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Payday Lending Reform and the Need to Reduce Demand

Colorado passes an initiative to restrict all lending to a maximum of 36% but is this the best way to attack the problem?

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Here in Colorado we had an initiative on the ballot last week to restrict payday loans to a 36% APR cap. It passed overwhelmingly because the general public does not want to support lenders who charge triple digit rates. The law goes into effect on February 1 and it likely means the end of the payday lending industry in Colorado.

This change comes on the heels of an opposite move at the federal level where the CFPB said it plans to propose revisions to existing rules that were designed to reign in payday lenders nationally. The CFPB had spent six years doing research and decided that one way to make payday lending more responsible was to require a check on a borrower’s ability to pay. It makes sense as this is what pretty much all other types of personal loans require.

But the payday loan industry has become successful in part because lenders did not have to take into account a borrower’s ability to repay. By not having to do this important step lenders could save money and expand their borrower base. But in doing so they have been serving many people for whom a payday loan is clearly a bad idea.

I have no problem with payday loans at all, they have a place in emergency funding for people who don’t have any savings. What I abhor, though, is predatory lending. This is when the payday loan becomes a debt spiral as the loan is continuously rolled over and a manageable $500 loan becomes a $2,000 or $3,000 nightmare that the consumer cannot pay back.

[Read more…]

Talking Regulation at the Online Lending Policy Summit

Regulators, lawmakers and leaders in the online lending industry come together in Washington for the third annual Online Lending Policy Summit

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Craig Phillips, Counselor to the Secretary of the US Treasury

Last week I was in Washington DC to attend the third annual Online Lending Policy Summit. This is the annual get together in Washington of the Online Lending Policy Institute where regulators, lawmakers and the industry come together to discuss regulatory frameworks and responsible innovation.

The big topic of the day was the OCC’s Special Purpose National Bank Charter also known as the Fintech Charter. The topic was laid out for the audience by the first keynote speaker, Grovetta Gardineer, the Senior Deputy Comptroller for Compliance and Community Affairs at the OCC. She talked about the history of the OCC going back to 1863, with the National Banking Act, when the dollar supplanted state currencies as the sole currency of the United States, a revolutionary idea back then. Ms. Gardineer reaffirmed the authority of the OCC to introduce a national fintech charter and talked about how companies should proceed if they are interested. While she would not comment on specifics she did say that the OCC is currently having preliminary conversations with fintech companies but no formal application has been received yet.

The new head of the CFPB’s Office of Innovation, Paul Watkins, talked about the importance of the regulatory sandbox concept. He was one of the architects of the Arizona fintech sandbox and he is bringing that knowledge with him to Washington. He talked about the two main tools to help facilitate innovation at the CFPB: their trial disclosure program and the no action letter. The only recipient so far of a CFPB no action letter was Upstart so it was fitting that Alison Nicoll, General Counsel at Upstart, came on stage to direct the Q&A after Mr. Watkins presentation. He said he would like to see increased cooperation between states and the federal government when it comes to sandboxes. He also said it is very rare to see fraud occur within a sandbox as fraudsters tend not to want to enter a collaborative relationship with a regulator.

[Read more…]

Report From NY State Calls For More Regulation of Online Lending

The New York Department of Financial Services releases their long awaited report on the state's online lending industry

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Last year New York Governor Andrew Cuomo signed a bill that required the State’s Department of Financial Services (DFS) to analyze online lending. Last week the NYDFS released their Online Lending Report as a result of this legislation. There was also an accompanying press release that summarized the report’s findings.

The New York DFS sent out surveys to 48 companies in the online lending space, both consumer and small business lenders. They received responses back from 35 companies. There is some interesting data from these 35 companies particularly when it comes to loan volumes. The table below shows the loan growth from 2015-17 for consumer and small business loans in New York.

Keep in mind that this data is only for online lenders who operate in New York AND who responded to the survey. This is by no means an accurate assessment of total lending activity but it is in interesting nonetheless.

As to the findings of the report here is a comment from DFS Superintendent Maria T. Vullo that summarizes their position, taken from the press release:

DFS supports the promise that new technologies are able to reach more consumers, but innovation must also be responsible, and all associated risks must be appropriately managed, including by strong underwriting standards, compliance with usury laws, and capital requirements.  All lenders must operate on a level playing field and address market risk.

[Read more…]

Bipartisan “Madden Fix” Bill Passes the House

The Protecting Consumers’ Access to Credit Act of 2017 was passed by the US House of Representatives

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We have been covering the Madden issue for several years here on Lend Academy (the full list of coverage is here). Today, marked an important day on this issue as the United States Congress passed the Protecting Consumers’ Access to Credit Act of 2017 (HR 3299), otherwise known as the “Madden Fix” bill.

This is a bipartisan bill that was introduced by Congressman Patrick McHenry (R-NC) and co-sponsored by Congressman Gregory Meeks (D-NY). It passed the house this evening by a margin of 245 – 171 meaning it picked up some support from Democrats (16 votes to be precise).

This bill would restore the “Valid when Made” doctrine meaning that if a loan was valid when it was made it does not become invalid when assigned to another party regardless of state usury laws. The Second Circuit Court of Appeals ruled on a case that meant loans made in Second Circuit states (NY, CT, VT) are exempt from this Valid when Made doctrine and theoretically, loans that are to be transferred from originating banks to non-banks would need to adhere to Second Circuit state interest rate caps. This has led to a significant drop in lending activity in those three states as investors and online lending platforms shy away from making and invest in loans there. This is why a fix is needed.

To get more perspective on what the vote today means we reached out to Nat Hoopes, the Executive Director of the Marketplace Lending Association who had this to say about the bill’s passage:

Over the past decade, borrowers across America have used marketplace loans to start new businesses and save billions of dollars through lower interest rates and more transparent products. Today’s action by the House will help ensure that small businesses and consumers can continue to access these affordable credit products online. This legislation simply restores the law of the land as it stood as recently as 2015, providing greater certainty for responsible, well-regulated and supervised partnerships between traditional banks and their fintech partners.

Gilles Gade, the CEO of Cross River Bank, also gave his perspective:

As a partner to many marketplace lending platforms, Cross River combines the trust, security and established expertise of a community bank with cutting edge technology to facilitate innovation, making responsible credit more accessible and affordable. Today’s bipartisan passage in the House is a positive step towards restoring confidence in the secondary markets and promoting lower cost, more efficient access to credit, particularly in communities who have had more limited access to traditional banking services. We look forward to working with Senators Warner (D-Virginia) and Toomey (R-Pennsylvania) to ensure this access continues while appropriate borrower protection is maintained.

Of course, this bill is still a long way from becoming law and it would need 60 votes in the Senate and then the President’s signature before that happens. Many people view that as unlikely but there are other ways it could become law by attaching it to another bill for example. But that is a story for another day. Today, is a positive first step in the legislative process for the Madden fix.

FSOC Annual Report on Financial Stability Highlights Marketplace Lending

The Financial Stability Oversight Council's annual report includes a section discussing the risks of marketplace lending

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Last month the Financial Stability Oversight Council (FSOC) released their annual report. This 165-page report highlights potential risks to our financial system by looking at new developments and providing recommendations to improve financial stability.

FSOC was established as part of the Dodd-Frank Act of 2010 and its mission is to identify threats to financial stability, promote market discipline and respond to emerging risks to the stability of the US financial system. FSOC is made up of heads of most of the financial regulatory agencies in Washington and was designed to help facilitate inter-agency communication.

FSOC produces an in depth annual report every year that covers pretty much all aspects of the financial system. Section 4.14 of this year’s report deals with new financial products and there is an entire section on marketplace lending. Here is their conclusion about our space:

Although marketplace lending has the potential to reduce costs and expand access to credit, the extent to which these benefits have been realized thus far is unclear. Furthermore, the marketplace lending model has not been tested through a full credit cycle. There are risks that misalignment of incentives could exist on these platforms.

One can’t really argue with the conclusions drawn here. They are basically saying the jury is still out on marketplace lending. It is still untested in a recession which is the most common criticism levied against our industry and one we can do little about. I disagree with the misalignment of incentives point but I know many industry observers who believe that is a potential problem.

In their section titled Potential Emerging Threats and Vulnerabilities the report bring up more concerns: [Read more…]

Marketplace Lending Predictions for 2018

A review of our 2017 predictions and some new thoughts for 2018

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Happy New Year everyone. As I do every year at this time I make a few predictions for the year ahead as well as review my previous years predictions.

Review of my 2017 Predictions

First, let’s review my predictions I made exactly one year ago. We had an interesting year as an industry in 2017, it was certainly a better year than 2016. I think I did ok on my predictions from last year although as you can read below I did get some things completely wrong.

  1. 2017 will be the year of the bank partnership
    I would say I was partially right on this one. We certainly saw a large number of new bank/fintech partnerships with deals closed from Avant, Fundation, Upstart, P2Bi, LendUp, Biz2Credit and many others. And in Europe the floodgates opened with dozens of new deals between lending platforms and banks announced. But in the US I was expecting even more partnership deals than we had so I think it is bit of a stretch to call 2017 the year of the bank partnership here.
  2. The OCC Fintech Charter will receive a positive reception
    It was an interesting year for the OCC Fintech Charter. With Thomas Curry leaving as head of the agency in April, then Keith Noreika holding the acting role for a few months and finally Joseph Otting being sworn in to lead the agency in late November it was difficult for any new initiative to get momentum. There was also the case of the Conference of State Board Supervisors suing the OCC over the charter, which was dismissed in December. So, while many of the fintech platforms supported the charter there was no real positive movement this year.
  3. Lending platforms will offer banking products
    While we had a couple of platforms offering credit cards for the most part this prediction failed to materialize. With the possible exception of SoFi I think we are still some time away from lending platforms offering a variety of banking products.
  4. One large platform will be acquired
    I am going to say I got this one right as one major platform was acquired in 2017. Student lender Earnest was acquired by Navient in a deal announced in early October. My guess that Prosper might be the platform to be acquired was wrong but there were rumors flying around about acquisition talks at more than one major platform last year.
  5. There will be no new IPOs this year
    I was almost right on this one but one US lending platform did have an IPO in 2017. Short term lender Elevate went public in April after postponing their IPO in 2016. None of the major marketplace lenders braved the public markets in 2017 as valuations continue to be depressed at many of the leading companies.
  6. China will become an important source of capital outside the USA
    I got this one right. China continues to make its presence felt as more US companies are looking for capital from that part of the world. The leading Chinese fund, the CreditEase Fintech Fund, made investments in 2017 in Upgrade, dv01, Orchard, Lenda and Nav just to name a few. China is now becoming a consideration for many more companies looking to raise money.
  7. Artificial intelligence will take center stage
    I think I read more articles about AI this year than in the previous five years combined. Whether it is for underwriting, customer acquisition, collections, compliance or cybersecurity AI is now central to the success of many lending platforms. It has taken center stage and will remain important for the foreseeable future.

[Read more…]

The Second Annual Online Lending Policy Summit in Washington

The online lending industry gathers in Washington to hear from lawmakers and regulators

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The Acting head of the OCC, Keith Noreika, takes the stage at the Online Lending Policy Summit

Yesterday, I attended the second annual Online Lending Policy Summit in Washington DC. It was headlined by the Acting head of the OCC, Keith Noreika, Congressman Greg Meeks (D-NY), Congressman Tom Emmer (R-MN) and William Isaac, the former head of the FDIC.

The event was opened by Cornelius Hurley, Executive Director of the Online Lending Policy Institute (OLPI). He then introduced the first speaker, Phil Goldfeder, head of Government Affairs at Cross River Bank, who laid out an overview of where we are today with online lending. Following that we had a panel focused on the Madden issue. There was a long discussion about the impact that this decision has had on borrowers in Second Circuit states: NY, VT and CT. Research has been done by Columbia University and others that show lending is down significantly in the three states and one panelist noted that “no marketplace lending platform is issuing loans in these states to borrowers under a 625 FICO.” If for some reason the Madden decision was to be expanded to all states then lending platform volume could drop as much as 50%. But there was some optimism that a legislative fix would be successful here.

William Isaac was the head of the FDIC under President Reagan and he painted a stark picture of the US today where 60% of the population cannot get a bank loan. He said that we have to do better and figure out a way to lend to a broader cross section of the population.

Acting Comptroller of the Currency, Keith Noreika, struck a surprising upbeat tone in his remarks. He began his speech by saying that online lending was a natural evolution of banking. This caught the attention of American Banker as well as everyone in the audience. He also cautioned that one of the problems with the industry today was a lack of profitability and the fact that the loan books have not been tested in a downturn. These are concerns we have all heard before. Not surprisingly he argued that online lending platforms should consider directly entering the banking industry. But what was interesting was that he did not mention the OCC fintech charter, instead pointing out other the various other types of banking charters that might be suitable for fintech companies.

[Read more…]

CFPB Announces No-Action Letter to Upstart

The no-action letter is an indication that the CFPB is open to alternative data being used to expand access to credit.

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Today, the Consumer Finance Protection Bureau (CFPB) announced a no-action letter to Upstart, an online consumer lender. A no-action letter essentially allows a company that is regulated by a government entity, in this case the CFPB, to operate under certain circumstances as proposed by the company without enforcement or supervisory action. For the CFPB the goal is to explore consumer-friendly innovations for emerging products or services. The announcement today by the CFPB is significant as it is the first no-action letter of its kind. The CFPB previously sought public feedback on the benefits and risks of using unconventional data to extend credit earlier this year.

When we talk about underwriting with alternative data we often talk about companies that operate outside of the US. Since many countries lack the protections similar to what we have in the US, it opens up the possibilities of using alternative data for many different things, including making credit decisions. Some examples include social data and mobile phone data. Two great examples of this include Tala and Lenddo which have both been featured on the Lend Academy podcast.

Upstart was founded by ex-Googlers and many of the employees hail from Google. They have differentiated themselves, leaning on their learnings at Google to use alternative data, machine learning and artificial intelligence to make better credit decisions. Some of the data points they have used historically has been using information around a borrower’s education. According to the CFPB’s news release:

Alternative data could include things such as bill payments for mobile phones and rent, electronic transactions such as deposits and withdrawals, and other information that may be less closely tied to a person’s financial conduct. This inquiry also looked at the use of emerging technologies for underwriting, such as the expanded use of machine learning to potentially identify new insights and improve decisions in the credit process.

According to the news release, Upstart will report lending and compliance information to the CFPB to mitigate risk to consumers and aid in the Bureau’s understanding of the real-world impact of alternative data on lending decision-making. The CFPB is interested in learning how using alternative data can help extend credit to more borrowers at affordable rates. The no-action letter relates to enforcement of the Equal Credit Opportunity Act and Regulation B.

[Read more…]

The OCC Publishes Details on the Fintech Charter

The OCC, the regulator for national banks, released details of their long awaited Fintech Charter today in a 16-page supplement.

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Today, the Office of the Comptroller of the Currency (OCC) released their long-awaited supplement on the new Fintech Charter. They officially announced the new charter back in December and began a 45-day open comment period. They received over 100 comments and addressed many of these comments in this supplement.

The 16-page draft licensing supplement provides more details on the new Fintech Charter and is expected to be a supplement to the existing OCC licensing manual. They addressed issues such as capital requirements, liquidity, financial inclusion plans, consumer protection and the application process.

First and foremost the OCC Fintech Charter is about encouraging innovation in finance. The OCC discussed that directly in the supplement:

The OCC has long supported innovation in the national banking system. Federally chartered institutions have continually sought new approaches to meet the needs of customers and an evolving marketplace. It has been and remains the OCC’s role to encourage and support institutions’ efforts to engage in responsible innovation to meet the needs of consumers, businesses, and communities. The OCC’s decision to issue the draft Supplement is consistent with that support. It is also one component of an initiative that began in 2015, when Comptroller of the Currency Thomas J. Curry announced the agency’s efforts to better understand innovation occurring in the financial services industry and to develop a framework to support responsible innovation in the federal banking system.

The Fintech Charter has received a mixed reception on Capitol Hill to say the least. The House Financial Services Committee sent a letter to Comptroller Curry last week warning him to not proceed with haste in pushing this new charter through before his term expires on April 9. The timing is interesting because they also announced today a new comment period on this supplement which is open until April 14. President Trump has not nominated a new Comptroller yet and Thomas Curry can serve until his replacement is confirmed. Of course, we have no idea if the new Comptroller will be a supporter of this Fintech Charter or not. [Read more…]

IBM Watson Just Bought A Company That Will Transform Bank Back Offices Through Artificial Intelligence

Watson is going to help automate regulatory compliance for financial services firms but that is just the beginning.

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IBM_Watson_AI_Promontory Financial_Group

The running joke is that after Dodd-Frank banks have become compliance companies that happen to make loans. It is funny because it is true. Dodd-Frank has over 22,000 pages of compliance regulation. Who can possibly understand and navigate all of that regulation?

There is one company that is widely regarded as the ultimate Dodd-Frank expert. This company is based in Washington D.C. and is hired by every major bank to help navigate these complex regulations. This company is called Promontory Financial Group and it is comprised of the all of the heavy hitters in bank regulation. Check out their firm leadership page, it includes senior leaders from the Fed, Treasury, White House, World Bank, Fannie Mae, FDIC and the OCC. They even have the former Vice Chairman of Citigroup and a Senator that was on the Senate Banking Committee for over 18 years. This firm has the who’s who of bank regulation.

Ever since Dodd-Frank was passed, banks have spent big time on compliance. It is a bull market for Promontory, which has helped everyone figure out those 22,000 pages of compliance. In order to put it into perspective, check out this WSJ chart from May 2016:

“The six largest U.S. banks by assets in 2013 together spent at least $70.2 billion that year on regulatory compliance, up from $34.7 billion in 2007, according to the most recent study by policy-analysis firm Federal Financial Analytics Inc., which said costs have continued to mount since then.”

The smart people at IBM took note of this massive shift in spend and the enormous regulatory problem for banks, they have the perfect solution – Watson. What if you take that 22,000 page book and you let Watson read it and then give advice? Let the computer figure it out. That is exactly what IBM has in mind now that is has purchased Promontory.

“Promontory, combined with IBM’s deep industry expertise and Watson’s cognitive capabilities, will directly address the massive operational effort and manual cost of constantly changing regulation and risk management requirements. With the completion of the acquisition, Promontory will help accelerate IBM’s development of cognitive solutions for risk and compliance.” [Read more…]

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