Happy Sunday and Memorial Day Weekend!
Fed officials are divided on additional rate hikes. Mortgage rates climb. Citizens Bank settles with CFPB. More states propose EWA regulations. Rocket Mortgage debuts a 1% down payment option. Airbnb teams up with Klarna, Stripe. Fifth Third acquires Rize. First Citizens sues HSBC. Daylight shuts down. SoLo gets third consent order. TransUnion April credit data.
Keep an eye out, as we will be releasing our Q1 Consumer Lending Review this week!
Fed Officials Split on More Rate Hikes
Fed officials are split over what to do on interest rates. While the 25 bps hike in May was unanimous, officials are divided over whether additional hikes are needed now or if they should take a ‘wait and see’ approach. St. Louis Fed President Bullard, who is not an FOMC voting member in 2023, argues two additional 25 bps hikes are warranted. Minneapolis Fed President Kashkari says it’s a “close call,” and that if the Fed does “pause,” it should make clear its tightening cycle isn’t over. Atlanta Fed President Bostic argues policy works with a lag, and the Fed should hold rates steady and see how things play out.
Mortgage rates, meanwhile, have jumped to their highest since March. The average 30-year fixed rate rose to 6.69%, cooling demand for new mortgages.
Citizens Settles With CFPB
Citizens Bank has reached a $9Mn settlement with the CFPB over allegations the bank improperly managed customer billing and fraud disputes. The case stems from issues that Citizens self-reported to the CFPB going back as far as 2010, with the bank saying it had remediated customers who had been harmed. But in 2020, the CFPB, under then-Director Kathy Kraninger, opted to sue the bank over the matter.
The key issue in the case is the allegation that Citizens required customers making fraud claims to provide a notarized affidavit to that effect. The CFPB argues that requirement was an unreasonable barrier to cardholders exercising their rights. Current CFPB Director Chopra hopes the settlement will be a warning to other banks.
More States Pursue EWA Regs
More states are seeking to regulate earned wage access (EWA) providers. Several states, including Georgia, Kansas, Texas, and Virginia have recently introduced bills focused on the product category. EWA has become a popular option for consumers to access liquidity in between paychecks, without resorting to more expensive options, like bank overdrafts or payday loans. But currently, there is little clear guidance about what is and is not permitted, beyond a 2020 CFPB advisory letter. The proposed bills require licensure or registration, but generally would not impact EWA’s current operating model.
Consumer advocates are generally unhappy with the bills that have been proposed so far. Advocates point to a report put out by the California DFPI last year that suggested the average equivalent APR for EWA products, including mandatory fees, tips, and optional fees, exceeded 300%.
Rocket Rolls Out 1% Down Payment Mortgage
Rocket Mortgage, one of the largest non-bank originators, is rolling out an option for homebuyers to put as little as 1% down. The new offering, dubbed ONE+, enables aspiring homeowners who earn 80% or less of the median income in their area to qualify to put just 1% down without needing mortgage insurance. In order to ensure that such loans can be guaranteed by and sold to GSEs, Rocket itself will pay 2% of borrowers’ loans.
While such an offering might sound reminiscent of the 2008 subprime crisis, Rocket’s loans still require borrowers to meet stringent underwriting standards.
Airbnb Teams With Klarna, Stripe
Vacation now, pay later. Airbnb has teamed up with Klarna to let users in the U.S. and Canada pay for their vacation rentals over time. Users in both countries will have access to split bookings over $500 into four, interest-free payments. U.S.-based users can also apply for longer-term financing with monthly payments. Airbnb is the latest merchant to join Klarna’s network of over 500,000 merchants. The U.S. market is now Klarna’s largest by revenue. The company boasts over 7Mn active monthly users in the U.S.
Last week, Airbnb also announced it has teamed up with payments processor Stripe to let U.S. users pay directly from their bank account. Users can receive a discount for stays of 28 days or longer if they choose to pay this way.
Fifth Third Acquire Embedded Finance Platform Rize
Regional bank Fifth Third announced it has acquired banking-as-a-service/embedded finance platform Rize Money. Rize provides payment infrastructure and risk management capabilities to fintechs and other companies seeking to offer financial services products. Fifth Third has quietly built a significant BaaS/embedded finance business, with annual revenue projected to exceed $130Mn this year. Rize’s capabilities to support embedded finance applications will be integrated with and support Fifth Third’s treasury management business.
First Citizens Sues HSBC Over Poaching SVB Staff
First Citizens, which acquired much of Silicon Valley Bank following its collapse, is suing HSBC. First Citizens alleges HSBC poached more than 40 of SVB’s employees in a bid to launch its own U.S. venture banking business. The suit argues HSBC violated federal law by hiring away workers in order to gain access to SVB’s trade secrets. First Citizens is seeking more than $1Bn in damages. HSBC declined to comment on the case.
Daylight Shuts Down
Daylight, a neobank focused on the LGBTQ+ community, is shutting down. The company had raised some $20Mn across its seed and Series A rounds. Its core product, a mostly undifferentiated spending account and debit card, never seemed to obtain significant traction. More recently, the company attempted a pivot to a subscription-type model for family planning services. It sought to connect Daylight users with professional services to facilitate adoption, surrogacy, and IVF.
The company was not without controversy. A lawsuit and recent profile in New York Magazine allege inappropriate behavior, fabrications, and retaliation by Daylight CEO Rob Curtis.
SoLo Funds’ Model in Question
SoLo Funds, a peer-to-peer microfinance platform, has racked up its third consent order in as many weeks. After reaching settlements with the California DFPI and Washington, D.C.’s attorney general, the company now has reached a settlement and consent order in its long-running battle with the state of Connecticut. The Connecticut banking regulator argued the company was operating without proper licenses and charged rates as high as 4,280% APR, in violation of the state’s usury cap. SoLo Funds must refund all consumer charges and pay a $100,000 penalty. The company is barred from operating in the state until it obtains the necessary licenses or receives written approval from the regulator to operate without them.
TransUnion Releases Credit Industry Snapshot for April
TransUnion released its monthly credit snapshot, with lots of data on the state of consumer credit, including auto, bankcard, mortgage, and unsecured personal loans (“UPLs”). The Q2 2022 and 2021 vintages of UPL delinquencies remained well above prior vintages.
Across consumer credit products, we saw declines in delinquencies from March to April, though TransUnion cited seasonality as a major factor to the decline. UPL ((29)bps), Auto ((17)bps), Bankcard ((13)bps) and Mortgage ((10)bps) all saw declines in their 60+ DPDs on a sequential basis. Average balances for bankcard, mortgage and UPLs rose, driven by a mix demand and high inflation.
Turning to originations, we got information on UPL origination volume for the January 2023 – February 2023 period (lag due to reporting time). Interestingly enough, banks increased originations across the entire credit spectrum from January to February, with the largest increases coming from near prime +20.4%, prime plus +13.6%, and prime +9.4% originations.
In contrast, credit unions cut UPL originations across the entire credit spectrum during the period, reporting the largest declines in subprime (25.9)%, near prime (14.4)% and super prime (12.4)% originations.
Finance companies reported declines in originations across most credit risk tiers, except for prime, which grew 1.9%.
Fintechs focused on credit, with UPL originations growing +4.8% in prime plus and +3.5% in super prime, but falling in the prime (5.6)%, near prime (14.0)%, and subprime (32.7)% categories.
In April, fintechs increased their lead in UPL total balances (34.3% of total), compared to finance companies (25.9% of total), banks (19.9% of total), and credit unions (19.9% of total). Fintech market share of total UPL balances is up from 30.7% in March. Average UPL balances per consumer increased 1.1% on a MoM basis.
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In the News:
FDIC Remains Trusted, but will Fight for Access and Punish “Imitation Banks”: Gruenberg (American Banker, 5/23/2023) FDIC Chairman Gruenberg said bank failures didn’t damage the credibility of the FDIC or its deposit insurance coverage and that they had little impact on banking access for low- and moderate-income families.
Banks Now Offer Payday-Loan Alternatives. How Many People Use Them? (American Banker, 5/21/2023) Some customers of banks that offer small-dollar loans still turn to higher-cost lenders.
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Crypto Giant Binance Commingled Customer Funds and Company Revenue, Former Insiders say (Reuters, 5/23/2023) Three sources told Reuters that Binance commingled customer funds with company revenue in 2020 and 2021, in breach of U.S. financial rules.
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