Regulation
OnDeck, UK Trade Group Work on Fintech Policy
March 17, 2016
Don’t look now but OnDeck is getting knee-deep in fintech policy.
The online lender said that it will partner with UK’s Innovate Finance, a fintech trade group to launch a Transatlantic Policy Working Group to exchange intelligence and information on regulatory and policy issues governing fintech.
The group will work on universal fintech issues like the use of data, building a payments infrastructure for financial inclusion, open source APIs in banking and automated investment advice through robo advisors, when kicking off its first meeting at Google’s Washington DC office.
“The transatlantic policy working group represents a great opportunity to share key insights, best practices and knowledge between US and UK fintech stakeholders,” said Daniel Morgan, head of policy and regulation at Innovate Finance “It will help drive real change in the public policy arena when it comes to the development and growth of a vibrant fintech sector.”
Venture capital investment in fintech companies more than doubled last year compared to 2014, hitting an all time high of $14 billion, up 106 percent from $7 billion in 2014. The UK attracted a total of $623 million in fintech investment in 2014 and Innovate Finance committed to increasing that number to $8 billion by 2020 in venture and institutional investment.
Fed’s Steady Interest Rates: What Does This Mean for You?
March 16, 2016The Federal Reserve kept interest rates unchanged citing a global economic slowdown and market volatility in the US.
The central bank kept the benchmark federal funds rate at 0.25-0.5 percent and scaled back forecasts of higher interest rates noting that the economy is exposed to the “uncertain global economy.”
What does this mean for online lenders? Not much directly as marketplace lenders don’t use the prime rate as a benchmark. But by association, it could affect demand for loans, credit performance and capital supply as the Fed rates play with investors’ expectations of yield.
But a small increase in rates wouldn’t have affected the industry too adversely. “Given the cushion we’ve already built into our loan pricing, we don’t plan to increase rates if there’s a small shift in the base rate,” Sam Hodges, co-founder and managing director of Funding Circle told WSJ last year, ahead of the rate hike in December.
But policymakers expect the central bank to raise rates by 0.5 percent by the end of this year. Will that affect be of any consequence? Hard to tell.
FINRA Issues Best Practices for Robo Advisors
March 15, 2016
Robots will manage assets worth almost $500 billion by 2020.
And since 2020 isn’t far, the Financial Industry Regulatory Authority (FINRA) has turned its attention towards the robo advisory industry and issued best practices for firms offering digital tools for wealth management.
Although companies are not legally bound to follow them, the regulator’s advisory guidelines outline regulatory principles in areas crucial to the business of digital investment advice.
Algorithms
FINRA suggested firms supervise and govern algorithms used in robo tools meticulously. “At the most basic level, firms should assess whether an algorithm is consistent with the firm’s investment and analytic approaches,” the report said.
Portfolios & Conflict of Interest
Manual approvals and supervision of portfolios proposed by tools is key. The report suggested that companies monitor the pre-packaged portfolios and assess its appropriateness for different investors. Herein, FINRA recommended customer profiling based on risk capacity and risk willingness.
Rebalancing
FINRA’s effective practices for automatic rebalancing recommended establishing customer intent on automatic rebalancing, disclosing to customers how the rebalancing works and apprising the customer of the potential cost and tax implications of the rebalancing.
Training
Robots are not fully infallible yet and the regulator endorsed training professionals on permitted use of digital tools, being fully aware of its assumptions and limitations and judging its suitability for a client accordingly.
CFPB Director To Testify Before House Financial Services Committee
March 11, 2016
CFPB director Richard Cordray will appear before the House Financial Commitee to address reports decrying the bureau’s activities.
The committee issued two reports detailing the bureau’s attempt to regulate auto dealers despite being prohibited to do so. The reports also exposed the CFPB’s flawed distribution of a $80 million settlement without doing a due diligence on the claimants leading in alleged racial discrimination. The documents revealed, some white borrowers received settlement checks over Asians, African-Americans and Hispanics.
“The CFPB undoubtedly remains the single most powerful and least accountable Federal agency in all of Washington,” said Chairman of the committee Jeb Hensarling (R-TX). “When it comes to the credit cards, auto loans and mortgages of hardworking taxpayers, the CFPB has unbridled, discretionary power not only to make those less available and more expensive, but to absolutely take them away.”
Since Cordray’s last appearance before in September 2015, the Bureau has has proposed regulations that compromise on the consumer’s’ right to access small dollar, short-term loans. The Qualified Mortgage rule that addresses few of the actual risks associated with mortgage lending led some community financial institutions to downsize or shut down their mortgage operations.
Big Banks Less Transparent Than Online Lenders Federal Reserve Study Finds
March 4, 2016The results are in. Dissatisfied small business borrowers are more likely to encounter transparency problems with big banks, not online lenders.
The margin of difference on this measure may have been razor thin, but the anti-online lender rhetoric isn’t matching up with borrower feedback. The 2015 Small Business Credit Survey, a comprehensive report released by the Federal Reserve, found that 33% of borrowers that were dissatisfied with a small business loan from a big bank, cited a lack of transparency as a reason. 32% of borrowers that were dissatisfied with an online lender cited a lack transparency. While both statistics show room for improvement, the results shatter the myth that online lenders are uniquely lacking in transparency.
The findings are also consistent with the results of a previous Federal Reserve study in which small business owners gave extremely high marks to online lenders for clarity (even after researchers tried to trick them). This latest report does not put online lenders in a favorable light, but it does show that a dissatisfied borrower is equally or more likely to be confused by a loan from Chase or Bank of America than they are from OnDeck or PayPal Working Capital.
Small banks were less likely than online lenders and big banks to experience dissatisfaction over transparency.
Online lenders were defined by the Fed as “alternative and marketplace lenders, including Lending Club, OnDeck, CAN Capital, and PayPal Working Capital.” Respondents could select multiple options for dissatisfaction, ensuring that a separate issue didn’t merely trump transparency.
Big banks also scored worse on difficulty of the application process. 51% of dissatisfied borrowers that got a loan from a big bank cited difficulty. Only 21% of dissatisfied borrowers that got a loan from an online lender cited difficulty.
A more difficult, lengthier, and more regulated process at big banks has apparently not led to more transparency with borrowers. The findings echo B. Doyle Mitchell Jr.’s testimony presented during a House Committee hearing last fall. Mitchell, who was speaking on behalf of the Independent Community Bankers of America, said that adding more pages to loan agreements do not make them any more clear to borrowers. “In fact it is even more cumbersome for them now,” he said.
The Federal Reserve’s own study has proven to be consistent with that assessment.
CFPB To Begin Accepting Small Business Loan Complaints
February 29, 2016Unhappy with your small business loan? The CFPB wants you to complain to the federal government about it. Small business loans including term loans, credit lines, and business credit cards, among other products, and lenders both small and large banks and non-banks such as online or marketplace lenders will soon all answer to the CFPB.
“Subject to an assessment of feasibility, the Bureau’s consumer response team will build the infrastructure to intake and analyze small business lending complaints,” a new priority report says.
That would add a new category alongside mortgages, student loans, vehicle loans, and payday loans.
Accepting these reports will likely mean that small business lenders would have to respond directly to the CFPB. Companies who receive a lodged complaint typically have 15 days to provide an answer. Both the complaint and the answer are stored in a public database that anyone can view.
In their report, the CFPB states that “existing research suggests that significant discrimination against minorities may exist in the small business lending market.” However, no link to any such research is provided and historically they’ve made such judgments (with stunning inaccuracy) by guessing the racial makeup of last names.
The CFPB accepts a wide range of complaints. Some companies have been reported simply because a company representative came off as rude over the phone. In other cases, company customer service was reportedly too slow or website outages caused undue stress.
Small business lenders can’t be penalized by the CFPB, but receiving a disproportionate number of complaints could certainly place one on a regulatory radar.
Over the next two years, “the Bureau will build a small business lending team and begin market research and outreach for rulemaking on business lending data collection,” the report promised.
SEC Says You Can Crowdfund Startups This Summer
February 23, 2016Now you can own a piece of a startup doing the next-big-thing or invest seed money in an idea that looks promising starting May this year.
Last week, the SEC released an investor bulletin on crowdfunding for retail investors and said that “Starting May 16, 2016, companies can use crowdfunding to offer and sell securities to the investing public.”
In October last year, the regulator adopted rules permitting companies to offer securities and raise a maximum of a million dollars a year through crowdfunding platforms. Individual investors with annual income or net worth less than $100,000 can invest no more than $2,000 but less than 5 percent of their annual income and not more than 10 percent for investors with income and net worth of over $100,000 in a twelve-month period. 
Investors are allowed to invest in these ventures strictly through an online platform including mobile app of a broker-dealer or a funding portal registered with the SEC and a member of FINRA.
This is a major step in recognizing crowdfunding as a legitimate means of raising capital, which thus far has been typically used to solicit charitable donations or raise funds for artistic projects like movies, music and social projects.
The SEC warned investors of the risks involved with such investments like limited disclosure, illiquidity, opacity in valuation and capitalization that is associated with private companies. Investors are also prohibited from reselling their stake for the first year unless it’s a transfer to the company, an accredited investor or a family member.
SEC Committee To Examine Capital Raised By SMEs
February 18, 2016The Advisory Committee on Small and Emerging Companies at the SEC announced they will meet next week (February 25th) to examine the capital raised in “unregistered securities offerings”
The committee provides a mechanism for the regulator to receive recommendations on small enterprises, both public and private with a market cap of less than $250 million. Stephen M. Graham, Managing Partner of Fenwick & West LLP’s Seattle office, and Sara Hanks, CEO of CrowdCheck will serve as co-chairs of the committee.
“Small businesses play a crucial role in our nation’s economy,” said SEC Chair Mary Jo White. “The advisory committee members have a wealth of experience and ideas that will help inform the Commission on the many important issues affecting small and emerging businesses.”
