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The PPP is Back, What do Fintech Leaders Think?

As part of a huge 5,593-page bill Congress includes a new round of funding for the Paycheck Protection Program

December 22, 2020 By Peter Renton Leave a Comment

Views: 1,045

Last night Congress finally passed a new round of stimulus funding. The $900 billion Covid-19 relief package included $285 billion for a renewed Paycheck Protection Program. You can read the full text of the 5,593-bill here.

This is big news for fintech as our industry played a major role in the initial rollout of the PPP earlier this year. While the details are similar to first PPP there are some important differences. Here are just some of the details:

  • Companies that received a first PPP loan can apply again provided they have 300 or fewer employees AND experienced a 25% drop in revenue in any quarter compared to 2019.
  • First time borrowers will be subject to the rules of the initial PPP although public companies will not be eligible.
  • Maximum loan size is $2 million, down from $10 million.
  • Small businesses can apply for 2.5 times their monthly payroll (3.5 times for the hospitality industry).
  • Borrowers need to spend at least 60% of the proceeds on payroll for full forgiveness.
  • The SBA will be required to establish regulations no later than 10 days after the legislation is signed into law.
  • Both the House and the Senate have passed the legislation with large majorities and the President has until December 28 to sign into law.

So, early in the new year round two will begin. While we don’t know the details of the program yet we learned from the New York Times yesterday that the top four PPP lenders, Bank of America, JPMorgan Chase, Cross River Bank and Wells Fargo all intend to participate again.

I reached out to a number of fintech leaders to get their reaction to the new round of PPP. Here is what Adam Goller, General Manager of Strategic Partnerships at Cross River, said: [Read more…]

Filed Under: Fintech Tagged With: Paycheck Protection Program, PPP, regulation, small business, small business lending

Views: 1,045

Podcast 272: Jo Ann Barefoot and David Ehrich of AIR

The co-founders of the Alliance for Innovative Regulation discuss how the future of financial regulation is going to look very different to today

November 6, 2020 By Peter Renton Leave a Comment

Views: 157

The regulatory system under which the financial system operates is exceedingly complex. This is understandable given mow important finance is to people’s lives. But the way we have implemented regulations has only changed incrementally over the last few decades while technology has completely transformed the financial system.

Addressing this challenge head on if the focus of our guests on the latest episode of the Lend Academy Podcast. Jo Ann Barefoot and David Ehrich are the co-founders of the Alliance for Innovative Regulation (AIR), whose mission is to make financial regulation more effective and less expensive at the same time. Jo Ann was last on the show back in 2018.

In this podcast you will learn:

  • Why Jo Ann and David decided to start AIR.
  • Why they decided to create the Regtech Manifesto.
  • What a new regulatory system could look like.
  • What digitally-native regulation looks like and how it works in the real world.
  • What machine executable regulation means.
  • The role of AIR in helping the regulators gain confidence in this new system.
  • The feedback they are hearing from regulators.
  • Details of the tech sprint they are doing with the NYDFS and CSBS.
  • The exciting results they had in their recent tech sprint on crypto and CSAM.
  • Their view on decentralized finance and central bank digital currencies.
  • Details of their Regulatory Design Project.
  • What else is coming down the track at AIR.

This episode of the Lend Academy Podcast is sponsored by Zest AI. The world’s most innovative lenders use Zest AI software to increase approvals, decrease losses and automate their lending.

Download a PDF of the transcription of Podcast 272 – Jo Ann Barefoot and David Ehrich.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 272 – JO ANN BAREFOOT/DAVID EHRICH

Welcome to the Lend Academy Podcast, Episode No. 272. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s episode is sponsored by Zest AI. The world’s most innovative lenders use Zest AI software to increase approvals, decrease losses and automate their lending. Zest AI software delivers powerful risk prediction and borrower assessment for fast, accurate credit decisions that result in more good loans and fewer bad ones. Deemed the gold standard by regulators, the Zest Model Management System brings together everything lenders need for easy, compliant AI adaption and effective credit model management. Find out more at zest.ai.

Peter Renton: Today on the show, I am delighted to be talking with Jo Ann Barefoot and David Ehrich, they are the Co-Founders of AIR, the Alliance for Innovative Regulation. I wanted to get them on the show because…….Jo Ann who is obviously, many of you know, she was on the show two and a half years ago, but since then she has co-founded AIR and it’s a really interesting organization, it’s a non-profit.

They ask the question, what if financial regulation could be more effective and less expensive at the same time. We talk about what they mean by that, we get into the Regtech Manifesto they published over the summer, we talk about digitally-native regulation, what that means, what it’s going to look like. Jo Ann actually talks through an example of how it can actually work, we talk about the Tech Sprints they’re doing, how they’re really helping with financial crime, we talk about how they see the relationship with some of the banking regulators and much more. It was a fascinating episode, we hope you enjoy the show.

Welcome to the podcast, Jo Ann and David!

Jo Ann Barefoot: It’s lovely to be back, thank you, Peter.

Dvid Ehrich: Yes, thank you, Peter, it’s great to be here.

Peter: Okay, thank you, it’s great to have you back, Jo Ann. I know it’s been about two and a half years since we last had you on, that time has flown, but maybe….I mean, Jo Ann, you obviously…a lot of people know who you are, but give us a little bit of background what you’ve been working on for the last two and a half years. I know we’re going to get into that in some depth, but just give us a little background.

Jo Ann: Right. So, I am CEO of the Alliance for Innovative Regulation or AIR, which I co-founded with David, and we are working on trying to catalyze and shape conversion of the financial regulatory system for the digital age. How are we going to digitize information in the financial regulatory system so the regulators can keep up with the digitization of the financial industry itself and working on that with David.

Peter: Okay. And, David, I know you’ve been involved in fintech for a little while, tell us a little bit about what you have done recently.

David: Sure. Most recently, I was the Co-Founder of Petal, which is a fintech credit card that’s using casual underwriting to provide safe and affordable credit to folks who don’t have a credit history. But, my background is 20 years in payments, both at American Express and JP Morgan where I was the Head of Credit Card Strategy and I’ve also been involved with a number of policy initiatives. I was the Head of BankOn and the Architect of the National Accounts Standards which provides a product development roadmap for banks to provide bank accounts that that don’t have overdraft fees.

Peter: Okay. So then maybe…I mean you’ve touched on it already, but why don’t you tell us why you decided to start AIR. Obviously, there wasn’t really an organization like yours out there so tell us, what was the impetus behind the starting of AIR.

Jo Ann: Yeah. So, I have worked for decades, more than I should even count, trying to promote consumer financial inclusion, financial health, consumer protection and finance through regulation. I was Deputy Comptroller of the Currency, I worked for the Senate Banking Committee and spent a long time trying to shape a regulatory environment that can do better for consumers. Six years ago, I immersed in technology activities and had the epiphany that technology could solve a lot of problems that regulation is never going to solve because we have a mixed record of success at best in these efforts toward financial inclusion and consumer and financial health.

I had another epiphany which was…I was at Harvard, I was working on a series of papers which are on the Harvard website and our website, papers on these and was studying the fintech and RegTech and it occurred to me, as a former regulator, that we work on a get the benefit of all of these new consumer technology and finance because we were probably going to regulate it wrong.

Not that it is anybody’s fault, our regulators are not designed to be tech-forward and they are designed to be careful and slow and prudent and how they’re going to keep up with both the upside potential and managing the downside at best that’s coming with a lot of these changes also in terms of things like privacy. So, you know, at the risk of sounding grandiose, I kind of appointed myself to solve the problem, I didn’t think anyone else was going to take on. David has a story about how we got together on it.

David: Well, Jo Ann likes to say if it’s a really hard problem then we know we’re in the right place. (laughs) You know, I like to call Jo Ann, especially when I was working at Petal, our fintech fairy godmother. What we did at Petal was take a very regulator-forward strategy so our whole value proposition was transparency to the consumer, but why not then have transparency to the regulator as well and part of what I saw was the inability of the regulatory community to fully embrace and understand casual underwriting.

They had many questions, many concerns about it and so I saw first hand the success of Petal and the success of products like Petal were only going to work if they could fit through this very narrow aperture of the regulatory system and so one of the things that I did at Petal was connect us with the work at FinRegLab which is a non-profit organization that was founded by Melissa Koide to really try to identify the value of cash flow underwriting and prove its use case for the regulatory community.

Jo Ann and I met because she was an advocate for fintechs that are doing this work and she recognized the need for the regulators to really understand, at a much deeper level, the work that was happening in the fintech community. And so, we connected because I saw her give a presentation at a convening that was sponsored by the Ford Foundation for financial inclusion for non-profits.

Her presentation just resonated for me so strongly because I really felt like she had uniquely hit this nail square on the head, nobody else was having this conversation. So, when Jo Ann shared with me that she was interested or thinking about starting a non-profit that would really dedicate itself to this question, I immediately put up my hand and said, Jo Ann, we could really talk about this, this is really exciting.

Peter: Right, right, okay. So, I want to kind of delve right into it because, you know, when we last chatted, Jo Ann, you’ve always been very optimistic about the future of the regulatory system that we have and I, myself, have not been and I kind of felt like we have…I always thought that there was just too many stumbling blocks, it’s too complex in this country.

We have this system that’s just been cobbled together over really centuries, in some cases, but I wanted to let the Regtech Manifesto….because when I read this, and I haven’t read every single word, but I have gone through it and I feel optimistic after reading this (laughs) because I felt like, finally, there’s a bit of a roadmap about what we can actually do to really improve, not just the incremental level, this is really re-thinking of it. So, maybe just talk a little bit about the background, about the Regtech Manifesto, what it is and what you actually write about in the hundred plus pages you’ve got there.

Jo Ann: Right, thanks for asking. Yeah, this is about a hundred pages and by popular demand, I am planning to read it on my podcast show for those who would rather listen than read so that’s coming soon. The Regtech Manifesto was a natural outgrowth of the work and thinking that we’ve been doing, it is a product of about 18 months of work. We issued it in July so most of it was written before the pandemic and yeah, it has been the right thing at the right time as we have been watching the pandemic and the economic downturn and the racial upheaval following the killing of George Floyd, all of these things really galvanizing interest and using better technology in the regulatory and government processes just to speed things.

I mean, we’re seeing every facet of our lives, including in regulation, and the paper makes the argument first for why we need to digitize the regulatory system and find apps and the reasons why the regulation has four missions…systemic stability, consumer protection, financial inclusion and countering financial crime. If we look at those areas, we’re doing better on some and worse on others, but with new technology we could do vastly better on all of them and probably at a sharply reduced cost for both the government and the industry.

And then on top of that, even if we thought we were doing great, if we look at where we used to traditionally, we know that these tools can’t keep up with the change ahead. We’ve got exponential rates in change in technology, they are transforming the financial system, we have all new kinds of things coming up from Libra to DeFi and the regulatory process is going to have to speed up. But, as I said before, it’s not built for speed so we try to lay out why we need to make those changes, why bad things will happen if we don’t and good things will happen if we will and then what a system like this would look like, what would be its attributes and its defining principles that should guide the design of it.

Thirdly, putting on my hat as a former regulator at the LCC, really trying to lay out how can we actually get there from here which is the thing that has hang people up, I think, from the beginning of when I begun doing this work. Just the feeling that it’s too complicated. In the Manifesto, we draw on the inspiration of Sir Tim Berners-Lee who invented the world wide web 31 years ago, was not that long ago. What we’re trying to do is complicated, but not as complicated as that so we think there’s an opportunity to break this work down into incremental steps. I am more optimistic than I was last time we talked, by far, because it’s happening everywhere. Maybe, David, you’d like to talk a little bit about that. That would show the examples of what’s going on.

David: Sure. You know , we like to say at AIR, think big, but start small. I think that your comment about the Regtech Manifesto giving you hope is actually I think a really important thread here because what you see, both in the ecosystem and in the regulatory community, really strong signs of change that really do give us hope.

You know, one of the things that AIR was really instrumental in doing was bringing to the US, in collaboration with the Financial Conduct Authority, Tech Sprints. Tech Sprints are really just a hackathon, they are a mechanism for doing an intensive problem solving session to solve a particular problem and create a rapid prototyping, but one of the opportunities that we’ve seen is to really bring this technology to the regulators as an innovation tool and they have really begun to embrace this. When we brought the first Tech Sprint here which was on anti-money laundering and human-trafficking, we had an incredible opportunity to showcase this event for over 16 regulators.

Jo Ann: 16 regulatory agencies.

David: They’re regulatory agencies who sent a number of people and this has now starting to get embedded in the regulatory agency culture. We are now providing technical assistance to six different regulatory agencies that have either launched or planning to launch regulatory Tech Sprint strategies. This has already been launched by the FDIC, the CFPB and just recently announced the Tech Sprint that is going to be happening with the Department of Financial Services so there’s some very significant changes in the regulatory landscape.

Peter: Yeah. I want to actually dig into it though because in the Manifesto you talk about digitally-native regulation machine, machine executable regulation. This is a quantum leap, right, this is not just, you know, not just like an incremental change. You know, normally, a new regulation, you see a big printout of a thousand pages and then everyone has to go and read it and understand how their company fits in. What I would love you to do is paint a picture for us of what digitally-native regulation looks like and how it works in the real world.

Jo Ann: So, it’s developing in pieces right now. I’ll give you a couple of examples and then maybe I’ll offer you sort of a …imagine those future…one of the exciting innovations this year has been the G20 Tech Sprint which they’ve done with the Bank for International Settlements and other partners, Monetary Authority of Singapore and others. They surveyed regulators all over the world, dozens of them offered use cases for regulator problems that maybe technology could help with and they distilled it into three use cases.

One is how regulators can share information in a crisis like a pandemic, one is how to detect financial crime in crypto currency and the third one was digital regulatory reporting and I was a judge in the third one. In the course of reviewing the submissions that came in, I was astonished at the sophistication of the approaches that world class companies are ready to take to try to bring us machine readable regulations so you can tag the regulation and the machine can figure out: does that apply to my startup or my bank or my product and what do I have to do.

And then, even more ambitiously, machine executable regulation in some cases where in the case of reporting, you would have the opportunity potentially in some areas to have the regulator issue some rules in the form of computer code which the regulator can simply plug into its systems and produce a correct report. The FCA pioneered this idea at the end of 2017.

I had convened a meeting at Harvard that June where we had talked about this as a future dream and then next thing I knew, six months later, the FCA ran a Tech Sprint and successfully proved that they could do it, that they could get a correct report back out of a pool of test data in ten seconds instead of what you just said, Peter, like two years issued the paper, have everyone read it, you know, implement all the operational controls, have all the mistakes that come with that and so on, and so on.

So these things are becoming real, those projects are now being incubated and BIS, you know, the Asian Hub in Singapore, that’s the kind of thing we’ll have. But, if I picture myself as a regulator ten years from now, maybe sooner, this won’t all be done by band, but you can imagine an environment in which I’ve got tools available to me that are closer to querying something on Google than to reading a regulatory report in the way that we do today. Now, as soon as I say that, everyone panics over the privacy implications and the data security, massive amount of work that needs to be done there.

The Manifesto does talk about some of the important subsets that need to be addressed, but if I wanted to…..suppose I was looking at something that could be turning into a sub-prime mortgage crisis that would lead to a global recession and I was wondering how vulnerable was the banking system to contagion from sub-prime lending practices that were outside the banking system. In 2006 or 2007, there wasn’t a way to know the answer to that, in the future we should be able to know, the regulator should be able to get more information, faster.

In the pandemic, the FDIC, for example, has undertaken this year a rapid prototyping project to modernize the call report because they’re sitting there in the pandemic in an economic downturn and they are trying to rely on reports that come in quarterly. (Peter laughs) You know, it’s late, they’re there blind, they have huge blind spots so we want to give them digitized information, I’d say give it to them, we’re not giving it to them, but we want to help them build the structures that are needed, the architectures that are needed for regulators themselves to begin to create that access they need to real-time data, full sets of data.\

Bank regulators today still got sample files of loans, they rely on these summary reports like call reports or reports sometimes that come in annually, instead of being able to take a look at where trends may be occurring, slice it vertically, look at it horizontally across all the financial institutions and see where the emerging risks might be. That’s what the future regulation should be like and I should say, bringing AI into that data. Get the data, extract it from the silos where it’s all locked up and imprisoned today and into forms where we can run machine learning and natural language processing over it and find the financial crime or find the patterns of unfairness or find the patterns of emerging risk.

David: Peter, at its core, we have the technology.

Peter: Right.

David: This is the technology to be pioneered today by fintechs and RegTech, right. You know, what we want to do is help the regulatory community embrace that same technology and it requires some structural changes and that’s we outlined in the Regtech Manifesto. If you want the regulators to have access to the benefits of AI then you need to build a system that is inter-operable and it requires that that system sit on a data layer that is standardized. None of these exist today and so this is what we are off to build, this is where we’re off to try to help the regulators put in place.

Peter: When you say that, David, you do mean….what exactly is AIR’s role here? Are you acting as an advisor….you like help them build, I mean, are you helping them build this, I mean, what’s the role exactly of AIR?

David: We are not, you know, a giant (laughs) consulting firm that built, you know, regulatory systems, but we see our role as a thought leadership and  also as exercising the test and learn use cases that can help the regulators gain confidence in some of the early steps they need to take. So, our Tech Sprint strategy is very much a part of that in terms of helping the regulators see that there’s not only a different innovation tool that they can use, but then you can actually produce a digitized prototype that can help solve that individual problem and help the regulators embrace the digital solutioning that’s possible.

Jo Ann: The other thing we’re doing is a tremendous amount of convening across these silos. The regulators increasingly want to come to the table. As you mentioned, in the United States we have a lot of regulatory agencies, you know, they have interest in sitting down talking with technology people, talking with industry people and innovators and I want to emphasize, none of us though was issued like Tim Berner-Lee’s original paper on with world wide web as a request for comments and we’re getting comments from all over the world.

You can come on our website and comment, we have also like notes on our Google document, if you want to, but outside of that channel, we are just finding that people are reading it, reaching out. We’re meeting new kinds of people, we’re building a community of people who have the will and the ability to really make this happen. Many of them are regulators and former regulators, as well as lots of people in the industry. So, our role is to be a catalyst and a helper.

David: At the end of the day, the regulators have to do this work internally, but as a catalyst, we’re helping them build their readiness for this.

Peter: And on that, you know….I mean, in some ways this is a very good timing because Jo Ann has spoken to both Chairman McWilliams from the FDIC and Brian Brooks, the Acting Head of the OCC, and, you know, both of those people are, from my perspective, seem to be the most forward-looking leaders we may have ever had in those two agencies. So, it seems to me that there is an acknowledgment that, yes, you are right, we need to change. Is that what you’re hearing from those two agencies?

Jo Ann: Definitely so and from the other agencies as well. We had recent podcasts with those two leaders and also with the Chairman of the National Credit Union Administration, Rodney Hood, he’s very, very committed to innovation as well and the same is true with the CFPB, the Fed, CSBS. You know, part of the reason we know we’re in a good place, Peter, is that we are bonding acronyms (Peter laughs) because a lot of tech people have no idea what CSBS is, for example, so CSBS is Conference of State Bank Supervisors.

We actually made an exciting announcement two weeks ago with the New York Department of Financial Services and CSBS that we’re putting on a Sprint with them on a COVID-driven problem they have as we talked about before, how do they get information faster, especially from non-banks in a time of crisis. So, we’re going to do a Tech Sprint with them focusing on a starter use case in crypto currency, we’ll be doing that early next year, Yes, those current group of leaders are very, very focused on innovation and some of them are not shy about moving quickly.

Peter: Exactly. It’s been quite amazing there to see the speed that they’re willing to move. I want to talk about last week because last week, and we’re recording this on October 26th, so last week, you had a Tech Sprint on a specific topic and at the end of it you had these open sessions. I caught Chris Larson, the Head of the New York Department of Financial Services, since we’re not using acronyms and also Ashton Kutcher, the sort of entrepreneur/actor, so why don’t you tell us a little bit about that. It was obviously about a specific topic, explain the topic and what you got out of the Tech Sprint.

David:  You know, this was our second Tech Sprint on financial crime. Our first one, I imagined earlier, we really focused on AML and human trafficking. This is one where we focused on crypto currency and very specifically its traceability in the block chain to identify and apprehend perpetrators of CSAM, which is Child Sexual Abuse Material, so a very heavy topic, very painful, at times, to engage, but very powerful in the sense that many people think that crypto is a currency that is often used for nefarious purposes.

In some cases, that is true, but what we have with crypto that doesn’t exist, say with cash, is the traceability on the block chain and we are learning through a new enhances that are being made in crypto analytics. We’re learning how to analyze the flow of funds and identify the wallets, the nodes that are particularly active in the purchasing of CSAM and we’re able to do that by connecting those wallets when they actually exchange for fiat currency. That’s the moment when you can actually link an identity with a particular crypto wallet even if it is anonymous. And so, this is the work that our teams did.

We had three teams from very diverse backgrounds, from crypto, crypto analytics, from children’s advocates, we had policy folks, regulators, financial institutions, both large and small, all coming together to try to solve this particular problem and so we had three teams. Each team  had about eight or nine people on it with very diverse backgrounds and we’re able to collaborate, over the course of a week, to produce a solution. The solutions were really focused on how to help law enforcement access, leverage and easily interpret the data that can be made available to them.

Jo Ann: We had five regulatory agencies or six participating in the Sprint. We had the Royal Canadian Mountain Police, we had a judge from the Financial Conduct Authority, FinCEN spoke and was a judge, we had Senator Rob Portman, Congressman Anthony Gonzalez, you mentioned Ashton Kutcher who was a Founder of a group called Thorn along with Demi Moore which protects children from these crimes. This crime is particularly heinous because the children are abused when they are going through the experience that they’re put through and then they’re re-victimized as their images are shown potentially forever online and it’s very difficult to find the crime itself.

So, we have law enforcement involved, people from DOJ, the FBI, the IRS brought down a big case and we added the dimension of trying to find these crimes by finding their patterns and the money in addition to the online photographs and videos themselves. We actually did have one of our teams find some live leads, this wasn’t beyond our expectations when we started, but developing these technology approaches, they found what appears to be some live CSAM crime underway and we were able to have that analyzed by Chainalysis which was a partner as was Ripple.

The whole idea came from Ripple and referred to law enforcement so it’s possible that these efforts may have saved some children already and then the winners are going into presentation to FinCEN to drill down further how the tools they developed might be used in law enforcement.

Peter: Right, I remember I was listening to your remarks on Friday morning, Jo Ann, and you were……what was striking to me was that you’ve got people, like you’ve got people who are focused on CSAM and that’s their area of expertise and you’ve got people who are focused on crypto and that’s their area of expertise and then you’ve got other people who are focused on catching these criminals. Their siloed, they don’t really have the knowledge of the others so it seemed like what you were going to do there that was most striking to bring together all these expertise, but have them cross-pollinate. So, the crypto person now understands about CSAM crimes and vice versa.

Jo Ann: Exactly, that’s the key to the Tech Sprint, it’s crushing the silos and bringing….and it’s especially bringing the tech people to the table. In the Regtech Manifesto, we have a section where we said, the technology people need to be in the room where it happens when we’re doing financial regulatory policy and they aren’t usually.

Peter: Right.

Jo Ann: But, when you put them in that room, they’ll have a different idea than the rest of us who may be lawyers or policy people are going to have and how you might be able to get out a complicated problem.

Peter: Right, right.

David: And part of this, Peter, is that you building lasting relationships. You know, at these Tech Sprints, you’re not only building relationships between regulators and market participants, between market participants and subject matter experts, but also between the regulators themselves.

Peter: Right.

Jo Ann: Even virtually, this one was virtual, the one we did with last year was live. Even without being able to grab a beer with each other, whatever, people made friends and they’re going to keep working on these problems.

Peter: Right, right. You know, in the virtual world we’re all used to it now so it is something that we find that….people are, I think, pretty open, for the most part, to creating new connections virtually. We found that here at LendIt with our events, we’ve been really pleased that people are willing to do that. So, we’re running out of time, but there’s so many other things we could talk about.

Maybe I just want to hit on….I’d love to get your sense on Decentralized Finance and that’s something that I’m starting to take more of an interest in. I don’t know if it’s anything that you’ve really thought about at AIR, but it feels like to me….you know, it’s becoming the next hot thing. The biggest concern for me about DeFi the way it’s kind of structured is a regulatory concern. The technology is great and it’s efficient, but it’s because we’re sort of combining, you know, crypto currency that is cross border by definition and I feel like the regulatory piece is still unsolved. Is there any work you’re doing in that area?

Jo Ann: Broadly so, yes. I mean, we haven’t had a project on DeFi, but we think it really reinforces the case that we’re making, that we can’t sit around waiting for bad things to happen, there might be some ahead. We really need to be gearing the regulatory capacity to move quickly without moving too fast and choking off good things. DeFi, crypto itself, Libra, the Chinese….I know you’ve spent time in China, they’ve already got their e-Yuan out there, we’ve got proposals for a digital dollar in the United States and grammable money, the Central Bank digital currency is under discussion in many parts of the world, how are we going to regulate these things (Peter laughs).

There’s a lot of smart work going on at both the SEC and the CFTC, sorry for the acronyms, but on using Artificial Intelligence to begin again to understand patterns, but to do that, we have to get the information in accessible form. So, we are really interested and, well, the upside opportunity of these things and also….which, you know, some of these just can be such a democratizing force if we do regulate it right, driving down the cost of intermediating financial transactions, taking friction out of it.

Again, think of the world wide web analogy, but the fact with possible problems to the regulators. We talk about this in the Manifesto, the regulators are going to need new skills, new training, new ways of collaborating with each other, with the industry, it’s going to be a big shift, but necessary and exciting. Frankly, I think, the field is attracting tech people because tech people like interesting worthwhile problems.

Peter: Right.

Jo Ann: We’ve got a lot of them.

Peter: Yeah, it’s a challenging problem on many levels. So, maybe, David, last word and we’d love to kind of get a sense….I mean, you talked about the CSBS and NYDFS Tech Sprint, but what else can we see coming out of AIR down the track?

David: Well, I think what we’re working on right now is identifying a series of projects that can really put in place the ideas and the resources that we outlined in the Regtech Manifesto. So really, we’re working on a couple of ideas to make them very concrete, make it into a particular project, the demonstration project that can help people really better understand what we’re talking about and help regulators understand the first baby steps that they can take to actually begin to achieve digitally-native regulations.

Peter: Right.

Jo Ann: And I think we might have forgotten to say, Peter, that we are launching the space, that’s what we’re calling the Regulatory Design Project. So, let’s take this idea and then figure out what is the work that should be done first concretely, as David said, what are the places where there’s the biggest nesting link that’s holding back progress and AIR is going to try to take that on with partners, including launching a series of webinars called the Regulatory Design Series will jog down on all these topics.

Peter: Interesting, interesting, okay. Well, we’ll have to leave it there and I am actually more optimistic than I was last time we chatted, Jo Ann, so I really appreciate you coming on the show sharing all these fascinating work you guys are doing at AIR. Thanks, Jo Ann, thanks, David, appreciate your time.

Jo Ann: Thank you for having us, thank you.

David: The art of the possible, Peter.

Peter: Indeed, okay (laughs). See you.

David: Thank you.

Peter: It really struck me after I hung up with Jo Ann and David that really, what’s amazing in what they’re trying to do is that the cost of compliance is what you….you read about this all the time. You know, banks, fintechs all have to deal with huge compliance costs and there’s really no way around it, there has been no way around it.

But, what AIR provides and what Jo Ann and David just pointed to there is there is a potential future  where that can be changed and changed quite dramatically is we’re starting to have this be, I imagine, like a digitally-native regulation where there’s API’s involved and really you can know with certainty how your operation is going to be impacted by a new regulation, you know, how you can produce reporting that the existing regulations requires and it can be all done electronically. The cost that can be taken out of the system is quite dramatic and I think it’s an exciting place.

We also talked when we stopped recording that, you know, this is a really complex problem that they’re trying to solve here and so, you know, they’re attracting some of the brightest and best minds in the world to attack these problems. So, one thing I’m really quite confident of is that in ten years time, the way regulation is innovated in the financial system, I think, will be very, very different and it’s going to be exciting to see how that transpires.

Anyway on that note, I will sign off. I very much appreciate you listening and I’ll catch you next time. Bye.

Today’s episode was sponsored by Zest AI. Zest AI has been perfecting AI-enabled credit solutions for over a decade and is committed to empowering lenders of all sizes to built, adapt and operate fairer, more accurate lending models. The Zest Model Management System is the only complete AI solution built specifically for fair and transparent credit. Powerful, compliant, swift and easy, see how Zest AI can transform your lending at zest.ai.

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Podcast 258: Rich Cordray, Former Head of the CFPB

The former Director of the CFPB talks about the impact the CFPB has had as well as his thoughts on payday lending, overdrafts, open banking, the Supreme Court decision and more.

July 31, 2020 By Peter Renton Leave a Comment

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The last financial crisis ushered in the Dodd-Frank Act and with that the Consumer Financial Protection Bureau (CFPB). The CFPB had a mandate to protect consumers from financial harm but it has not been without controversy.

Our next guest on the Lend Academy Podcast is none other than Rich Cordray, the first Director of the CFPB from 2012 through the end of 2017. Earlier this year he published a new book, Watchdog: How Protecting Consumers Can Save Our Families, Our Economy, and Our Democracy, that shares many of the details of his tenure.

I wanted to get Rich on the show to get this thoughts on the crisis and many of the other major issues of the day, not least of which is the recent Supreme Court decision on the constitutionality of the CFPB leadership structure.

We recorded this podcast on Zoom so you can watch this interview on YouTube or view it below.

In this podcast you will learn:

  • How playing Jeopardy help Rich pay off his student loans.
  • What he is most proud of in his tenure as head of the CFPB.
  • How the complaint process works at the CFPB.
  • How the bureau changed the behavior of financial firms.
  • What the most challenging part of being the Director of the CFPB was.
  • Why the CFPB was wrong recently when it rescinded the restrictive payday lending rules.
  • Where he draws the line on high interest rate lending products.
  • What Rich thinks of the state of overdrafts in banking today.
  • How fintech companies should work with the CFPB when creating new products.
  • Rich’s thoughts on open banking and whether it should be mandated here as it is in other countries.
  • Rich’s somewhat surprising view on the recent Supreme Court decision regarding the CFPD leadership structure.
  • What he thinks about the regulatory response to the crisis.
  • What the priorities of the CFPB should be if we see a Biden presidency.

This episode of the Lend Academy Podcast is sponsored by LendIt Fintech USA 2020. The world’s largest fintech event dedicated to lending and digital banking is going virtual in 2020.

Download a PDF of the transcription of Podcast 258 – Rich Cordray.

Click to Read Podcast Transcription (Full Text Version) Below

PODCAST TRANSCRIPTION SESSION NO. 258-RICH CORDRAY

Welcome to the Lend Academy Podcast, Episode No. 258. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt Fintech.

(music)

Today’s episode is sponsored by LendIt Fintech USA, the world’s largest fintech event dedicated to lending and digital banking is going virtual. It’s happening online September 29th through October 1st. This year, with everything that’s been going on, there’ll be so much to talk about. It will likely be our most important show ever. So, join the fintech community online this year where you will meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Sign up today at lendit.com/usa

Peter Renton: We’ve a very special guest on the show today, I’m delighted to welcome Rich Cordray, he is the former Director of the CFPB, a position he held from 2012 through the end of 2017. He was the first Director of the CFPB and he’s also recently written a new book, it’s called “Watchdog: How Protecting Consumers Can Save Our Families, Our Economy and Our Democracy.”

We talk about a range of different topics here, we talk about payday lending, we talk about overdrafts, we talk about the Supreme Court decision, we talk about innovation and how the CFPB really encouraged that and we talk about open banking and much more. It was a fascinating interview, we hope you enjoy the show.

Welcome to the podcast, Rich!

Rich Cordray: Glad to be here.

Peter: Okay. So, you’ve got a very interesting background, but one thing I want to touch on that I was reading about in your background going back many, many years, you were actually a Jeopardy champion back in the 1980’s, I believe, so why don’t you just tell us a little bit about that experience and how it sort of, I guess, influenced your future back then.

Rich: Well, that was my default strategy for paying off student loans (Peter laughs). It doesn’t work for the broader population, but it worked for me. Now, I had done some quiz show-type programs over the years in school and I had a friend who went out and was on Jeopardy and did very well and he came back and said I should do that.

I was in law school at that time, I felt like I was very busy, but the next year when I went off and served as a law clerk, I found some time, I went off to Los Angeles and tried out which was how you did it in those days, this was before online. I tried and got invited to be on show and was one of their five-time champions at that time, again, different from now. You played five games and if you won five games in a row, they took you off the show and had you come back later for the Tournament of Champions. I did that and it was, you know, successful for me, I made more money on Jeopardy than I did working for the Supreme Court that entire year (Peter laughs).

Peter: Great, that’s a great story. Well, let’s fast forward through several decades, I guess, to your time at the CFPB. The CFPB has been….you came out of the financial crisis and Dodd-Frank and you were the first permanent appointed, you know, Head of the CFPB so we look back at that time, what are you most proud of in your tenure there?

Rich: You know, there’s actually a lot of things. We had a great team of people and I’m proud of building the agency and building the quality of the personnel as highly as we did, but I would say there were three things, I think, that stick out the most. The first was that we were willing to bring and were aggressive about bringing enforcement actions to change behavior in the financial industry We ended up recovering $12 Billion for 30 million Americans who had a series of different enforcement actions and I think that made a difference in the marketplace.

Second, we were coming off of a financial crisis that had been caused by tremendously irresponsible and predatory mortgage lending and Congress had given us the task of putting safeguards in place to improve the mortgage market and to make it a stronger market, a better market for consumers and, frankly, better for the industry which had failed dismally in the lead up to the crisis and I believe we did that. I think the rules had been assessed, now there was a five-year look back requirement, we’ve come into this new crisis and foreclosures have been very low, loans have been strong and so that was important.

The third thing is something I talk about in my book, a whole chapter of my book, and I was surprised that it lead itself to that much action, but we set up a complaint response system that allowed individual Americans to have their voices be heard and have their problems be handled and responded to by the Bureau. More than 1.3 million people did that during my time there. They’re now well over 2 million complaints that they’ve handled and it has been very effective for people across the country. It also was very effective at helping the Bureau understand better what kind of real-time challenges consumers were facing so that we could understand and address those challenges in that respect too.

Peter: So, how did those complaints work like someone files a complaint, you can’t go and fully investigate 1.3 million complaints, you just don’t have the manpower for that so, do you look for….if like 50 people were complaining about the same thing, do you go and investigate it? What was the process then?

Rich: So, every complaint got handled and processed. In the first place, what we did was we put them to the financial company that was complained about to address in the first instance which is interesting because very often the consumer had gone to the company once or twice before coming to us, but we found that when we were looking over their shoulder and we made it clear to them that if they didn’t process complaints appropriately that could be the basis for an enforcement action, they were more responsive.

They gave them more respect, they gave them more time, more effort so that was important, but as you say, it was also important for us to recognize that to do meaningful interventions on these complaints, we need to look for a pattern of problems that consumers were facing. When we found that, we did take enforcement actions and we did look at companies through our examination process or supervision process to clean up those kinds of problems.

I tell a story in the a book about a young service member and his father, he was put into a very predatory auto loan and it turned out it was part of a network of lenders across the country that were doing this to service members who were right targets for abuse. They are young people, out on their own for the first time, guaranteed paycheck from the US government so they are very handy targets for a lot of predators.

We looked at that and found a pattern of problems and we ended up taking an enforcement action that corrected the problem for 50,000 service members across the country, recovered millions of dollars and ended up leaving and paying the Pentagon’s Allotment Program for paying of debts for military service members that solved a lot of problems on into the future. So, that was an example how the voice of the consumer amplified sometimes by, as you say, multiple complaints, a pattern of complaints could become a good work done by the Bureau to resolve consumer problems.

Peter: So, do you think that during your tenure you had an impact on the behavior of companies in financial services? Do you feel like this…..the fact that they knew that there could be an enforcement action against them change behavior?

Rich: It clearly changed behavior and it changed behavior significantly for some institutions, not as significantly for some others who we continue to have trouble with. Of course, these things are uneven across an entire marketplace with lots of different players, but they certainly understood and by the way it was part of the resistance to the Bureau. There was significant resistance to the Bureau and efforts in Congress to slow us down or impede us in various ways because companies did not want to be told what to do, they did not want to have the law enforced aggressively and very often they were dragged kicking and screaming into change, but in many instances that was not the case.

In many instances, people realized that if we could clean up the marketplace it would be better for the customers, it would be better for them if they were trying to be a high road business doing the right things, not having to compete against the cheaters that cut corners or violate the law to get a advantage which creates a very different dynamic in the marketplace. They had it in the market even after the crisis.

So, again, you know, it varied from company to company, but there was a lot of behavioral change, there was a lot of straightening up and thinking harder about how they were serving the consumer and a lot more emphasis on listening to the voice of the consumer which is something we stressed all the time.

Peter: Right, right. If you look back and look at some…I was reading some of the articles from your tenure there and there were certainly some people who had tremendous dislike, it seemed, for you personally, but certainly for the Bureau, like you mentioned, the whole set up of the Bureau, we’ll get to that in a little bit, but I’m curious about…from your perspective what was the most challenging part of being the Director of the CFPB?

Rich: Well, I certainly did have to face the facts early on that I wasn’t going to be liked by everybody (Peter laughs). In particular, you know, some industry executives were very opposed to what we were doing, they felt threatened by that and many of them got with the program and understood it and recognized that change had to be made and they had to be part of the change and learn to embrace it.

But, for example, when I would go to testify in front of Congress, which I was required to do in front of the House and the Senate about every six months although it turned out to be more often than that because they took a great interest in what we were doing, these were difficult sessions and there was some real opponents of the Bureau.

People who had been opposed to the Bureau had voted against the creation of the Bureau were doing their best to try to, as I say, resist the work that we were doing and sometimes they got very partisan, they got very nasty and that was just something that I had to learn and deal with as best I could. I would try to diffuse it, if I could, but the only way I knew for sure that I couldn’t diffuse it was by doing less at the Bureau and I wasn’t willing to do that. We felt strongly the sense of mission to improve the marketplace and we knew we had limited time to do it so we were pushing it to upgrade the place,

Peter: Okay, okay. So, I want to talk about something that’s been in the news a bit lately and this is about payday lending or small dollar loans and, you know, the CFPB under you had proposed limits on payday lenders and those limits have now been rescinded. I’d love to get your perspective on why it was wrong to rescind those rules, in your opinion.

Rich: Sure. And, again, this is against the background of….. payday lending was an industry that grew up at the state level. The usury caps in place in actually all 50 states limiting the interest rate that can be charged on the lending of money and there are a number of states that have made an exception in interest rate cap to allow small dollar lending at much higher rates because it is a less lucrative business, it’s costly and so forth, but about a third of the states have not rescinded their interest rate cap so, in about a third of the states there is no payday lending.

It’s an interesting reflection when we try to restrict payday lending, the industry said, no, you can’t do that, people can’t get by without access to this kind of credit. Well, about 100 million Americans in 17 states do get by without access to this kind of credit so that’s an interesting reflection. What we were doing was trying to put in place, for the first time, better rules to reform the market and the reform that we were looking at, in particular, was that small dollar lending has become lucrative for companies because they targeted their particular kind of customer.

It’s a customer who needs a loan, but will not be able to repay that loan in full at the end of the two weeks or the short period and will have to roll it over again and again and pay fee after fee and end up in a long term debt trap as opposed to a short term situation at very high rates of interest. We’re talking 390% on average and sometimes exceeding 500% in your rates of interest, obviously, willingness to finance people stuck in these loans for a long time.

So, the reform that we put in place as the first rule governing the payday lending market was that if you were going to make a payday loan or be it a title loan, you have to first make a reasonable assessment that the borrower would have the ability to repay that loan when it came due without having to immediately re-borrow and that’s in principle the ability to repay principal that has been put in place.

In the mortgage market, in the credit card market it works very well, it’s typical of traditional lending. Typically, a lender will not lend to a borrower unless they know the borrower is likely to be able to repay or else they will lose their money. It’s just that this particular industry is different, we analyze millions of payday loans and found that they made most of their money off the strapped repeat customers who were paying fee after fee and ultimately, might well default, by then, the payday lender had more than made their money back.

So, that was the gist of the reform rule. Now, what is definitely effective revenue and the business models of payday lenders as they exist today and they have been deeply resistant to that all along and after I had left the Bureau, during the last two months of my term, they did go back to the Bureau and have gotten the Bureau now to rescind that rule, although that’s going to be challenged in court, and I think the ultimate outcome at the moment remains highly uncertain. But, that was the reason why we attacked those problems and that’s the problem we were trying to take on and that’s the reform we were looking to put in place.

Peter: Right, right, it makes logical sense. If someone’s taking a loan, it would make logical sense that you should check to see that they could afford it. Anyway, I want to talk about…there’s payday lenders and there’s the installment lenders that are often, you know, 10/15%, but there’s in-between. I’d love to get your perspective because you hear from the advocacy groups saying that, you know, anything over 15% is unacceptable, it’s too high and there’s obviously usury caps in many states.

But, what about those companies that are lending money, like there’s …..US Bank has a pretty significant lending program, it’s not payday, same with Key Bank, there are other smaller banks that have these, many online lenders that have programs. In your assessment, is there a line in the sand….like is it 36%, is it 15%, is there a line in the sand where you say that is unacceptable and it’s going to be harming the consumer or how do you know? There are some lenders that I know that have fairly….like rates in the high double digits that go out of their way to try and make sure it’s a positive outcome for the consumer. So where do you stand on that?

Rich: Well, look if you’re talking about a rate that’s in the high double digits, it’s very difficult to make that a positive outcome for the consumer. I mean, it’s possible in individual instances for some particular reason, but in general, that’s not going to help people’s finances and the argument here over access to credit is should there be access to credit of any kind whatsoever no matter how harmful it may be or should it be only access to beneficial credit. Now, the consumer group typically draw the line in the sand on the 36% rate of interest, that’s sort of the top end of any kind of credit card program, it’s become an acceptable number around the country at the state level.

I, personally, think that that’s a reasonable level although I think you could add certain fees, again….. short term loans are more expensive to make and more cumbersome to make and less lucrative. So, when I was the Director, we encouraged US Bank to pilot a program that turned out to be somewhat higher than 36%, but well under triple digits or under triple digits and Fifth Third and KeyBank. To see banks, some banks, trying to offer a small dollar loan product and many credit unions offer such a product, I think is a good thing.

It creates competition and shows that small dollar lending can be done at more affordable levels. You don’t have to be at a 390% rate of interest and make money in this market and so I’d like to see more banks try to offer a more beneficial product, but I don’t want to go back to… there were some banks…Wells Fargo who at one time were offering the high triple digit interest rate loans and they were really mimicking the payday lending industry and bringing that industry into the banking process rather than coming up with decent banking loan programs that, of which you say, there are several and there could be more, I thought was the wrong approach.

Peter: Okay. So, I want to talk about overdrafts. You talk about this in your book and it’s a personal pet peeve of mine so I want to give you a situation where someone overdraws their account by $10, they pay a $35 fee. If that person pays back that fee and the original amount in seven days, I did the math, it’s an APR of 18,250%. Why do we have a product like that and I know you took some actions, you talk about it in your book against some banks on this and many of the digital banks are really using this no overdraft as a selling point and I’d just love to get your perspective on how you feel about overdrafts, in general.

Rich: Yeah. I think consumers have learned a lot about overdrafts in the last decade. They know that it is a danger, they know that it can be very harmful, people often talk about the $35 cup of coffee and people are trying to avoid that. As you say, there are some fintech providers that have developed good products, more friendly products to help them avoid overdrafting, and by the way, the people who pay a lot of overdrafts are some of the people who subsidized free checking for other customers at the banks.

The banks became dependent upon this as a source of significant revenue when the banking regulators allowed them to move in their overdraft in a very aggressive way, a very costly way for consumers. I think that the efforts being made to use technology to root out the very benefits of the consumers…we did not issue a rule on overdrafts while I was the Director in part because there had been new rules just issued by the Federal Reserve and need to take some time to see how those played out and our bandwidth was really absorbed by the mortgage rules which were such a heavy burden for the Bureau early on. But, I think overdraft could stand some consideration in terms of whether they are a regulatory reform that would improve that market, at the same time, there’s been efforts made to develop safer banking products within the system. The FDIC has had such an effort, we joined them on that.

As you say, there are fintechs that are providing services and competitive programs instead of much more user-friendly for consumers so it’ll be interesting to see how that plays out, but it’s still the case, overdrafts is a significant source of revenue for the banks. It is not a very user-friendly product and it’s very expensive, there are ways the banks could provide more notices and alerts to help people avoid overdrafting, They typically don’t want to cannibalize their revenue to a significant degree and so that’s the standoff that we currently face.

Peter: Right, right, okay. I want to talk a little bit more about fintech here and you talk about this, you have a whole chapter in your book where you had this…..there’s fintech throughout your book, actually, but there’s one chapter where your talk about Project Catalyst which was  the innovation project at CFPB. We had Dan Quan on the show, Dan has been a long time friend of LendIt and he’s actually helped us set up this interview, but I’m curious about…..you say there you don’t like the sandbox concept. So, I’m just curious, how should fintech companies work with regulators like the CFPB if there is this regulatory uncertainty, where they are creating new products.

Rich: Yeah. So, sandbox is become some kind of a slogan that’s turned around kind of loosely, not only in the United States but around the world, and it can mean different things to different people. If it means a kind of regulation free zone where anything goes and there’s a lot of laxity, I don’t think that’s good for consumers and I don’t think it’s good for the industry because it’s not sustainable over the long run. If you think that that’s useful for incentivising fintech to try new things, I give some credence to that.

We tried to do this kind of incentivising through our office, our program, which as you mentioned Dan Quan headed it. He was tremendous at the Bureau, really spent a lot of time understanding the fintech industry and bringing their insights back to the Bureau helping us understand where they were consumer-friendly and where they were consumer-risky and we spent a lot of time and paid a lot of attention to some of the leading fintech companies to help guide them on their way and see if we could help clarify some regulatory obscurity that they run into.

They inevitably run into it because if they’re offering new products, novel products then clearly, it’s not apparent how they fit into this regulatory scheme which is drawn around existing or prior/previous products. So, there’s going to be questions, there’s going to be uncertainties and we try to leave the door open for people to get a better read on that while at the same time encouraging people to innovate, but to do it in a consumer-friendly way and to recognize that we didn’t have all the answers as to what that meant, they did not have all the answers to what that meant and that we could learn from each other as we went along and what we tried to do.

But, I don’t think there’s yet a clearly defined program at any of the agencies in the United States or even around the world that is working effectively to marry a very rigid world of financial regulation with the innovation needed with fintech companies to meet consumer needs. It’s something that you need to keep working at and keep trying to fit together and there’s a lot more work to be done in that area.

Peter: Okay, okay. I want to switch gears a little bit and talk about open banking because this is something that I’m also really interested in and it’s been mandated in the UK. It’s been now two and a half years or thereabouts that they’ve had it. Actually, there’s been a lot of innovation around basically getting all this access, the banks can no longer solo their data and they have to provide API access and there’s some really, really interesting products developing there. Here, there’s been no regulatory action on this and I’d love to sort of get your take on whether we should go the route of the UK and force banks or do you think the market should decide?

Rich: That’s a great question because it is, as you say, being done very differently around the world, in Europe, in the UK and, frankly, increasingly Canada and Australia. There are open banking initiatives that are regulatory in nature, they are being driven by the regulators. It’s interesting because there has to be a certain confidence by the regulators that they know the right direction to go. In the United States, it’s been more market-driven and the regulators have been more hands off and that could work, it’s possible.

The difficulty in this area is that there is a real disconnect between individuals who want to control their own financial information and the biggest financial institutions, the banks, who have a lot of that information and put time and effort into assembling, it, analyzing it, organizing it, safeguarding it and the like. I firmly believe, and we made this clear when I was the Director at the Bureau, that that information need, ultimately, to be controlled by the consumer, permission of the consumer, who should direct it’s use.

The financial institutions have resisted that, and there’s kind of a freeway battle going on, they may well be ways to establish standard setting organizations. I’ve done some work for Finicity and they’re working on the FDX standard setting organization that may make a difference in this industry, the FDX, which is today. Without a request for information to understand more how it could assist in standard setting, standards have to be set and they have to be enforced in some manner, it’s going to work and the natural way that happens in a lot of places through a regulatory body, but we’ll see how it develops here.

It does seem to me that there is tremendous, tremendous value for the consumer in being able to permission and control their data to have it go to third party experts, as you say, that can help them understand better how to manage their finances, how to apply for loans, what they really qualify for in the credit space and getting the best deal for themselves. All of these things can flow from that.

The other side of this is data has to also be kept secure and there has to be privacy safeguards so that the use of it is something that the consumer controls and doesn’t get away from them. That’s been a difficult issue for a lot of financial institutions and, again, creating some standard setting body to help enormously on that.

That’s something some of us have been working on and are very encouraged at the prospect of doing it that way, but we will see and it may be that the United States will have to transition to more like the European regime or the European and other regimes may learn from what we’re doing in the United States and may find that a lot of these things can be adapted to their mode, we will see.

Peter: Interesting.

Rich: Early days in many respects for open banking although the promise of it and the incentives to do it and value for the consumer, I think, are now beyond dispute.

Peter: Right, right, okay. So, we need to talk about the Supreme Court decision that happened earlier this month, I think it was, and it especially struck down the CFPB leadership structure as unconstitutional. I thought it is really a sad day for the CFPB, it’s a sad day for the consumers and then I read your op-ed in The Washington Post where you said, actually, it’s not really….there is a silver lining here and more than a silver lining, you said it’s actually a win for consumers. Explain why you say that.

Rich: You know, in some respects, I am one of the very few people who are in the best position to assess the position and the benefits of that decision, having been the first Director and led the Bureau for six years, obviously the longest tenure in the Bureau’s history. I can tell you that I don’t think that my work would have changed much at all if I had been removable at will by the President as opposed to removable for cause. There’s a kind of independence that comes with that, you’re hedged in by a lot of different influences and circumstances in any event, but at the same time, it wasn’t going to change my approach to the mission of the agency.

The other guest issue that was stated in the case was whether if the leadership starts with the Bureau, the independent tenure of the director was found unconstitutional, was that going to somehow upset the applecart for everything the Bureau had done over the last ten years and was it going to perhaps even put the Bureau out of business for the future. There were parties in the case or briefs in the case filed that argued that point and argued for that broad, disruptive result, but in the end the court did not go there.

The court said in fact that aside from the leadership structure and the tenure provisions for the director, everything else about the agency was valid and would be upheld and certainly opened the door for the agency to go back and ratify actions that had been previously taken whether by me or by Acting Director Mulvaney or Director Kraninger and they have ratified many, many of those actions taken and they’re ratifying more as we have each passing day. So, it’s not a disruption to these markets and to recognize that the work with the Consumer Bureau has done, although it’s been resisted in many ways, has in fact been constructive for a lot of these markets. It’s improved the mortgage market, no question. It’s improved the credit card market and it is having its effects in other markets as well.

Peter: Right, right, okay. So, we’re almost out of time, but a couple more questions I really want to get to here. Obviously, we’re in a very unique time right now where there’s tremendous uncertainty, there’s a lot of financial hardship happening with people unemployed and there’s political wranglings happening right now. We are recoding this in mid-July and unemployment [benefits] may end at the end of this month and you know, obviously the forces surrounding force…I mean, what do you think…I’d love to get your perspective on how we can protect consumers in this time and what sort of a regulatory response should we have to enable that.

Rich: Sure, and this has been a fascinating and very difficult situation that has just come up, you know, so swiftly in this country this year and didn’t really even happen until March of this year. After that time, we were in a long, slow recovery from the last financial crisis, I have said again and again and many others have said the worst financial crisis of our lifetime, that crisis in 2008. Well, lo and behold, suddenly we have a financial crisis to match it and maybe exceeded, Peter, in 2020, particularly with the speed of the economic collapse with the closing of the economy that followed the mishandling of the pandemic by this administration.

And, the interesting thing is the last financial crisis was caused by financial markets, by the mortgage market and the imbalances and the excesses and the irresponsible behavior there that flowed through Wall Street and securitized investments and caused a lot of damage to the financial system. This is not a financial crisis of that kind, this was caused by a pandemic, but whatever it is that’s upset the engine of the economy, knocks it off of it’s smooth path, the results often end up being the same.

There will be unemployment, there will be people who cannot pay their bills and cannot make payments and end up defaulting because they’ve lost income, there are very uncertain times for many families. In the United States, when you lose a job, you often also lose healthcare and that can cause tremendous financial stress for families and uncertainty. The oddity of this recession though is that the interventions from Washington have been so dramatic, so vast and so quick that, in fact, we saw average household income, when you take both income and jobless benefits and put them together, rose in April and we’re still up even though down slightly from April, still up in May.

As Jamie Dimon said recently, I agree with him, this is a very strange recession. Income has been up, house prices have been up, the kind of misery that we often feel as people are dislocated, businesses go out of business and people are out of work has been deferred in this case and may be deferred further if we did another stimulus bill from the Congress in the next couple of weeks, which we may well get.

Eventually, it will hit and we will have a problem, we will have closures, we will have evictions, we will have people on long term unemployment. It’s already estimated by most responsible observers that unemployment will remain in the double digits through the end of this year and remain historically high through 2021. So, we are in a collapse that is significant, it is being papered over by policies that have been very aggressive, not just by the Congress, but by the Fed and how all that plays out is very difficult to say.

We have this tremendous disconnect between the investment markets on the one hand and the actual economic numbers for the GDP and the real economy which are much worse. Who is right and who is wrong will take some time to play out, particularly the Fed artificially stimulating the economy as much as they have been and with the country suddenly running which is going to be $4/5 or 6 Trillion deficit starting this year which is unprecedented.

Peter: Right, right, okay. So, final question, we are about three and a half months from election day and obviously we don’t know what’s going to happen, but if Joe Biden wins the presidency I would expect the CFPB may take a slightly different direction, what do you think the priorities of the CFPB should be in a Biden presidency?

Rich: Well, I think the priority of CFPB should be whether….I’ve always thought the priority of CFPB should be, which is the C, which is consumers and in the time where the pandemic and it’s effects are going to continue to mean a lot of hardship for a lot of Americans and, again, maybe it didn’t happen in April for some of them, maybe it didn’t happen in May, but it will happen for many of them eventually here, there’s going to be a need for a vigorous response from the CFPB.

They’re going to have to protect people in terms of their credit reports, they’re going to have to protect people from abuse and harassment by debt collectors, they’re going to have to think about how we transition out of a period where people haven’t been able to pay their mortgages, haven’t been able to pay their rents and what kind of public policy response has to be.

Then we’re also going to have to…… once we’ve righted the ship and we’ve got the economy back on the course of recovery and long term recovery, not an up and down herky jerky recovery as we seem to be having right now, we need to think about whether there are any reforms that are needed to address the problems that have been laid bare by this current crisis.

The last time the Dodd-Frank Act was a significant financial reform bill, I don’t know if that’s merited here because it wasn’t a financial problem that caused the crisis, to begin with, but there are some things around Fannie Mae and Freddie Mac, there are some things around the hedge fund and others that may call for congressional legislation, and, again, we’ll see what the foot of the landscape is.

As you say, we’re three and a half months from election, that’s a lifetime in politics as many people have seen and it will be a very different course mapped out for this country, depending on who wins this presidential election and the course will roll up again very dramatically, depending on how that pans out.

Peter: Okay, Rich, we’ll have to leave it there. I very much appreciate you coming on the show today.

Rich: My pleasure, thank you.

Peter: Okay, see you.

You know, if every financial institution really had the best interest of consumers in mind with every single thing they did, then we would not need the CFPB, but the reality is they don’t and even…..there are some that either by errors of omission or by hiding things in the fine print, they try and get away with things that really is not in the best interest of the consumer. There are those that have tried to really just dismiss the CFPB as something that’s worthless, there are those that have really challenged it.

Now, the Supreme Court has ruled and Rich said it’s actually really a net positive for consumers and I think that it is good. As Rich said, it changes behavior knowing that there’s a watchdog out there that financial institutions can’t just have free reign, they’ve really got to have the best interest of the consumers at heart.

Anyway on that note, I will sign off. I very much appreciate your listening and I’ll catch you next time. Bye.

Today’s episode was sponsored by Lendit Fintech USA, the world’s largest fintech event dedicated to lending and digital banking is going virtual. It’s happening online September 29th through October 1st. This year, with everything that’s been going on, there’ll be so much to talk about. It will likely be our most important show. So, join the fintech community online this year where you will meet the people who matter, learn from the experts and get business done. LendIt Fintech, lending and banking connected. Sign up today at lendit.com/usa.

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Filed Under: Lending and Fintech Podcast Tagged With: CFPB, regulation, Rich Cordray

Views: 198

Manatt Fintech: What to Expect in 2020

Manatt, one of the leading professional services firms in fintech, looks back at 2019 and sets the stage for fintech in 2020 and beyond.

January 15, 2020 By admin Leave a Comment

Views: 612

[Editor’s note: This is a guest post from Brian Korn, Neil Faden, Benjamin Brickner and June Kim of Manatt, Phelps & Phillips, LLP]

Taking a break after eight brisk years of regulatory and litigious turbulence, the world of fintech and marketplace lending in 2019 was notable for being more business as usual, or what some might call a “ho hum” year of upward growth.

Despite the moderation, 2019 saw growth in nearly all aspects of the fintech ecosystem, including:

  • Capital flowing to originators, especially payments and AI, but fewer start-ups emerging (big equity bets in Figure Technologies, Goldman Sachs’ investments in Even Financial and Climb Credit)
  • Retail access to bespoke debt investments and funds growing sharply, with lightning-fast subscription periods (YieldStreet, Cadence, PeerStreet, CrowdStreet, Sharestates, CNote, Fundrise)
  • Growth of securitization with greater rate and spread stability (15+ unique rated fintech issuers and many issuing $1 billion annually in nearly quarterly ABS transactions)
  • Established banks swallowing smaller fintech fish and digesting their tech or high-profile banks partnering with fintech (American Express, KeyBank, Goldman Sachs, Barclays, Silicon Valley Bank, Santander)
  • Credit and warehouse lenders opening the market for upstream origination capital (UpLift, SoFi, Idea Financial, Upgrade, Platinum Autos, CircleUp)
  • About the only facets of fintech that saw a cooling off were interest in blockchain and cryptocurrency, and the federal regulatory environment.¹

Here are a few key industry trends we observed in 2019 and areas worth watching as we enter 2020: [Read more…]

Filed Under: Fintech Tagged With: 2020, fintech, Manatt, regulation

Views: 612

Why a National Interest Rate Cap is a Bad Idea

Legislators want to introduce a national rate cap of 36% but there are better ways to solve the problem they are trying to address

December 17, 2019 By Peter Renton 2 Comments

Views: 813

Last month five legislators introduced the Veterans and Consumers Fair Credit Act, a bipartisan piece of legislation that proposes an ill-advised solution to a difficult problem. It seeks to put an interest rate cap on all loans nationally in the name of consumer protection. Unfortunately, it will likely have the opposite impact on the consumers it seeks to protect.

No one likes predatory loans where consumers can sink into a debt spiral that often ends up in financial ruin. While this bill seeks to focus on payday and car-title loans, two loan products that are universally disliked, it will also impact many installment lenders. These are the companies who sit between the low interest marketplace lenders and the payday loan industry, offering loans with APRs of 36% to 100%, many of whom provide critical financial support for struggling consumers.

The fact is that an interest rate caps is a very blunt instrument to use on a nuanced problem. There are some who believe that any interest rate above 20% or 25% is unacceptable and certainly 36% is out of the question to many. But what is the solution for people who simply don’t qualify for a loan at a lower percentage rate? According to the legislation proposed these people would just be out of luck. This will lead to more bankruptcies and more lives disrupted.

This is not just my opinion. This recent op-ed in The Hill by Consumers’ Research cited a study conducted in 2014 on the historical evidence of the impact of rate caps at the state level and they concluded that “state interest rate ceilings restricted credit availability…for higher-risk borrowers.” So, the legislation that is supposed to help higher risk borrowers in effect will price them out of the system and leave them with no good options.

Sometimes I think critics of high interest loans suffer from a kind of magical thinking. That if we simply legislate away a product the demand will go away. Clearly that is not going to happen, in fact demand will likely increase for a product that would now be banned. [Read more…]

Filed Under: Fintech Tagged With: earned wage access, interest rate cap, interest rates, regulation

Views: 813

Talking Fintech Regulation at the 4th Annual Online Lending Policy Summit

Highlights from the fourth annual Online Lending Policy Summit held in Washington DC last week

October 31, 2019 By Peter Renton Leave a Comment

Views: 249

Congressman Bill Foster, interviewed by John Kromer of Buckley LLP, kicks off the Online Lending Policy Summit

I was in Washington DC last week for the fourth annual Online Lending Policy Summit. This one day event is put on by the Online Lending Policy Institute (OLPI) where regulators, lawmakers and the industry come together to discuss regulatory frameworks and responsible innovation.

The day of the Summit also happened to coincide with the day that Mark Zuckerberg was testifying before the House Financial Services Committee. There were several Congressmen who spoke who are on that committee, so Facebook’s move into financial services, specifically their Libra initiative, became one of the themes discussed throughout the day.

They kicked off the event with Congressman Bill Foster (D-IL) who is Chairman of the House Artificial Intelligence Task Force as well as a member of the House Financial Services Committee. He also happens to be the only member in Congress with a PhD in physics. He believes that AI is going to disrupt financial services as much as other parts of the economy and many jobs will be impacted. He also stressed that it is important to be able to explain any AI decision impacting consumers in a simple manner. One interesting comment he made was about the state of the US government today, it has not been structured for a world where technology is the largest industry. When it comes to interest rate caps he believes that this should be a data driven decision. If the cap cuts too deep it could harm consumers. He will be paying close attention to what California is doing in this area.

The energetic Congressman Trey Hollingsworth (R-IN) talked about the divide between urban and rural areas and how fintech innovation, particularly online lending platforms, can help to bridge the divide. As branches for banks and credit unions close rural Americans often feel that they cannot participate in the same economy as urban Americans. His north star is to ensure that rural Americans have access to today’s financial system. He also said it is important for regulators to be harnessing the latest technology and that regulatory uncertainty has the potential to delay innovation in the long run to the detriment of the US economy. He closed by telling the audience that he is a big fan of the important work we are doing in fintech. Then he was off to question Zuckerberg. [Read more…]

Filed Under: Regulation Tagged With: fintech charter, OLPI, Online Lending Policy Summit, regulation, Washington

Views: 249

Judge Rules OCC Unable to Issue Fintech Charters

A federal judge ruled yesterday that the OCC does not have the authority to issue fintech charters

October 22, 2019 By Ryan Lichtenwald 5 Comments

Views: 574

We’ve been following the OCC Fintech Charter since it was first formally proposed in December 2016. Since then it has been slow going and with no application granted. If successful the charter would have allowed a fintech to be able to operate nationally without having to go the route of state licensing.

For background, here is our previous coverage:

  • New Fintech Charter Proposed by the OCC (December, 2016)
  • The OCC Publishes Details on the Fintech Charter (March, 2017)
  • OCC Announces Fintech Charter on the Heels of US Treasury’s Report on Fintech (July, 2018)

Since our last coverage, prospects of a OCC Fintech Charter have remained in gridlock. At the heart of the problem were lawsuits that came from states including New York. Representatives from the Conference of State Bank Supervisors and the New York Department of Financial Services who challenged the fact that the OCC had the authority to even issue a charter. Due to the uncertainty, no fintech had formally applied though many had expressed interest.

Yesterday, a federal judge ruled that the OCC does not have the legal authority to issue bank charters to non-banks. Judge Victor Marrero ruled on the fact that a clause in the National Bank Act’s business of banking requires that only firms which take deposits can receive a national bank charter.

An OCC spokesperson wrote to American Banker that the agency “disagrees with the decision and the court’s interpretation of the authority the National Bank Act grants the OCC. The agency plans to appeal the ruling to resolve this issue.”

Our Take

We’ve seen firsthand the positive impact that fintech firms are having across many areas, but they are still burdened by a complex set of legacy regulations. The state by state regulatory environment which most fintechs have to go through is an expensive proposition and it stifles innovation in our country. Those that oppose the fintech charter argue that issuing charters would create an unfair playing field but the reality is that these fintechs would still go through rigorous vetting by the OCC. Obviously this news is a huge blow to the OCC and the fintech community and we’ll continue to follow developments here as the OCC plans to appeal the judge’s decision.

Filed Under: News Tagged With: Conference of State Bank Supervisors, legal, New York Department of Financial Services, OCC Fintech Charter, regulation

Views: 574

Congress Passes New Law to Mandate IRS Modernization

The Taxpayer First Act of 2019 will create a real time API-based process for income verification

June 17, 2019 By Peter Renton Leave a Comment

Views: 695

When LendingClub’s founder and then CEO Renaud Laplanche testified before congress in December 2013 he was asked what the federal government could do to help facilitate more access to capital. Renaud answered that easy access to IRS data would really help move the needle for a company like LendingClub. Nothing happened.

Four years later, in December 2017, then head of Funding Circle USA, Sam Hodges, penned an op-ed in Techcrunch arguing for pretty much the same thing. By that stage there was a bipartisan bill before Congress, co-sponsored by Rep. Patrick McHenry (R-NC) and Senator Cory Booker (D-NJ), called the IRS Data Verification Modernization Act of 2017. Nothing became of that bill in the previous Congress.

Fast forward to last week and movement has finally been made. That previous bill has become part of the Taxpayer First Act which was quietly passed by the U.S. House and Senate last week and it now heads to the President’s desk for his signature which may happen as early as this week. This is a bipartisan bill with 28 co-sponsors from both parties.

The Taxpayer First Act does many things to help modernize the IRS but the most important for the lending community is the mandate for IRS information. In particular this bill “requires the IRS to implement a fully automated program for disclosing taxpayer information for third-party income verification using the Internet”.

What this means is that lenders will have API access to taxpayer information rather than the archaic system today that relies on paper and fax processing. The existing system is pretty much unusable for online lenders who must rely on other sources of data.  The new system will be a consent-based system obviously, with the borrower providing consent for a third party to request IRS information in real time.

Nat Hoopes, the head of the Marketplace Lending Association has been working on this with various parties on Capitol Hill for a long time. Here is what he had to say about the passage of this new bill:

Congress is taking a big leap forward in requiring the IRS to upgrade its systems for income verification in the context of online loan applications and credit decisions. The MLA has had a couple of top legislative priorities on Capitol Hill since our Association launched back in 2016, and this is one of them. If it’s implemented properly, an API-based process for income verification can help reduce fraud, cut out unnecessary middleman costs, and help get more tailored products into the hands of both small businesses and consumers. It’s still going to take some time for that promise to be realized, but there’s potentially a lot to be excited about.

The key for this to actually be useful will be in the implementation as Nat points out. Oversight will be needed to make sure this new process meets the needs of industry and is widely available. But don’t hold your breath. Nothing moves quickly in government and the IRS is notorious for running on outdated IT systems. The bill contains a three-year deadline to implement this new system.

As they say the best time to have started this was many years ago, the second best time is today.

Filed Under: Regulation Tagged With: congress, IRS, Marketplace Lending Association, regulation, taxpayer first act

Views: 695

FCA Announces New Rules For UK P2P Lending Platforms

The long awaited new rules for P2P lending have been released by the FCA and will come into effect on December 9

June 4, 2019 By Peter Renton 2 Comments

Views: 1,455

The long awaited changes to P2P lending regulations in the UK are finally here. Today, the Financial Conduct Authority (FCA) announced that the new rules for peer to peer lending platforms have been set and will come into effect on December 9, 2019.

The biggest change here is around investor protections and it is also the most controversial piece. Investors will no longer be able to put more than 10% of their investable assets into peer to peer lending. Some people considered that number too low and somewhat arbitrary as many investors today have far more of their net worth in the peer to peer lending industry.

Another controversial part of the new rules is the introduction of an “appropriateness test” for investors. From December 9, 2019, P2P lending platforms will need to carry out an appropriateness assessment that considers a client’s knowledge and experience of P2P lending before the platform can accept a new investment. Not only that but platforms will be restricted to those people who are certified or self-certify as sophisticated investors, making it much more difficult for the industry to attract new investors.

Here are more highlights of the new regulations: [Read more…]

Filed Under: Peer to Peer Lending Tagged With: Financial Conduct Authority, lendy, P2PFA, regulation, sophisticated investors, UK

Views: 1,455

Manatt Fintech’s Top 5 Takeaways of 2018

The team from Manatt looks back at 2018, sharing their expertise on digital finance and marketplace lending.

January 7, 2019 By admin Leave a Comment

Views: 531

[Editor’s Note: This is a guest post from Brian S. Korn, Leader, Digital Finance and Marketplace Lending, Partner, Manatt Financial Services (above left) and Benjamin T. Brickner, Associate, Corporate and Finance. You can learn more Manatt’s work in digital finance and marketplace lending by visiting their website.]

In the financial technology industry (fintech), 2018 was a fascinating and fast-paced year. The digital finance industry has started to mature and flourish, with more creative niche originators than ever before, more investments now available online and general acceptance of marketplace lending as a bona fide securitization vertical.

It was also the second year of the Trump administration, and unlike in prior years, the industry avoided major scandal and enjoyed a lighter-touch regulatory environment at the federal level. Without further ado, here are our top five fintech takeaways for 2018:

  1. Now accepting fintech charter applications. Hello? Is this thing on??

The third time was the charm for special purpose fintech charters issued by the Office of the Comptroller of the Currency (OCC). After three comptrollers—first Comptroller Thomas Curry, then Keith Noreika and now Joseph Otting—each had a hand in promulgating fintech charters, the OCC finally announced in July that it will accept applications from fintech companies for special purpose national bank charters.

The announcement was accompanied by a helpful OCC policy statement and a Department of the Treasury fact sheet that effectively endorsed marketplace lending and the prospect of special purpose fintech banks. Fintech charters promise a national pre-emptive lending license that removes the risk of the prevailing bank partnership model and the compliance burden of state-by-state licensing.

Raining lightly on this parade was news that fintech chartered banks would be subject to the same capital and compliance burdens as other banks. But they will not be required to accept deposits, and therefore will be exempt from obtaining deposit insurance and from Federal Deposit Insurance Corporation oversight.

Raining harder, however, is the prospect that the first applicant likely will be joined with the OCC in a pending lawsuit by the New York State Department of Financial Services (DFS) and other state regulators. A previous lawsuit challenging the authority of the OCC to grant fintech charters was dismissed for lack of ripeness—the OCC had yet to receive an application, much less grant one.

With a live fish on the hook, however, the new suit presumably will proceed on the merits. The OCC and state regulators are likely to have deeper staff and legal budgets than a fintech charter applicant caught in the crossfire. However, Superintendent Maria T. Vullo, one of fintech’s toughest critics, recently announced her departure from DFS in February 2019. It is unclear how this fierce consumer protection advocate’s departure will affect New York’s position on fintech charters.

With the promise of greater market access tempered by legal uncertainty, we expect to see a rush to be second in line for a fintech charter in 2019. Despite the risks, we believe the OCC stands on solid ground and expect their view ultimately will prevail.

  1. Fintech has weathered recent market volatility well and shows little sign of slowing.

The final months of 2018 have seen increasing volatility and downward pressure in equities, with triple-digit declines in major U.S. indices a regular occurrence. At the same time, loan volume is up and investment in loan-based and other fintech products is higher than ever. While this might seem counterintuitive, we believe investors have grown comfortable with online investing and major platforms now have an established record of delivering forecasted returns. These maturing trends may be making inroads into public equity markets’ inherent liquidity and transparency.

Moreover, fixed rate returns, limited losses of principal and a relatively steady consumer borrowing base with historically low unemployment (for now) have increased crowdfunding platforms’ appeal as increasingly safe and secure investment vehicles. Given the checkered history of crowdfunding and predicted parade of horribles following the 2007–09 financial crisis, it is ironic to now see alternative online finance becoming a benchmark of safety and security.

  1. Credit markets are open and borrowers are increasingly flexible.

The credit market for online lending is deeper and wider than ever before, with several platforms accessing these resources in the latter half of 2018. Platforms that previously could not attract institutional funding until originating at least $100 million now have their choice of facilities at earlier stages of growth. Banks are using platform facilities as early entrees to securitization relationships as banks seek to develop footholds farther upstream. We see the overlap between recent Structured Finance Industry Group ABS and LendIt conferences as evidence of this trend.

At the same time, U.S. consumers (and to some extent, small businesses and real estate industry members) have shown a willingness to borrow at rates higher than their actual default risk would normally dictate. This affords platforms greater flexibility to access capital from different sources. Banks tend to lend at mid- to high-single-digit rates, and we have even seen some platforms attract Libor+250 and +200 pricing, down from +450 and +600 one year earlier. Some banks are even using these facilities to comply with Community Reinvestment Act requirements to provide banking services to low- and moderate-income individuals.

Advance rates are also creeping back over 90%, with less capital needing to be raised from mezzanine funding and equity in order to maximize a facility. Family offices, hedge funds and hard money lenders are still providing facilities to earlier-stage platforms and those with riskier borrowers at rates around 11–15% plus 1–3% warrant coverage. Committed facilities are also a higher percentage of the credit deals we see today, whereas the prior year was dominated by forward flow and option loan purchase programs. In other words, if a platform originates within a predetermined definition of “Eligible Loan,” the facility gets funded.

  1. Marketplace lending is a bona fide securitization vertical.

Break out the champagne! The dire predictions of a slowdown in marketplace lending securitization as a result of the 5% risk retention rule and just plain unfamiliarity with the sector have not come to fruition, as 2018 was the most robust yet. More deals were done, more sponsors completed transactions (now more than ten sectorwide) and the market seems finally to have shaken off the 2016 LendingClub scandal. According to PeerIQ, through the third quarter of 2018, more than $40 billion was issued across 134 transactions, up 34% from the prior year. Upstart, Upgrade and Laurel Road joined the roster of new issuers, along with repeat issuers LendingClub, Prosper, SoFi and CommonBond.

Banks are taking the sector seriously, with Citigroup, Deutsche Bank and Credit Suisse leading the league tables. Also of note is that marketplace lending rating agencies were led by DBRS and Kroll Bond Ratings, with traditional powerhouses S&P, Moody’s and Fitch lagging behind.

It remains to be seen, however, whether the party will continue in 2019 given possible weakness in economic growth and the threat of divided government and future government shutdowns.

  1. States and “regulation by class action” are running counter to relatively relaxed federal oversight.

State financial agencies continue to wield the hammer in the fintech industry. Strict enforcement of states’ securities laws (often referred to as “blue-sky laws”) is a staple of any fintech legal department, as are frequent notices on failures to license, charge a lawful interest rate, calculate the rate correctly (including origination fees) and make required disclosures. Federal consumer lending compliance—including Truth in Lending, Fair Credit Reporting, and Unfair, Deceptive or Abusive Acts or Practices—provide important structure to much of the compliance a platform must undertake.

The federal agencies regulating unlawful and unfair lending conduct have noticeably taken their foot off the gas in the last year. For example, the Consumer Financial Protection Bureau, which for most of last year was headed by Trump appointee Mick Mulvaney, brought only nine enforcement cases in 2018. At the same time (and perhaps also as a result), states have become more aggressive in enforcing conduct by members of the financial services industry.

The bank partnership model of lending—wherein loans are originated through fintech platforms by chartered banks and then sold back to the platforms—has been under regulatory assault for several years. The 2017 Madden v. Midland decision still looms large over originator and investor behavior in the Second Circuit states of New York, Connecticut and Vermont, where the decision now applies.

True lender cases have since been decided, even in preliminary motions, that have had wide impact on online lending and the bank partnership model in the states or jurisdictions in which they are brought. The most prominent pending case is the one brought by the Colorado attorney general against Avant and Marlette, with a countersuit by WebBank and Cross River Bank, the two banks that originate loans from borrowers sourced by these platforms. The case is pending, but we expect the final decision will have far-reaching effects on the industry.

Filed Under: Guest Post Tagged With: Brian Korn, Manatt, regulation

Views: 531

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LendIt Fintech News, Powered by Lend Academy, has been bringing you all the news and information about fintech and online lending since 2010 when it was founded by Peter Renton. We not only have the industry’s most active news site, but also the largest investor forum and the first and most popular podcast.

We are a team of fintech enthusiasts who have been covering the industry for many years. With a deep knowledge of online lending, digital banking, blockchain, artificial intelligence and more our team covers the daily news and writes in-depth editorials.

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