operations was examined just once but in a manner that met the requirements of several states

One way to look at all this activity: as fintechs and other nonbanks modernize financial services, state regulators are modernizing the regulatory system that oversees these companies.

We are doing so by forging a new regulatory infrastructure for nonbanks that can be compatible with the banking system’s — encouraging competition but assuring consumer protections — without expanding the federal safety net. In essence, we are bringing the benefits of multistate branching from the banking sector into nonbanking and then allowing the marketplace to work. 

I believe this is the right approach, the balanced approach, that regulators need to take to financial services, whether the regulated entity is an online start-up or a mature branch operation. In the end, though, the real decision comes down to the consumer and which companies earn their trust, confidence…and business.

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SRR settles SAFE MLO Test questions lawsuit

The CSBS subsidiary that operates the Nationwide Multistate Licensing System (NMLS) settled a lawsuit against four defendants who were alleged to have misused and reproduced copyrighted questions from the national exam that state-licensed mortgage loan originators (MLO) must pass to obtain a license.  

The lawsuit alleged that Colorado-based MTI, Don Exley, Carey Green and Billy Glenn “Bart” Bartholomew misused and reproduced the State Regulatory Registry’s (SRR) copyrighted SAFE MLO Test questions without authorization, causing damage to SRR and compromising the integrity of the SAFE MLO Test. State and federal law require all licensed MLOs pass the SAFE MLO Test. 

John Ducrest, Louisiana Office of Financial Institutions commissioner and SRR Board chairman: “The integrity of the SAFE Act test is integral to ensuring that state-licensed mortgage loan originators understand the laws and regulations they operate under and to protecting consumers from bad actors.” 

Bill Matthews, SRR president and CEO: “SRR takes the security of test questions and other aspects of SAFE MLO Test security very seriously. We will not hesitate to appropriately defend our copyrighted materials.” 

The court ruled that SRR takes significant measures to ensure the confidentiality of test questions, including by storing questions in a secure database and implementing video and audio surveillance of test takers. Advance access to the test questions may give a test taker an unfair advantage on the exam. The judge’s ruling confirmed that SRR owned valid copyrights and that at least two of the defendants – MTI and Green – copied the protectable elements of SRR’s work.

SRR revoked MTI’s NMLS-approved course provider status and barred Don Exley from ever being associated with any NMLS-approved course provider. Mr. Bartholomew was also barred from associating with NMLS-approved course providers for five years. Carey Green’s access to NMLS is suspended indefinitely.

MTI, Exley and Bartholomew, who worked for MTI, admitted that MTI’s practice tests included questions that were substantially similar to actual test content. Green acknowledged that some of his SAFE MLO Test prep questions sold on his website infringed SRR’s copyrighted exam questions but denies knowing that the test questions belonged to SRR. All the parties have reached settlements on terms that were satisfactory to SRR.

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