Over the last few months, “securitizations” were frequently cited as a reference point for the health of a small business lender or alternative finance provider. Given the vague information and inferences that circulated, I decided to schedule a chat with Methodical Management co-founder Gunes Kulaligil to get his perspective. Our discussion on the state of securitizations in alternative lending below:
Small businesses that stay out of bankruptcy but have some portion or all of their debts forgiven (excluding PPP debt) are in for a rude awakening come tax time next year. In a variety of circumstances, cancelled debt can be classified as taxable income for the debtor per the IRS. This, according to a new tax study titled Did The IRS Forget Non-PPP Debt? authored by Grassi & Co, a leading accounting and business firm based in New York, that was produced in collaboration with deBanked.
At face value, it would appear that taxpayers who have non-PPP debt canceled, forgiven or discharged during the COVID-19 crisis and do not meet any of the specific exclusions mentioned in the report, would be subject to tax on the cancelled debt as income.
This tax treatment, which pre-existed COVID-19, could be devastating in this era where the prevalence of debt forgiveness is likely to reach unprecedented levels.
In many cases this year, debt cancellation will be the direct result of government mandated shutdowns that were of no fault of the businesses themselves. Should they refrain from filing for bankruptcy and successfully negotiate a cancellation of some debt, it seems quite disastrous that the same government that shut them down might deliver a second blow by taxing the acts that enabled the businesses to survive.
One must also consider that a lender may just cancel some or all of a portion of a debt without any direct action of the debtor, with the end result being the same, a potential tax bill to the business on the cancelled portion.
It’s important to understand the various exclusions to the IRS guidelines that govern cancelled debt. The full report can be ACCESSED HERE.
Watching the Super Bowl, you may have seen a number of oddities: the resurrection of a peanut as an infant, the tattooed inside of a popular rapper’s head, Google’s plea to be the hub for all your elderly relatives’ memories, and, on top of it all, a cheeky spar between mortgage lenders.
Quicken Loans, the Detroit-based mortgage provider, had an ad that featured Hawaiian actor Jason Momoa reveal his ‘true’ self, all while explaining the values of Quicken’s Rocket Mortgage product. Par for the course with Super Bowl ads, until United Wholesale Mortgage’s advert aired. Throwing shade at it its competitor with the line: “Playing with rockets is great when you’re a kid, but when it’s time to get a mortgage, you quickly realize a rocket is complicated and expensive,” United promoted its FindAMortgageBroker.com website, which points potential customers towards a host of brokers local to themselves, before closing its ad with the #brokersarebetter hashtag.
Speaking to The Detroit News about the joke, United CEO Mat Ishbia said: “I don’t think we attacked (Rocket Mortgage); we had fun with it … I think it’s going to grow their business just like it’s going to grow ours. I think (Quicken founder) Dan Gilbert and (CEO) Jay Farmer are going to laugh when they see it. They won’t like it enough to chip in with the cost. The reality is we’re friendly competitors.”
Being a wholesale lender, United gains customers exclusively from its brokers, where as Quicken engages with both brokers and its own marketing efforts. In a call with deBanked, United’s Chief Marketing Officer, Sarah DeCiantis, explained that this was one of the main motivators behind the ad. Noting that for local, independent brokers it can be a struggle to compete with behemoth retail lenders, DeCiantis said that the ad was an answer to the question of ‘How do we allow them to get out there?’ “Retail are amazing at marketing and customer retention, so we try to do what we can to put [independent brokers] on the same playing field because they don’t have the same budget.”
And with only 30 seconds to express this, the challenge was on — not to mention how such ads are estimated to cost $5.6 million. “So much thought goes into every frame, every second,” remarked DeCiantis, who said she was proud of the final product. “We’ve gotten over 75,000 searches on the website just in the first few days after the ad.”
The high profile decision to purchase Super Bowl air time comes during what looks like will be a big year for United, with it planning to add an additional 3,000 employees to its already 5,000-strong staff in its Pontiac headquarters. Despite this, according to Ishbia the focus is still on the local: “If a consumer goes through an independent mortgage broker it will be faster, easier and more affordable than going through a retail lender or mega bank.” From his point of view, it just makes more sense to go independent, it isn’t rocket science.
LendEDU, a Hoboken-based company that lists and ranks loan providers, came under fire this week after the FTC filed a complaint detailing how LendEDU charged businesses for higher positions in its rankings of lenders and promoted fake testimonials. Providing ratings for student loan refinancing, personal loans, and mortgage lenders, it is the first of these loan types that is in the spotlight.
While LendEDU initially denied that it received any compensation for its lists, saying, “ratings are comparatively objective and not influenced by compensation in anyway” and that “research, news, ratings, and assessments are scrutinized using strict editorial integrity,” this assertion was disproved by the FTC’s investigation.
Emails were discovered which featured CEO Nathaniel Matherson and Vice President of Products Alexander Coleman discussing with a business the pricing per click to hold the #1 spot on the best student loan refinancing company list, as well as what sort of traffic could be expected at this ranking. Accompanying this was a contract between LendEDU and a student loan refinancing company, revealing that in return for compensation the company would drop “[n]o lower than position three” in the rankings. It was also found that if businesses who were already in the rankings refused to pay for the clicks they received, they would drop down in the list.
The testimonials that featured prominently on LendEDU’s homepage, which noted alleged consumers’ names, colleges, and years of graduation, were found to be wholly false, with the people portrayed in them being nonexistent.
And the reviews of LendEDU that were found on Trustpilot and subsequently posted to the company’s own website, were also shown to be fake. Of the 126 reviews, 123 were found to be 5-stars; and only 11 were proven to be from customers (this was confirmed as the emails matched those used by customers), the other 115 were deigned to be written by friends, family members, and associates of LendEDU members, as well as by LendEDU employee’s themselves under false names.
All this is coming after LendEDU landed in hot water following a controversy in 2018 that saw Matherson admit to working with others to create a fictitious expert on student loans, named Drew Cloud, who would give interviews and comments to publications, creating a pro-student loan refinancing discourse. According to Matherson, Cloud “was created as a way to connect with our readers (ex. people struggling to repay student debt) and give us the technical ability to post content to the WordPress website.” Cloud was even given a pixelated face and backstory that extended into high school, imbuing him with a passion for journalism even in his teenage years. Neither Matherson’s comments on Cloud nor his fictional biography do anything to explain how or why his creators decided to give him a name that is quite clearly fake.
LendEDU promptly agreed to settle the charges and pay $350,000 while not admitting or denying the allegations. The public has 30 days to comment on the settlement prior to it becoming final.
This week Loans Canada, a lead generation company, released a study documenting the disparities between perceived financial literacy and actual financial well-being. Surveying 1,665 Canadians, the report asserts that those individuals who claim to have a firm grasp of their financial situation may in fact be out of touch.
This being highlighted by major misunderstandings about how to budget for the future as well as a lack of education regarding loan repayments. 72% of the respondents said that they did not save for emergencies, 43% did not track their spending, and 66% do not stick to a monthly budget. Such budgetary omissions outline the potential for a large portion of the Canadian market to be in trouble should unforeseen expenses arise, and the fact that two thirds of the market aren’t even drawing up budgets is a cause for concern.
Such factors are made worse by the community’s seeming misinterpretations of loan terms. With 40% of the survey stating that they didn’t know payday loans were one of the most expensive ways to borrow money, 30% not understanding that paying the minimum amount of a credit card charge still meant you had to pay interest, and just over half of those surveyed were not able to identify the factors which affect the cost of loans, there appears to be a problem surrounding financial literacy and education of individuals regarding loans.
As well as these issues, there is the case of stacking loans, with the study indicating that the practice is not fully understood by Canadians and that the two top reasons for taking on multiple loans are for emergency costs (25%) and making ends meet (43%). Interestingly, the respondents who claimed to have the most confidence in their capacity to make financially sound decisions are more likely to be individuals who stack loans, leading them, inevitably, to have similar or more debt than those surveyed who said they were not confident in their financial decision-making ability.
Altogether, the study paints the picture of Canada as a market in need of further education. While financial literacy isn’t in crisis, the report points towards vulnerable sectors, such as such as those individuals with poor knowledge of loans and interest rates, as well as budgeting, are groups that need to develop a better understanding.
Apple and Goldman Sachs came under fire this week after numerous users of the Apple Card, a joint venture by the two companies, took to social media claiming that the algorithm used to determine credit limits discriminated against women.
It began when Danish tech entrepreneur and racecar driver David Heinemeier Hansson wrote up an expletive-laden teardown of the card and the companies behind it after he discovered that he had access to twenty times more credit than his wife, despite the couple having filed joint tax returns. Following the twitter thread’s viral surge, other men came forward with similar stories, some noting that their wives had better credit scores than themselves.
Upon dealing with Apple’s customer service, who gave Hansson’s wife a “VIP bump” to her credit limit, raising it to match her husband’s, the entrepreneur lamented the giant’s response to his questions about the decision-making process behind Apple Card.
“Apple has handed the customer experience and their reputation as an inclusive organization over to a biased, sexist algorithm it does not understand, cannot reason with, and is unable to control,” Hansson wrote after being told by two Apple representatives that they were unable to explain the reasoning behind the inequity other than say that “it was just the algorithm.” Hansson went on later to criticize the implementations of algorithms that incorporate “biased historical training data, faulty but uncorrectable inputs, programming errors, or malicious intent” as a whole, pointing to Amazon’s recent use of an algorithmic hiring tool that taught itself to favor men.
And in a surprise twist, Apple Co-founder Steve Wozniak weighed in, saying, “The same thing happened to us. I got 10x the credit limit. We have no separate bank or credit card accounts or any separate assets. Hard to get to a human for a correction though. It’s big tech in 2019.”
Over the weekend word came from the New York Department of Financial Services that it would be investigating the practices behind the Apple Card to determine whether or not such an algorithm discriminates on the basis of sex, which is prohibited by state law in New York. This is the second such investigation recently, with the NYDFS announcing last week an investigation into the healthcare company UnitedHealth Group and its use of an algorithm that allegedly led to white patients receiving better care than black patients.
“Financial service companies are responsible for ensuring the algorithms they use do not even unintentionally discriminate against protected groups,” wrote NYDFS Superintendent Linda Lacewell in a blog post that explained the decision to investigate and called for those who believed they were affected unfairly by Apple Card to reach out. “[T]his is not just about looking into one algorithm – DFS wants to work with the tech community to make sure consumers nationwide can have confidence that the algorithms that increasingly impact their ability to access financial services do not discriminate and instead treat all individuals equally and fairly no matter their sex, color of skin, or sexual orientation.”
In their response, the Goldman Sachs Bank Support twitter account posted a note listing various factors that come into consideration when determining a person’s credit limit, asserting that they “have not and will not make decisions based on factors like gender.”
And it would appear that this is correct, at least in the literal sense, as the application process for the Apple Card does not include any questions relating to gender.
Bruce Updin of Zest AI, a company that provides machine learning software for underwriters, said of the controversy that “there’s bias in all lending models, even human lenders … race, gender, and age are built into the system. It can show up just due to the nature of the credit scoring system as FICO scores at the end of the scale can correlate to race.”
Explaining that there are connections between identity and information many humans might never perceive without machine-learning algorithms, like Nevada license plates being an indicator of the likelihood of someone’s race, Updin asserts that such links need to be weighed, balanced, and supervised by those in the banks. For Updin, transparency and explainability are the real problems here rather than the algorithms themselves.
Software exists that can pinpoint which variables are producing results that, for example, skew to prefer women over men, and can remove such factors and run the tests again, probing for differences. The trouble arises when banks find themselves unable to communicate such details for whatever reason, be it an inherent misunderstanding of their own programs or an unwillingness to explain why some of their models prefer certain groups over others.
It’s really a case of “giving up a little bit of accuracy for a lot of fairness” when choosing to remove variables that are proxies for gender, race, age, or a variety of other identifying features, according to Updin. “It’s just a lot of math, it’s not magic. The more you automate the tools, the easier it is.
“I’m convinced in 5-10 years every bank will be using machine-learning for underwriting … we don’t need to throw out the baby with the bathwater.”
Today the CLA announced the winners for its 2019 Leaders in Lending Awards. Highlighting the efforts of exceptional players within the fintech and alternative finance fields, the awards seek to “celebrate the industry and celebrate all the cool fintech things happening in Canada,” according to the CLA’s Strategic Partnerships Director Tal Schwartz.
Now in its second year, the Leaders in Lending Awards are split into two categories, with one focusing on the efforts of companies in the industry and the other on individual executives. 2019 will be the first year that the latter of these categories is incorporated. The awards will be imparted to their new owners at the Canadian Lenders Summit later this month, where a special prize will also be given to one winner from each category.
Among the winners in the first category are Borrowell, IOU Financial, and Michele Romanow’s Clearbanc. While making an appearance in the second category are David Gens of Merchant Growth, Paul Pitcher from SharpShooter Funding, Smarter Loans’ Vlad Sherbatov, and Kevin Clark from Lendified.
The criteria for the awards were based upon three tenets, these being a commitment to the “use of advanced fintech solutions” to solve challenges in the lending process, the “implementation of new or innovating lending strategies or business models,” and evidence of successful outcomes following the implementation of new fintech or a new business model.
When asked about possible expansions to the awards in the future, Schwartz was receptive to the idea of covering more ground with the prizes, saying “I definitely think we’ll expand the categories.” Mentioning that there’s a host of niches that are worth highlighting, such as blockchain, psychographic credit scoring, and credit rebuilding, which deserve their day in the sun.
“We have a mandate as a trade group to celebrate the industry,” emphasized Schwartz. And that celebration will be taking place on November 20th at the Canadian Lenders Summit in Toronto.
The Canadian Lenders Assocation (CLA) received 124 nominations for these awards from leaders in lending across the country. The CLA’s goal is to support access to credit in the Canadian marketplace and champion the companies and entrepreneurs who are leading innovations in this industry.
The Top 25 ﬁnalists in this report represent various innovations in the borrower’s journey from innovations in artiﬁcial intelligence powered credit modelling to breakthroughs in consumer identity management using blockchain technologies. These ﬁnalists also represent solutions for a wide spectrum of borrower maturity and needs, ranging from consumer credit rebuilding all the way to senior debt placements for global technology ventures.
The 75 year old ﬁrm is the only Canadian bank devoted exclusively to supporting entrepreneurs.
Borrowell helps Canadians make great decisions about credit. They were the ﬁrst company in Canada to offer credit scores for free, without applying for credit, and currently has over 800,000 users. Eva Wong and Andrew Graham were the joint recipients our the CLA’s awards in 2018.
Clearbanc offers a new approach to capital access for entrepreneurs that uses AI to determine funding terms with a focus on unit economics and repayment through revenue share as a way to get founders access to the capital they need to fuel their growth.
CreditSnap is a best in class pre-qualiﬁcation and cross selling engine to deliver highly relevant pre-qualiﬁed loan offers to CreditSnap banks and CUs.
Dealnet Capital services the home and retail sectors providing end-to-end ﬁnancing plus innovative technology and communication solutions.
Since 2009, Espresso Capital has provided over 230 early and growth stage technology companies with founder friendly capital. Espresso offers lines of credit and term loans to enable entrepreneurs to grow their businesses without dilution, board seats, or personal guarantees.
Financeit is a market leading point-of-sale consumer ﬁnancing provider, servicing the home improvement, vehicle and retail industries.
|First West Capital
First West Capital is a leader in Canadian mid-market business funding. First West Capital helps ventures acquire and transition through innovative junior capital ﬁnancing.
Home Trust Company is one of Canada’s leading trust companies. Home Trust offers Canadians a wide range of ﬁnancial product and service alternatives, including mortgages, Visa cards, deposits and retail credit services.
Inverite is the ﬁrst Canadian designed, developed and focused real-time bank veriﬁcation service. With coverage for over 240 Canadian FIs.
Based in Montreal, IOU Financial provides small businesses throughout the U.S. and Canada access to the capital they need to seize growth opportunities quickly.
Lending Loop is Canada’s ﬁrst and only regulated peer-to-peer lending marketplace focused on small business.
Magical Credit has been helping Canadians consumers get approved for quick and simple short term personal loans since 2014. They offer personal loans up to $10,000 regardless of the borrowers past ﬁnancial issues or credit.
Manzil is the market leader in the manufacturing and distribution of Islamic Financial products for Canadians who wish to balance material pursuits with their spiritual obligations.
Marble Financial uses smart technology and socially responsible lending practices to help Canadians rebuild credit once their past debt has been settled by a consumer proposal.
owl.co is a customer insight engine that helps ﬁnancial institutions make better decisions. By connecting to tens of thousands of trusted data sources, Owl is able to instantly aggregate and synthesize millions of data points to learn more about customers and entities.
Paays is a Canadian eCommerce ﬁnancing solution for a new generation of digital consumers seeking “point of inspiration” ﬁnancing.
PayPal Canada recently announced a new SMB loan offering in Canada – a quick application process that can approve an applicant in minutes and transfer funds in one to two business days.
Named by CB Insights to the 2018 Fintech 250, a list of the world’s top ﬁntech startups, Progressa is Canada’s fastest growing ﬁnancial technology lender focused on changing the way pay cheque to pay cheque Canadians access and build credit.
In its effort to become a one-stop e-commerce shop, Shopify Capital allows Shopify business owners to secure funding through revenue sharing on daily sales.
Silicon Valley Bank
For more than 35 years, Silicon Valley Bank (SVB) has helped innovative companies and their investors move bold ideas forward, fast. SVB provides a full range of ﬁnancial services and expertise to companies of all sizes in innovation centers around the world.
Spring Financial is a subsidiary of Canada Drives, one of the leading brands for auto ﬁnancing in Canada. Spring provides accessible solutions for Canadians to establish a positive payment history.
Thinking Capital is a leader in the Canadian Online Lending space, leveraging technology to be at the forefront of the FinTech industry. Since 2006, they have helped more than 14,000 small-to-medium sized Canadian businesses reach their full potential
Uplift’s mission is to make travel more accessible, affordable and rewarding by enabling travel providers such as JetBlue, American Airlines, and United to offer ﬂexible payments to their customers.
Venbridge is a leading Canadian venture debt ﬁrm. Venbridge provides SR&ED, grant and digital media ﬁnancing and consulting.
National Business Capital & Services Expands into Cannabis Funding with CannaBusiness Financing SolutionOctober 15, 2019
Today National Business Capital & Services (NBC&S) announced it has begun serving cannabis companies. Through its new program, CannaBusiness Financing Solution, NBC&S is now accepting applications for loans starting at a minimum of $10,000 from firms in the industry that are over one year old.
“The CannaBusiness Financial Solution will allow business owners to seamlessly obtain the capital they need, and allocate funding toward either hiring new employees, purchasing inventory, marketing strategies, or any other business need right away, without government regulations hindering growth opportunities or having to give up equity,” explained NBC&S President Joseph Camberato. “We’re not a bank and the lenders we work with aren’t banks either, so it falls into a different area of commercial lending.”
CannaBusiness is available in the 33 states where cannabis is legal, be it for medicinal or recreational uses, as well as in Canada.
“It’s a rapidly growing space, no pun intended,” joked Camberato when asked about the differences in funding cannabis companies compared to the industries NBC&S has served in its 12 years of business. “It would still be underwritten, just like one of our normal businesses. But we’re definitely going to want to know a little bit more about the business and understand what exactly they’re doing, how they’re operating, and exactly what are they’re focused on.” They’ll also examine if the business is in compliance with state laws. Qualifying cannabis companies must be in business for at least 1 year, with a minimum of $10K in monthly revenue. There is no minimum FICO score requirement.
While it’s not the first funder for cannabis companies, NBC&S views the move as a step in the right direction to “get ahead of the curve” according to Camberato. “We’re living through a modern-day prohibition, I think in 20 years we’ll look back on it and talk about it with our grandchildren and be like, ‘wow’ … I don’t think people realize how big of a deal this really is, but it is a business and it is another industry that has bloomed in front of us, again no pun intended. I think it’s fascinating that we get to witness this and that we’re really at the forefront of it and helping folks get the funds they need to grow.”
Jumping off from the politically charged word of ‘prohibition,’ NBC&S’ Vice President of Marketing, T.J. Muro, noted that he believed cannabis legislation to be one of the few issues that can be bipartisan, saying, “Out of everything today in our political climate, I think it’s the one thing that has unified people in the political parties. The liberal side appreciates the cultural influence and significance there, and then on the more conservative side it’s the tax revenue.”
The upcoming Senate vote on the SAFE Banking Act will put this theory to the test. The bill, which would allow the cannabis industry wider access to banking, has already passed the House.
Consumer debt has surpassed $4 trillion for the first time, and it’s continuing its ascent into the stratosphere. It’s getting big enough to trigger the next recession, and financial education isn’t changing the underlying consumer behavior.
Personal loan balances shot up $21 billion last year to close 2018 at a record high of $138 billion, according to a TransUnion Industry Insights Report. The average unsecured personal loan debt per borrower was $8,402 as of the end of last year, TransUnion says.
Much of the increase in consumer debt has emerged with the rise of fintechs— such as Personal Capital, Lending Club, Kabbage and Wealthfront—notes Rutger van Faassen, vice president of consumer lending at a U.S. office of London-based Informa Financial Intelligence, a company that advises financial institutions and operates offices in 43 countries.
In fact, Fintech loans now comprise 38% of all unsecured personal loan balances, a larger market share than any of the more traditional institutions, the TransUnion report notes. Banks’ market share has decreased from 40% in 2013 to 28% today, while credit unions’ share has declined from 31% to 21% during the same time period, TransUnion says.
Fintechs are also gaining at the expense of the home- equity market, van Faassen maintains. “They’re eating away at some of the balance that maybe historically was in home-equity loans,” he says. While total debt is increasing, the amount that’s in home equity loans is actually shrinking, he notes.
What’s more, fintechs are changing the way Americans think about credit, van Faassen continues. Until recently, consumers experienced a two step process. First, they identified a need or desire, like a washer and dryer or home renovation. Realizing they didn’t have the cash to fund those dreams, they took the second step by approaching a financial institution for a loan.
If consumers chose a home equity line of credit to procure the cash, they had to wait for something like 40 days from the beginning of the application process to the time they got the money, van Faassen says. “You really had to be sure you wanted something,” or the process wasn’t worth the effort, he says.
Fintechs have removed a lot of the “pain” from that process, van Faassen says. With algorithms helping to assess the risk that an applicant can’t or won’t repay a debt and digitization easing access to financial records, fintechs can quickly evaluate and make a decision on an application. Tech also helps assess applicants with thin or nonexistent credit files, which broadens the clientele while also contributing to total consumer debt.
Meanwhile, mimicking an age old process in the car business, merchants are beginning to make credit available at the point of sale. Walmart, for example, recently signed a deal with Affirm, a Silicon Valley lender, to provide point-of-sale loans of three, six or 12 months to finance purchases ranging from $150 to $2,000. Shoppers apply for the loans by providing basic information on their mobile phones and don’t have to talk to anyone in person about their finances. Affirm’s CEO Max Levchin has called the underwriting process ‘basically instant.”
If that convenience comes at too high a cost, it doesn’t matter much because borrowers can later find another finance vehicle with better terms, van Faassen says. “So if I get the money at the point of sale, which might have been zero for six months and then it steps up to 20-plus percent, there is no problem with refinancing that debt,” he says.
But there’s a downside to the ease of borrowing, van Faassen cautions. It could trigger the next recession, even though unemployment remains low. Despite modest recent gains, wages have remained nearly stagnant for years. That means an increase in interest rates could lessen consumers’ ability to pay off their debts, he says.
Meanwhile, at least some large mortgage lenders have begun running into problems, a situation that bears an eerie resemblance to the beginning of the Great Recession that struck near the end of 2007, notes a report in luckbox magazine, a publication for investors. Stearns Holding, the parent of Sterns Lending, the nation’s 20th largest mortgage lender, filed for bankruptcy protection just after the July 4 holiday, the luckbox article says.
Another worrisome sign with regard to the possibility of recession is emerging as institutional investors buy into the peer to peer lending market. Institutional investors bought batches of sliced and diced home mortgage securities that helped bring about the Great Depression.
Then there’s the nagging notion that the country and the world are becoming ripe for recession simply because no downturns have occurred for a while. Talk to that effect was circulating at the recent LendIt Conference, van Faassen observes. Fintech executives often come from the banking world and thus still find themselves haunted by the specter of the Great Recession. That’s why they’re already beginning to tighten underwriting for consumer credit van Faassen says.
One difference this time around lies in the fact that nothing about the increase in consumer debt appears to be hidden from public view, van Faassen says. Before, investors fell victim to the mistaken impression that risky mortgage-backed securities were rated AAA when they weren’t.
Plus, the increase in peer-to-peer lending could keep the economy going even if big financial institutions freeze the way they did during the Great Recession, van Faassen notes. “Hopefully, with the new structures that are out there, we can keep liquidity going,” he says. That raises key questions for the alternative small- business funding community. The industry came into being partly as a response to banks’ tightened lending policies during the Great Recession, so perhaps a downturn isn’t such a bad thing for the sector. But a downturn for the economy in general could cripple merchants’ ability to pay off debt.
But all bets are off during hard times. In the last recession the conventional wisdom that consumers make their mortgage payment before paying other bills was turned on its head. Instead of making the house payment—because foreclosure would take several months—people were choosing to make their car payments so they could get to work. Nobody really knows ahead of time what will happen in a recession, van Faassen notes.
After all, economics relies to at least some degree upon the often-irrational financial decisions of the general public. And science demonstrates that it’s no easy task to convince consumers to handle their cash, credit and debt responsibly, says Mariel Beasley, principal at the Center for Advanced Hindsight at Duke University and Co-Director of the Common Cents Lab (CCL), which works to improve the financial behavior of low- to moderate-income households.
“For the last 30 years in the U.S. there has been a huge emphasis on increasing financial education, financial literacy,” says Beasley. But it hasn’t really worked. “Content-based financial education classes only accounted for .1 percent variation in financial behavior,” she continues. “We like to joke that it’s not zero but it’s very, very close.” And that’s the average. Online and classroom financial education influenced lower-income people even less.
Lots of other factors influence financial behavior, Beasley notes. How much a person saves, for example, depends upon how much they make, what their bank tells them and what practices they encountered at home as children, she says. The CCL has been finding out some other things, too.
In one example of its findings, it discovered that putting an amount for a minimum payment on a credit card decreases how much consumers pay. That happens because listing a minimum payment amount creates an anchor, and borrowers adjust their payment upward from there, Beasley says. If the card carrier doesn’t specify a minimum, consumers tend to adjust downward from the full amount they owe. “It turns out to be incredibly powerful,” she contends.
It’s the kind of problem that shows financial institutions haven’t devised many systems to reduce consumer debt by speeding up repayment, Beasley maintains. In this example, suggesting higher payments would prompt some consumers to pay off their debt more quickly.
In an exception to standard practice, a credit card company called Petal does exactly that by placing a slider on its website to help borrowers determine the amount of their payment, she notes.
Meanwhile, people tend to base financial decisions on the examples they see other people set, Beasley says. Problems arise with that tendency because they may see one neighbor spending money freely to dine in restaurants but don’t see any of the many neighbors eating at home to save money. They see a neighbor driving a new car but don’t know how much that neighbor is setting aside for retirement.
That’s why most people overestimate how much others spend to dine out in restaurants, Beasley says. When shown the error, most reduce their own spending in restaurants, she notes, but within two weeks their behavior returns to its original level, their newfound knowledge “drowned out by the noise in the world,” she says.
That’s not good for consumers or small businesses, but help is on the way, according to John Thompson, chief program officer of the Financial Health Network, a national nonprofit research and consulting firm that works with financial institutions and other companies to improve consumer financial health.
As part of that mission, the Network has formulated procedures to assess the financial health of individuals and small businesses, Thompson says. It’s too early to say whether the tool will help with loan underwriting, he notes, but financial wellness determines the ability to pay back debt, he notes.
The Network also publishes the U.S. Financial Health Pulse, which recently pronounced just 28% of Americans financially healthy, meaning that they have sufficient income, savings and planning to handle an unexpected expense and act on the decisions they make. About 55% are relegated to various stages of coping, and 17% find themselves in a vulnerable state.
So Americans aren’t feeling financially secure, and they’ve borrowed $4 trillion to reach that unenviable state. They’re borrowing more and learning virtually nothing useful about their financial errors. Thompson has a way of summing up the situation. “It’s crazy,” he says.
On Sunday Fox Corp announced it had agreed a deal to buy a majority share of 67% in Credible, a San Francisco-based online lending platform that is publicly traded in Australia.
Credible, which was valued at $397 million by Fox, provides credit checks for mortgages, personal loans, and student loans; gathers the information yielded; and presents prequalified rates and refinancing options to customers, which they can click-through to. In addition to an investment of $265 million for their stake, Fox Corp will allocate an additional $75 million to cover Credible’s operating costs for the next two years.
The news may come as odd to many familiar with some of the media company’s biggest subsidiaries, such as Fox News, 21st Century Fox, and Fox Sports, but it is the second such investment to be made since Fox Corp sold the majority of its television and film assets to Disney for $71 billion in 2017. May saw Fox acquire 4.99% of Stars Group, an online sports betting site, for $236 million.
The move could be viewed as an attempt to enhance how current financial content is delivered through Fox Corp’s channels. With access to a pool of data that covers information relating to large swathes of credit ratings, loan approval speed, and financing priorities, Fox Business Network would be better positioned to deliver analysis. The Wall Street Journal, which shares a parent company with Fox Corp, News Corp, noted that Fox executives will be able to use Credible’s data in the digital avenues of its local television stations.
Lachlan Murdoch, who was made Chairman and CEO of Fox Corp when his father Rupert stood down earlier this year, said in a statement that “The acquisition of Credible underscores Fox Corporation’s innovative digital strategy that emphasizes direct interactions with our consumers to provide services they want and expand their engagement with us across platforms.” While in return, Credible will “benefit from our audience reach and scale, will drive strategic growth, further develop our brand verticals and deepen consumer relationships.”
A fate that Credible founder and CEO Stephen Dash appears to be content with, stating that “Fox Corporation’s record of innovation and focus on audience engagement will further enhance Credible’s position as a leading consumer finance marketplace in the United States, creating opportunities for organic growth and the expansion of the Credible platform. Credible’s industry-leading user experience, combined with FOX, will provide greater impact and scale for consumers.”
But not everyone with a stake in Credible is convinced by the decision, as Bell Potter analyst Damian Williamson has claimed. “Premature is the word to describe how some minority shareholders see the transaction … This company is operating in a very large market and has the potential to do really well.”
Regardless, the deal comes after months of negotiations, which were initially secured in May, only to go through an on-again-off-again phase until recently. While signed off by both Credible and Fox Corp, the sale won’t be confirmed until the Australian Securities Exchange approves the transaction.
Representing the first of its kind in acquisitions, the Fox Corp-Credible deal is an anomaly within the industry, being the pioneer case of a broadcasting company foraying into alternative finance – a field notedly uncovered by vast portions of the media.
Senator Elizabeth Warren and colleague Senator Doug Jones (D-AL) addressed a letter to multiple federal agencies this week to inquire about their individual roles in overseeing fintech, particularly as it pertains to potential discriminatory underwriting.
The senators cited a UC Berkeley study that examined discrimination in the era of algorithmic underwriting. “With algorithmic credit scoring,” the researchers write, “the nature of discrimination changes from being primarily concerned with human biases – racism and in-group/out-group bias – to being primarily concerned with illegitimate applications of statistical discrimination. Even if agents performing statistical discrimination have no animus against minority groups, they can induce disparate impact by their use of Big Data variables.”
The letter tasked the Federal Reserve Chairman, OCC Comptroller, CFPB Director, and FDIC Chairman with responding to 5 questions by June 24th. They are:
1. What is your agency doing to identify and combat lending discrimination by lenders who use algorithms for underwriting?
2. What is the responsibility of your agency with regards to overseeing and enforcing fair lending laws? To what extent do these responsibilities extend to the fintech industry or the use of fintech algorithms by traditional lenders?
3. Has your agency conducted any analyses of the impact of fintech companies or use of fintech algorithms on minority borrowers, including differences in credit availability and pricing? If so, what have these analyses concluded? If not, does your agency plan to conduct these analyses in the future?
4. Has your agency identified any unique challenges to oversight and enforcement of fair lending laws posed by the fintech industry? If so, how are you addressing these challenges?
5. Has your agency identified increased cases of lending discrimination in financial institutions that participate in the fintech industry? Are there additional statutory authorities that would help your agency enforce fair lending laws or protect minority borrowers from discrimination in their interactions with the fintech industry?
The Canadian Lenders Association’s (CLA) workshop on credit invisibles and credit deserts was held at the Toronto law offices of Blake, Cassels & Graydon on June 5th. Situated in the financial district with views of the CN Tower, Michael Turner of Policy and Economic Research Council (PERC) kicked off the morning with a presentation on credit invisibility.
Using data from TransUnion Canada, PERC’s research showed that 36.5% of all credit files in Ontario, the most populous province, have between 0-2 trade lines. Anything fewer than three was considered to be credit invisible. The numbers were similar for Quebec and British Columbia at 33.7% and 37.2% respectively. Meanwhile, in sparsely populated Yukon, the percentage of invisibility is over 65%.
Credit deserts were geographic areas where invisibility was highly concentrated.
The panel that followed affirmed PERC’s research that there is a lack of available credit data on a significant portion of the population and that geographics play a role. Panelists included Jason Appel, EVP & Chief Risk Officer of goeasy ltd., Glenn Waine, Head of Data Science at TransUnion, Elizabeth Sale, Partner at Blake, Cassels & Graydon LLP, Tony Vardy, COO at Progressa, Vahan Der Kaloussian, Director of Data Science at Capital One, and Christopher Grnak, CRO & EVP and Trust Science.
A video recording of the presentations is below:
Walmart customers can now pay for items using credit from Affirm, the online consumer lender announced yesterday. Walmart customers can find out how much they qualify for online and then make online or in-store purchases with in three, six or twelve monthly installments. A credit decision is made in real time and does not affect the customer’s credit score, according to Affirm.
“Walmart serves millions and has become a leader in the retail landscape with its commitment to help shoppers ‘save money and live better,’ which closely mirrors our own mission to ‘improve lives’ with our products,” said Max Levchin, founder and CEO at Affirm, as well as a founder of PayPal. “I’m looking forward to introducing Walmart customers to a modern and innovative way to buy the things they need.”
Affirm is now available as a payment option on Walmart purchases ranging from $150 to $2,000. This is not Walmart’s first foray into financing. In fact, in July of last year, Walmart entered into an exclusive partnership with Capital One to issue a Walmart credit card. But Elizabeth Allin, Vice President of Communications at Affirm, said that this partnership is the first point-of-sale loan product partnership for Walmart.
“They’ve really embraced e-commerce and the evolution of digital and mobile,” Allin said of Walmart, which has been the biggest retailer in the world for years.
Now 57 years old, the retail giant is pursuing partnerships with financial organizations to facilitate access to customer credit. But back in 2006, Walmart set its sights on bringing these lending operations in house, by becoming bank. Using a controversial statute, it attempted to get a charter to become an ILC bank. Met with strong opposition from banks and other opponents, Walmart backed down.
The unsecured personal loan market hit an all-time high in 2018, jumping 17 percent year-over-year to $138 billion, according to data from TransUnion released today and featured in a CNBC story.
“The rapid growth in consumer loans sits squarely on the shoulders of fintechs,” said Jason Laky, senior vice president and leader of TransUnion’s consumer lending line of business. “They continue to be the main driver.”
According to the data, fintech companies, like LendingClub, Prosper and Elevate, issued 38 percent of all U.S. personal loans last year, which is up from 35 percent in 2017 and just five percent in 2013. Conversely, banks’ market share for unsecured personal loans is shrinking. Traditional banks’ share of these loans is down to 28 percent from 40 percent five years ago.
Will this trend continue? The non-bank consumer lenders think so.
Credit unions are down to 21 percent from 31 percent in the time period. While their market share shrank, they still saw overall growth in total loan balances, according to Laky.
“Although regulations are starting to loosen, banks still cannot provide the kind of emergency funds that so many Americans need,” Chief Operating Officer of Elevate Credit Jason Harvison told deBanked via email.
He said that the rise of the gig economy has created near-constant income volatility for a large number of Americans and cited a recent JP Morgan Chase study that found that 41% of U.S. households experience income fluctuations of 30% or more month-to-month.
“Many consumers who need access to funds quickly in order to weather financial emergencies can’t access personal loans from banks,” Harvison said. “Online lenders can help fill this void.”
By lending to non-prime borrowers, do these lenders worry a lot about what might happen in an economic downturn?
“We’ve found in past downturns that non-prime consumers actually fare better than prime,” Harvison said. “Essentially, non-prime consumers are always living their lives in a state of “recession.” They experience income volatility, job insecurity, and a lack of access to necessary financial products. They live like this every day, and therefore know how to weather these challenges.”
Two members of the New York State legislature have introduced a bill to apply consumer usury protections to small businesses. Bill A03638, introduced by New York Assemblymembers Yuh-Line Niou and Crystal Peoples-Stokes define a small business as “one which is resident in this state, independently owned and operated, not dominant in its field and employs one hundred or less persons.”
The bill is separate from the one introduced to outlaw Confessions of Judgment in financial contracts.
Commonbond announced today that it has signed $750 million in lending capacity from Goldman Sachs, Citibank, Barclays, BMO, and ING.
“From the start, we have set out to build the highest levels of trust with our customers and our capital partners,” said CommonBond CEO and co-founder David Klein. “Access to this level of capital, and at a lower cost, is a testament to the platform we’ve built, the quality of our members, and the success of our capital markets program. We’re thrilled to have some of the world’s top banks recognize [this], and work with us in a way that ultimately benefits the consumer.”
This new financing will support growth for Commonbond, which provides student loans and student loan refinancing. According to a company statement today, in addition to growth, the new lending capacity reflects significantly lower cost of capital for CommonBond, improving the company’s borrowing spreads and advance rates.
This financing comes a little less than a month after Reuters reported that Commonbond laid off 18% of its staff, which affected 22 people. Based in New York and founded in 2013, Commonbond has originated over $2.5 billion in loans.
How much does a non-prime consumer lender spend to acquire a borrower? According to Elevate’s Q4 earnings report, the company spent less than $150 per borrower to originate $31 million in loans towards their partnership with FinWise Bank. Overall, however, their cost of acquisition has hovered below $245.
Elevate’s direct mail channels made up 42% of acquisitions in 2018. That’s down from 54% in 2017. In the company’s earnings call, Elevate CEO Ken Rees said of the decreasing reliance on direct mail, “we believe this sets us up for strong future growth through these expanded channels.”
Elevate offers three products to non-prime customers: RISE, a state-licensed online lender that offers up to $5,000 in unsecured installment loans and lines of credit, Elastic, a bank-issued line of credit, and Sunny, a short-term loan product for customers in the UK. RISE and Elastic serve the US market.
Separately, Elevate reported $787 million in revenue for 2018, an increase of $113 million, or 17%, compared to 2017’s full-year revenue of $673 million.
A story this week in American Banker suggested that popular home improvement TV shows like HGTV’s “Fixer Upper,” “Love It or List It” and “Property Brothers” are creating a growing demand for home renovation, and hence, home renovation loans.
Nielsen rating data shows that the combined viewership of the three aforementioned shows on the HGTV (Home and Garden Television) channel rose from 5.4 million viewers in 2014 to 8.6 million viewers in 2018.
deBanked spoke to Michael Funderburk, Director of Personal Loans at LendingTree, which encompasses home improvement loans, and he said that he has seen an increase in home improvement loan volume at LendingTree. But he doesn’t necessarily think there is a correlation to the popularity of the HGTV shows.
Funderburk said people are likely to renovate their home as opposed to buy a new one for a few reasons. One is that new home supply hasn’t quite caught up with demand yet, which is causing home prices to increase. Secondly, mortgage rates are higher than they have been for the last several years.
“Despite the fact that the economy is doing well, people are in better financial positions, have better income, people are thinking ‘What do I do with this [money]? I don’t necessarily [have enough] to move homes, but maybe I can renovate my current home?”
Spending on home remodelling has steadily increased over the last two years from approximately $295 billion at the start of 2017 to nearly $340 billion at the end 2018, according to a study from the Joint Center for Housing Studies of Harvard University.
According to the American Banker story, Doug Duncan, Chief Economist at Fannie Mae, said that there are two reasons why home remodelling spending (and resulting borrowing) is increasing.
“Baby boomers [have] said they intend to age in place,” Duncan said. “As you get older, it requires some accommodations, things like door handles, potential wheelchair ramps, bars in the shower, that type of thing.”
The other reason for increased home improvement, he said, is that Generation X (those born between 1965 and 1979) will also be remodelling their homes.
“Gen Xers maybe have kids in junior high or high school and would like to move up,” Duncan said. “But there simply isn’t inventory, and it’s expensive if they’re in an urban center and in a school district they like.”
Whether it’s because someone saw a beautiful new den built on the “Property Brothers,” or they’re just too settled in to move, the market for the home improvement loans seems to be growing and is likely to continue. And it’s possible that small businesses may seek similar loans to freshen up their stores rather than find a new space.
PayPal announced Friday that it was devoting $25 million to a program that offers interest-free cash advances of up to $500 to federal workers who have been impacted by the record long partial government shutdown.
“No matter where you stand on the issues, the fact is that 800,000 of our fellow Americans suddenly find themselves without a paycheck,” PayPal CEO Dan Schulman wrote in a blog post. “We think that the private sector and the public sector need to come together to think about creative solutions, to be able to help,” he said in a video.
Josh Criscoe, a PayPal spokesperson told deBanked that borrowers need only make the minimum monthly payment, generally equal to 3% of the outstanding balance. The APR is 0% until the cash advance is repaid.
Crisco said that any government worker who has gone without pay due to the shutdown qualifies for a $250 cash advance, while most of the others who meet certain credit criteria, are eligible for the full $500.
“We’ve seen strong interest since Friday and through the weekend,” said Criscoe.
PayPal is using public records to confirm that applicants seeking the interest-free cash advances are, indeed, unpaid government workers. And they are asking for certain forms of verification as well.
PayPal is not the only lending institution that is trying to help unpaid government workers. In California, nearly a dozen credit unions are providing financial assistance to their members affected by the shutdown.
“The uncertainty as to when the shutdown will end has created stress and hardship for many credit union members who are now struggling to pay their bills and provide for their families,” said Elizabeth Dooley, President and CEO of the Educational Employees Credit Union, in a statement.
“Credit Unions are offering options to federal employees affected by the partial shutdown – such as skipping a loan payment or zero percent loans – to help their members get through this challenging time.”