Today at Lendit Fintech, Brian Brooks, acting comptroller of the currency at the Office of the Comptroller of the Currency (OCC) discussed the topic of expanding financial access through regulatory innovation.
Notably, Brooks was formerly a general counsel of Coinbase, a digital currency exchange platform. So as moderator and Spring Labs’ founder and CEO Adam Jiwan puts it, that experience gives Brooks the ability to offer “a very different perspective” to the OCC.
The OCC, Jiwan pointed out, regulates 1200 national banks including some of the largest banks in the country. It has a staff of thousands with a budget of $2 billion annually.
In addition to having worked at Coinbase, Brooks also served as general counsel of Fannie Mae, which itself is one of the largest financial institutions in the world, as Jiwan noted.
He asked Brooks what awakened him to the reliance and importance of innovation, and if there were “any aha moments.” He also asked what initiatives the OCC could take that he thought “could make a real difference to people, to businesses and to the country.”
Brooks refers to Apple co-founder Steve Jobs in his answer.
“When you’re thinking about a career, and you’re looking at it going forward, you have no idea how one thing connects to the next. But he used to always say that if you turn around and look backward, there’s some kind of internal logic that reveals itself,” he said. “Now when I hear you list my jobs, I’m not sure that there is internal logic, but I have my thoughts.”
One of the things Brooks saw when representing banks, credit card companies and mortgage lenders was how important finances were, and just how limited it was.
“So many people could benefit from finance and access,” he explained.
Brooks recalls a trip when he and the then CEO of Fannie Mae went to meet with a fintech startup, got trapped in the Bay Area when Snowmadeggon (an epic snowstorm) came into Washington, D.C., and closed all the airports for days.
“The CEO of Fannie Mae and I are in the Bay Area with five days on our hands, one change of clothes and no way to get back,” he said. “So what do you do? What you do is go up and down Sand Hill Road…and we came away with an entirely new appreciation of all the unexploited possibilities.”
It was during that time that the pair realized that the company could “probably underwrite credit more effectively,” Brooks said.
“If you use APIs to validate bank data as opposed to making us go through their documents, we realized that appraisals could be better if we used models, as opposed to actual human appraisers,” he recalled. “And that’s what led us to talk about blockchain as an early idea. Here was a really, really big industry that serves 80% of people really well and kind of doesn’t serve the other 20%, unless you use tech to go and serve those people cheaply efficiently, find people that aren’t going to be well-served by a traditional high cost, high cost bank.”
Fast forward to when he was offered the OCC job last winter and Brooks said he knew that the OCC “could be an amazing force for good, but that lack of clarity had impeded the development of innovation to benefit a lot of people.”
During his tenure at the OCC, Brocks launched an initiative called Project Reach, a collaboration among regulators and consumer advocates, business builders and senior executives within the industry “to try to finally move the needle on the unbanked…and drive financial inclusion.”
The initiative aims to harness market incentives in a permanent way.
“We should take seriously the idea that there really are structural barriers – not overt racism, I’m not saying that, but there are structures that we rely on in finance that have the unintended effect of excluding certain kinds of people from credit,” Brooks pointed out. “The easiest one to understand is the credit score right so in this country. You cannot apply for a mainstream mortgage or credit card, unless you have a credit score. And it turns out that roughly 45 million Americans don’t have one. That’s because historically we built these credit bureaus on a very clunky old ecological platform where you can only intake so much information.”
For example, Brooks said, most credit scores are based on things like paying a mortgage, credit cards or personal loans.
“They have no way of capturing other recurring payments that people are making, such as paying rent on time every month, or utility payments,” he said.
So, one of Project Reach’s goals is to harness models from places like Credit Karma and JP Morgan to synthesize a new form of credit score that will capture those millions of people “and for the first time allow them to access credit.”
“We can turn renters into homeowners, and those people who are not building wealth can build wealth,” Brooks added. “That’s a transformational idea.”
Brooks also acknowledges the tension between traditional banks and challenger banks.
His advice to traditional banks is to recognize that “it’s too late” to “pull up the drawbridge and fill up the moat” to stop challengers.
“The challengers are here, and they’re big. I mean, nobody can look at PayPal and say geez, maybe put that genie back in the bottle,” Brooks said. “They’re here because customers want it…I think it needs to be easier for banks to benefit from technology, versus viewing tech as a threat or the competition.”
One of the reasons it’s been so difficult historically for banks to benefit from tech is because, he added, bank regulators have these “super heavyweight third party management obligations.”
He recalls a situation when a bank loved a tech product and wanted to buy it. Eighteen months later, they finally checked off all the third-party risk boxes, he said.
“That doesn’t actually make the system less risky, but it does make it harder for banks to innovate the business,” Brooks said. “So making it easier for them to do that is key.”