FDIC to Establish Office of Innovation to Fight Payday Loans

Inside Subprime: Oct 26, 2018

By Lindsay Frankel

The Federal Deposit Insurance Corp. (FDIC) plans to establish an office of innovation in an effort to help banks adopt new financial technologies and combat payday loans. Chairman Jelena McWilliams announced the plan at an American Bankers Association conference, noting that regulators’ failure to foster innovation has meant the most significant changes have occurred outside the banking industry.

“We have created the regulatory framework where we have actually discouraged banks from innovating for a number of years,” McWilliams said. “So innovation has been happening outside of the banking primarily and a very small percentage of it has happened within the community banks in particular that don’t have the resources, nor are they able to enforce the compliance mechanisms in place that would be needed where the regulators would look positively at innovation.”

McWilliams described three ways the FDIC could encourage innovation: through the industrial loan company, through the regulation of third-party vendor relationships, and by utilizing technology companies to improve efficiency, processing, and service at banks.

McWilliams hopes the FDIC can work with the OCC and the Federal Reserve to jointly propose modernization of the decades-old Community Reinvestment Act so that the law would include digital channels in the assessment of banks. The legislation was enacted to encourage financial institutions to satisfy the credit needs of borrowers within their communities, particularly vulnerable populations. Often, low-income families turn to payday lenders when banks do not meet their credit needs.
McWilliams emphasized the importance of hearing the perspectives of individual banks. She encouraged banks to send comment letters directly to the FDIC, rather than merely signing on to a trade group’s letter. McWilliams added that personal letters can be brief and would merit significant attention. “We will log it in as a separate letter. We will discuss it internally. That letter will probably rise to my level attention and the senior staff at the FDIC. So I would strongly encourage you to send us your stories in your letter.

The FDIC isn’t the first banking agency to set up an office focused on technological innovation. The Office of the Comptroller of the Currency (OCC) provided fintech companies with a limited-purpose charter, and the Consumer Financial Protection Bureau (CFPB) has discussed a “disclosure sandbox” that would allow companies to test new ways of communicating information to customers.

McWilliams expressed concerns over the fragmented manner in which the FDIC has been addressing innovation. She said she hopes the agency can take a holistic approach to change. “How can we encourage banks to innovate? How can we bring that within the banking sector?” McWilliams asked.

For information on predatory payday loans, check out all of our Subprime Reports.

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