Fintech
Digital Mortgage Lender “Better” Goes Where No Fintechs Have Gone
October 8, 2018
One product noticeably absent from fintechs expanding into lending or banking is mortgage loans, but now a fintech startup is looking to disrupt the $13 trillion mortgage industry.
Eric Wilson is co-founder and head of operations at Better Mortgage, a New York-based digital mortgage lender. Wilson explained to deBanked:
“Our industry more than consumer lending is stuck in the pre-internet era and hasn’t been able to leverage the tools to make getting a mortgage feel as simple and as empowering as other products we’re used to consuming online. The industry was waiting for a company like ours to come along with the right skills and engineering staff.”
Better Mortgage is an end-to-end mortgage lender that matches investors interested in giving loans to a subset of consumers. “We take applications and compare with investors for the best price. Underwriting and communication with the borrower happen on the internet,” Wilson said.
The investors are large financial institutions that are in the business of buying mortgage loans.
“We are a direct lender. We originate mortgages. We don’t charge origination fees to customers. We make money when we sell those loans to the secondary market, whether it’s Fannie Mae or any one of our 28 partners,” said Paula Tuffin, Better Mortgage chief compliance officer and general counsel.
In addition to zero origination fees, Better has eliminated commissions. “For us, we believe you should be able to put your storefront online and have consumers find you. We don’t think it’s appropriate or necessary pay one individual to take $6,000 out of a $300,000 loan,” said Wilson.
Instead, Better relies on a team of loan consultants who are “full-time employees or better” who are incentivized to deliver a delightful customer experience,” said Wilson. This differs from the traditional broker model used by much of the industry. “We don’t deal with third-party mortgage brokers. This eliminates a lot of the potential for fraud and harm to investors,” he noted.
Pain Points
The “pain points,” he noted, tied to mortgage lending surpass that of personal or unsecured lending. For instance, greater amounts of data are needed for loans of this size, and there’s the complex and intensive process of risk underwriting, all of which is exacerbated by heavy regulation.
Unlike some of its fintech peers, Better Mortgage has no interest in pursuing an OCC special- purpose national bank charter, or fintech charter.
Wilson is a millennial who had a front-row seat to the mortgage crisis and all of the hardship that fell on consumers. “It was a result of irresponsible lending practices,” said Wilson, “and a failure by regulators to keep lenders in check. So to that end, we are champions of post-crisis Dodd Frank-era consumer protection regulation.”
While operating under a single regulator across all 50 states would streamline the process for Better, it would come at the high price of innovation. “It comes with some pretty hefty strings attached. That regulatory environment is often so challenging to navigate or requirements so onerous … that I would be hesitant to go head-first into a program like this,” said Wilson.
As a result, Better incurs the cost of taking a state-by-state approach, a burden that Wilson says the company is happy to bear: “If we were to pivot and get a bank charter issued by the OCC, we could transact in 50 states overnight. But our ability to innovate evaporates in the process.”
Better is licensed in 19 states and is making an expansion push in which it plans to operate in all 50 states in the first half of 2019. The minimum FICO score for a Better conforming mortgage product is 620.
“By and large, the market is shallow in the application of technology. We’re a tech company first and we acquired a mortgage company as opposed to being a mortgage company learning about tech. This gives us a fundamental advantage in the way we think about problems,” said Wilson.
Congressman Cleaver’s Findings on Fintech Lending Mixed
August 30, 2018
Congressman Emanuel Cleaver, II from Missouri announced findings earlier this month from a year-long inquiry he initiated into fintech small business lending practices and minorities. His initial inquiry was to determine if merchant cash advance companies had mechanisms in place to avoid discriminatory lending practices.
Cleaver concluded that some common practices in non-bank underwriting processes lend themselves to discrimination against minority business owners. One such practice is using a merchant’s personal credit score to determine a business’ credit worthiness, which the report maintains is unfair because “a personal credit score has little bearing on a business model or the owner’s business acumen, and using it unfairly punishes minority business owners who may not have had the same opportunities to build credit.” Another complaint is the common practice of having merchants sign forced arbitration clauses that forbid the borrower to take the lender to court.
The companies that he surveyed included OnDeck, Kabbage, Fora Financial, Lending Club, Biz2Credit and LendUp, even though Lendup only does consumer lending. And OnDeck, Kabbage and Lending Club don’t offer a cash advance product. Still, they make non-bank business loans.
The report also mentioned that algorithms used by some of these companies could inadvertently be discriminatory. That’s because they have the ability to incorporate the number of criminal records and bankruptcies in the merchant applicant’s zip code when making a funding decision. And these numbers tend to be higher in minority neighborhoods.
However, the report also highlighted some good practices, such as including a third party in the lending process to protect from engaging in unintentional discriminatory behavior.
“From the responses gathered,” the report reads, “it has become increasingly clear that a majority of the companies have taken some measure to prevent blatant discrimination. Nevertheless, additional protections are very much needed.”
“The initial findings are clear as day, Congressman Cleaver said in a statement about the report. “We need to further understand how lenders may be intentionally or unintentionally offering higher interest rates to minorities and underserved communities, and work to implement industry-wide best practices.”
Investment in Fintech Soars in 2018
August 6, 2018
Fintech investment in the Americas reached a new high of $14.8 billion for the first half of 2018, according a KPMG report. This was spread across 504 deals. The bulk of the investment, $14.2 billion, went to U.S. companies.
Big fintech deals in the U.S. this year spanned a range of sub-industries, from blockchain (R3, Circle Internet) and Cryptocurrencies (Basis) to Insurtech (Lemonade, Oscar) and wealth management (Robinhood). The largest deal of the year was the acquisition of Boston-based Cayan, a payment technology company, by global payments solutions provider TSYS, for $1.05 billion.
While the U.S. accounted for the majority of fintech investment in the Americas, there was notable fintech investment in other countries. Brazil-based Nubank held the fourth largest VC round in the Americas during the first half of the year with a $150 million Series E raise.
“While an outlier in terms of deal size, the Nubank deal highlights the growing importance VC investors are placing on Brazil as an epicenter for fintech innovation in Latin America,” the report read.
Fintech investment in Canada continued to evolve in the first half of 2018 with $263 million in total. However, this was actually a decrease compared to the second half of 2017 which brought in $510 million for Canadian fintech companies.
The Canadian government is in the process of updating its Bank Act, which is expected to occur in 2019. And Payments Canada, a government organization, is also undertaking a multi-year payments modernization initiative aimed at upgrading critical infrastructure. According to the KPMG report, while both of these initiatives are in the process of happening, VC investors and fintechs recognize that change is coming and are trying to position themselves to take advantage of the changes once they are implemented. San-Francisco based fintech, Plaid Technologies, announced in May of this year that it would be expanding into the Canadian market. The report indicates that other U.S. companies will likely follow suit.
Can Fintech Startups Become Banks? OCC Opens The Gates
August 1, 2018
Yesterday, the U.S. Treasury Department released a report that prompted the Office of the Comptroller of the Currency (OCC) to say that it would start accepting applications from fintech for special purpose national bank charters.
This is boon for fintech companies that, until now, have mostly been prevented from applying for national bank charters because of protest from banks and others that they will not be subject to adequate regulations. But now the OCC, a significant regulator, is opening the door for non-depository fintech companies – like OnDeck and Kabbage – to become banks.
“Over the past 150 years banks and the federal banking system have been the source of tremendous innovation that has improved banking services and made them more accessible to millions,” said head of the OCC, Comptroller of the Currency, Joseph M. Otting, in a statement. “The federal banking system must continue to evolve and embrace innovation to meet the changing customer needs and serve as a source of strength for the nation’s economy…Companies that provide banking services in innovative ways deserve the opportunity to pursue that business on a national scale as a federally chartered, regulated bank.”
The main advantage for fintech companies of having the opportunity to get their own bank charter is that they would now be able to operate nationwide under a single licensing and regulatory system, instead of a myriad of state licenses. Currently, fintech companies must adhere to the regulations in each state where they do business, which can be expensive. And some states have regulations that are stricter than others. That is why this news is bad news for states that feel that this development will allow fintech companies to bypass and undermine their regulation designed to protect consumers.
The OCC’s decision is the latest development in a years long, sustained effort by fintechs to become banks. In fact, for the last several years, Fintech companies have tried attaining bank status by getting the Utah Department of Financial Institutions to allow them to become Industrial Loan Company (ILC) banks. So far, Square, SoFi and NelNet have tried, in some capacity, to become an ILC bank.
The New York Department of Financial Service and the Conference of State Bank Supervisors (CSBS) was angered by the OCC’s decision.
“An OCC fintech charter is a regulatory train wreck in the making,” said CSBS President John W. Ryan in a statement. “Such a move exceeds the current authority granted by Congress to the OCC. Fintech charter decisions would place the federal government in the business of picking winners and losers in the marketplace. And taxpayers would be exposed to a new risk: failed fintechs.”
He said that his organization is keeping all options open to stop what he says is regulatory overreach.
The OCC indicated in its announcement that fintech companies that become special purpose national banks will be subject to heightened supervision initially, similar to other banks. But these special purpose banks would not have to abide by the stricter regulations of deposit-taking banks and they would not have to be insured by the Federal Deposit Insurance Corporation (FDIC) either.
“It is hard to conceive that insured national banks will allow the OCC to allow a fintech entity a national bank charter without insisting that all national bank obligations apply—which is what fintech companies want to avoid,” said Joseph Lynyak, partner and regulatory reform specialist at the law firm Dorsey & Whitney.
LendingPoint Gets Increase in Financing
June 28, 2018
LendingPoint announced today that it closed an increase of its mezzanine financing, bringing the total of the facility from Paragon Outcomes Management to $52.5 million. Mezzanine financing is a hybrid of debt and equity financing. Paragon and LendingPoint initiated a relationship with its first credit facility in January 2017 for $20 million. It was then upsized seven months later, and has now been upsized for the second time to $52.5 million.
“We believe this shows a tremendous amount of confidence in the way our portfolio continues to perform,” LendingPoint Chief Marketing Officer Mark Lorimer told deBanked. “It’s a great vote of confidence.”
Among other things, the new credit facility provides an increased advance rate for more efficient equity usage. Today’s announcement comes on the heels of more than a billion dollars worth of senior credit financing that LendingPoint has closed in less than a year. The company secured an up to $500 million senior credit facility in August 2017 and an up to $600 million senior credit facility last month, both arranged by Guggenheim Securities.
“[Paragon’s] support has been critical as we grow our origination volume and balance sheet, and march towards profitability next year,” said Tom Burnside, LendingPoint co-founder and CEO. “We’re proud that LendingPoint’s performance to date means companies like Paragon Outcomes want to be part of our future.”
In March, LendingPoint debuted a point of sale lending platform for merchants that Lorimer said is going well.
“We’re continuing to build it out, add more merchants to the platform and increase the funding levels,” Lorimer said.
Founded in 2014 and based in Kennesaw, GA, LendingPoint and its Merchant Solutions platform have originated more than 70,000 loans totaling more than $500 million.
New York Institute of Credit Celebrates 100 Years and Honors Harvey Gross
June 12, 2018
About 300 people gathered underneath the soaring ceilings of Guastavino’s ballroom in Manhattan last night to celebrate the 100th anniversary of the New York Institute of Credit (NYIC). Most attendees were members of the association, which provides networking opportunities and education to a myriad of constituents, including factors, financial advisors, lawyers, investors and accountants.
“[NYIC] is one of the few meeting places that brings judges, investors and professionals together,” said Jack Butler, CEO of Birch Lake, a boutique merchant bank based in Chicago.
In addition to Butler, other members, like Maxwell Cohen, traveled to attend to event. Cohen works in Fort Lauderdale, FL as Managing Partner for Corporate Strategy & Financial Consulting LLC and specializes in underwriting and brokering business loans.
“[NYIC] is great because it connects people in similar sandboxes…and sometimes we can build off each other’s strengths, ” Cohen said. “Everyone here is verified [and] if you’re here, we know you have capabilities to deliver.”
A central part the NYIC centennial celebration was the honoring of the organization’s Executive Director, Harvey Gross, who has worked for organization for 54 years.
A montage video of congratulations to Gross included praises from New York judges and others, including:
“He has a way of putting people together that produces spectacular results.”
“He’s been a mentor to so many.”
“Harvey has communicated best practices.”
“Some organizations looks inward. NYIC looks outward, because of Harvey’s leadership.”
“To talk about 54 years in five minutes is not easy, but I will try,” Gross said to the audience upon receiving the award. He explained that when he was 12 years old, his brother suggested that he get into the factoring business. He later told deBanked that he spent the next five or so years learning the business and left school by the time he was 18 to start a career in factoring. When he started working for the NYIC, the organization primarily served the factoring business, and has since expanded.
“I think tonight showed that the NYIC went through a lot of transitions over the last 100 years,” Gross told deBanked. “And we’re excited about new transitions in the next 100 years. And that includes MCA and fintech.”
Square Funded $339M to SMBs in Q1
May 2, 2018
Square’s small business funding arm, Square Capital, made over 50,000 business loans for a total of $339 million in Q1, according to the company’s latest earnings report. That figure is a 35% increase year-over-year and puts them on pace to break last year’s $1.177B total. OnDeck, by comparison, who is arguably their top rival, made $2.11B in business loans last year.
“[..] they just don’t have another way to get access to that sort of capital. And when they get it, they invest in their business,” Square CFO Sarah Friar, said of their merchants during the earnings call. “They’re buying inventory, they’re hiring new employees, they may be taking any lease hold and opening that second location. And when they do that, their business grows and hence our business grows. So, we still think we have a unique product that no one else can really follow us into.”
Square also earned $34 million in revenue from bitcoin, thanks to the Cash App they launched in January that allows users to buy and sell bitcoin. Bitcoin was mentioned an eye-opening 37 times in their quarterly shareholder letter, while their loan program is only referenced 7 times.
Overall, the company brought in $669 million in revenue and recorded a $24 million loss. They also entered into an agreement to buy Weebly, a company that helps people build professional websites and online stores.
“Weebly will expand Square’s customer base globally and add a new recurring revenue stream. Weebly has millions of customers and more than 625,000 paid subscribers,” the company wrote.
Chris Larsen on Crypto, Ripple, and ICOs
April 24, 2018
At LendIt Fintech, Ripple co-founder and Chairman Chris Larsen got real in his on-stage conversation with Jo Ann Barefoot. This is what you missed:
I think this is a fundamental shift in fintech and what we believe the big thing happening here is the development of a second internet. We call it the internet of value so that value, money, assets will begin moving as quickly and efficiently as data has been moving for the last 25 years
Using SWIFT is like sending a letter. You know, when drop it in the mailbox, you have no idea where it is, if it got there or not. So, getting away from that I think is profound. And what we would say is that, you know, a lot of the backlash from globalization today, it’s not because globalization is bad. It’s essential. It’s that it’s incomplete because globalization needs kind of 3 key systems to be working together and it needs interoperability and data.
I think all new technologies start with a, you know, screw the government, disruption, tear everything down. So, I think that’s natural and then, you know, the internet started that way too and then it has to sort of grow up. And particularly, it’s solving real world problems. Real world problems are always more complicated than that. And then when you switch to finance, this is different. Right? You know, the internet was mostly technology. Mostly. It’s just now kind of crashing into regulatory issues.
I think on some of the other things like ICOs, we’re pretty anti-ICO. I think it’s a bad thing to get involved with from the founder’s perspective because, you know, if you’re a founder and you can raise money many ways today, do you really want to do something where you’re going to have the SEC, you know, kind of threat hanging over your head for 10 years with strict liability? You just don’t want that. You know, that’s a problem.
[..]From building currencies, digital assets, ICOs typically say, “Okay. There’s a currency for this use case and none other.” That’s kind of the opposite of the way it should go. Currencies need to be as liquid as possible. And so, they’re going to have as many use cases as possible. For XRP for example, the kind of early beachhead has been cross border payments, but we see that as just the beginning of something that really has a multitude of use cases. To get as liquid as possible, that’s what drives utility and value at the end of the day. So, I think in all fronts ICOs are problematic and that’s why you’re seeing the regulators crack down on them, not everywhere, but I think they’ll be transformed. They’ll probably look like, you know, IPOs at the end of the day.
