Happy Sunday,

Fed warns 2% inflation target may not be achieved until 2025. More auto owners have negative equity. Some signs labor market cooling. Supreme Court will hear CFPB case. Goldman may shrink consumer business. Klarna’s losses widen. LendingTree teams with Upgrade on credit card. Earnings season continues.

Last week, we published our Q4 Consumer Lending Review – if you missed it, you can find it here.

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Rates Likely to Stay Elevated Until 2024, At Least

With inflation remaining stubbornly high, Fed officials are leaning into higher rates. Atlanta Fed President Bostic expects rates will need to rise to at least 5-5.25% and stay there “until well into 2024.” Meanwhile, Fed Governor Jefferson defended the central bank’s 2% inflation target. He warned that changing the target could destabilize “well-anchored” inflation expectations. Jefferson further warned it will take time to bring inflation back to target, with the current forecast pointing to achieving that in 2025.

Image: Bloomberg

Rates are having a very real impact on consumers, however. The average new-car interest rate rose to 6.9% in January from 4.3% the year prior. New vehicle prices are 20% higher than before the pandemic, with used car prices still up 37% (even after falling some). These trends are helping to drive a greater share of borrowers to have negative equity in their vehicles.

Finally, there are some signs the labor market is cooling. ZipRecruiter and Recruit Holdings both say their data shows a stronger decline in new job listings vs. the government’s Labor Department data.

Supreme Court Will Hear Critical CFPB Case

The Supreme Court has agreed to hear a case critical to the CFPB’s future. The decision to hear arguments in the case comes about four months after an appeals court unanimously ruled that the bureau’s funding mechanism is unconstitutional. The CFPB’s funding isn’t appropriated by Congress, but rather comes from the Federal Reserve. The Federal Reserve’s funding, in turn, actually comes from fees from its member banks, leading some to describe the bureau’s funding mechanism as “double-insulated.”

Two trade groups representing payday lenders brought the case, which, among other claims, argues this funding structure is unconstitutional because it violates the separation of powers.

The Biden administration asked the Supreme Court to hear arguments on the lower court’s ruling. But while the Supreme Court agreed to do so, it won’t hear the case until its next term, which begins in October. That means any decision on the case may not come until as late as June 2024.

Despite the cloud of uncertainty, the bureau is pushing ahead with an ambitious agenda. CFPB Director Chopra has made clear the bureau is continuing its enforcement efforts, recently saying, “We are not holding back on that front.”

Goldman Considering Shrinking Consumer Business

Goldman Sachs held its second-ever investor day last week. Alongside other business and strategic updates, CEO David Solomon announced the bank is considering “strategic alternatives” for parts of consumer business, including its credit card partnerships (Apple, GM) and the GreenSky personal lending business. The review doesn’t include Goldman’s Marcus-branded digital banking products.

The news comes just months after a larger shake up that saw Goldman’s fledgling consumer efforts split up. Its direct-to-consumer “Marcus” business was folded into the newly combined Asset and Wealth Management division, while credit card partnerships, GreenSky, and transaction banking went into the newly-formed “Platform Solutions” division.

The Apple Card, the best-known piece of the newly formed group, was once hailed as a coup for Goldman. Now, it looks more like an albatross around the neck of the new division.

Klarna’s Losses Widen, But Says a Return to Profitability is in Sight

BNPL juggernaut Klarna saw its losses jump 47% to about USD $1Bn last year. Still, the 18-year-old company said it is on track to return to profitability. Klarna has made significant inroads in the U.S., despite stiff competition from native competitors like PayPal and Affirm. Klarna’s GMV in the U.S. rose by 71% last year, making it the company’s largest market by revenue.

Seasoned industry analyst and commentator Ron Shevlin made an interesting argument that, really, Klarna isn’t a buy now, pay later company. Instead, think of it as a “commerce enablement” company, he argues, as Klarna goes well beyond financing to offer product search, shoppable video, creator/influencer content, order/return tracking, and more. Together, for some users, Klarna is a shopping destination in its own right, rather than an interchangeable button relegated to the checkout screen.

LendingTree Teams With Upgrade on First Credit Card

LendingTree, long known as a shopping comparison site for credit products, is launching its own credit card. The company has teamed with fintech Upgrade to offer a card that is repaid in equal, fixed payments, akin to an installment loan. The product will leverage Upgrade’s model and balance sheet, with purchase-loans repayable in equal installments over 24, 36, or 60 months. The card will be issued by Sutton Bank with credit lines issued by Cross River Bank.

Rates, Economic Uncertainty Pushes Execs to Tighten Credit

Source: PeerIQ

As we covered above, LendingTree’s big earnings announcement was the launch of its Win Card. To apply for the card, users will need to have a MyLendingTree membership. LendingTree reported 24.8Mn cumulative sign-ups for its MyLendingTree program, up 4% sequentially.

LendingTree also observed consumer credit tightening with CEO Douglas Lebda explaining consumer segment revenue fell (16)% sequentially because, “In our consumer segment we saw throughout the second half of 2022 lenders tightened underwriting criteria due to higher interest rates and effect they have on our economy. A stricter credit environment generally leads to lower close rates for our lenders which reduces our revenue.”

Curo management reiterated that it began to tighten credit to lower credit tiers and increase pricing in the first half of 2022. The company reported a 10% sequential increase in gross loan receivables driven by its Canadian Flexiti business.

NCOs increased to 14.8%, from 13.2% a quarter prior, which management attributed to normalization. Management expects 15-17% NCOs on a normalized basis.

Rocket Companies found early success in its Rocket Rewards program launched in October, reporting 1Mn users. Closed loan origination volume continued to slide on higher rates, down (26)% sequentially. At the same time, gain on sale margin fell to 2.17%, from 2.69% a quarter prior. Management explained that the decline in gain on sale margin was due to the popularity of its “Inflation Buster” promotional purchase product. The product gives homebuyers a reprieve by reducing their monthly mortgage payment one percentage point in the first year of their loan.

In the News:

Apartment Rents Fall as Crush of New Supply Hits Market (Wall Street Journal, 2/27/2023) Rents across major metropolitan areas have fallen over the past six months through January.

US Pending Home Sales Surge 8.1%, Most Since June 2020 (Bloomberg, 2/27/2023) Pending home sales rose 8.1% in January from a month earlier, beating estimates of just 1%.

U.S. Bancorp Signals CFPB has Turned up Heat in Prepaid Cards Probe (American Banker, 2/28/2023) The CFPB is weighing enforcement action against U.S. Bancorp after launching an investigation of its management of prepaid cards for unemployment benefits.

Backdoor Ban’ on Crypto Banking? Regulatory Statements Raise Concerns. (American Banker, 2/28/2023) Some worry the regulator statements (Fed, FDIC, OCC) could create a de facto supervisory framework that blocks crypto firms from the banking sector.

The Number of Banks Facing a Liquidity Crunch is Growing (American Banker, 2/24/2023) A decline in deposits is putting pressure on loan-to-deposit ratios, even as loan demand wanes in many categories.

JP Morgan Is Still Cleaning Up Its ‘Disastrous’ $175M Frank Acquisition (Forbes, 2/27/2023) JPMorgan deals with its ongoing legal battle over fintech startup Frank, suing founder Charlie Javice for fraud, saying she had fabricated a list of over 4Mn fake customers.

Remitly to Shutter Digital Banking Platform Passbook (Banking Dive, 2/27/2023) Remitly is closing its immigrant-focused digital banking platform launched in 2020.

Klarna UK to Introduce Charges for Late Payments (Finextra, 2/27/2023) Will begin charging late payment fees in a bid to curb loan defaults.

Bankers See Growth Ahead — but Credit, Interest Rate Risks Mount (American Banker, 2/27/2023) 83% of CEOs surveyed expect balance sheet growth this year.

Troubled Buy Now/Pay Later Lenders Try to Turn a Corner (American Banker, 2/28/2023) BNPL providers face challenge of adjusting business models for rising interest rates.

Banking-As-A-Service Is Under Fire — What’s Next for Fintech’s Hottest Segment (Forbes, 2/27/2023) BaaS faces regulatory headwinds and overcrowding.

Better Offers Vested Equity as Homebuying Collateral for Amazon Employees (Fintech Nexus, 2/28/2023) Better launched Equity Unlocker, a new product that allows employees with vested equity to pledge it as collateral for a down payment on a new home.

Lighter Fare:

Utah Wants to Build the World’s Longest Gondola to Solve Traffic (Vice, 3/1/2023) There may be a solution to the traffic jams caused by skiers and snowboarders heading to the mountains.

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