Lots to cover this week. We touch on the (1) latest American unemployment data and a record monthly jump (25%) in existing home sales; (2) we recap 2nd quarter earnings; (3) we review a big industry result – the settlement of “true lender” litigation in Colorado.
Let’s get to it.
Weekly Unemployment Holds Steady at 1MM…
New unemployment filings inched back above the 1MM mark this week, underlining the slow pace of recovery in American labor markets. And yet, although slowly, job markets are steadily recovering – the 14.8MM people collecting unemployment benefits was the lowest number since April.
The fits-and-starts recovery of the American economy puts even more pressure on the Federal Reserve to continue its support. As Bloomberg highlights this week, that support is expected to continue for a long time to come. Federal Reserve Chair, Jay Powell, has been overseeing a review of the Fed’s inflation strategy, and there are strong indications that the Fed will break from history to allow (if not outright encourage) inflation above 2% in the months ahead.
Those low rates are having an impact – not least on the housing market, which saw an unprecedented 24.7% jump in the number of existing home sales in July. The monthly increase was the largest on record (going back to 1968) and brought home sales to a pace not seen since December 2006.
…Even as Gov’t Spending Peters Out
Evercore released an updated version of their disbursement chart, showing the continued fall-off in government support as the COVID-19 pandemic continues (now down to ~$10Bn per week).
Source: Treasury, Census, SBA, BEA, Evercore ISI, PeerIQ
Colorado AG Settles “True Lender” Litigation…
Huge news out of Colorado this week, as the AG’s office announced a comprehensive settlement with non-bank lenders Avant and Marlette, as well as their bank partners in a pair of lawsuits that had challenged established practice on “true lender” regulation.
Under the terms of the settlement, the non-bank lenders have agreed to maintain lending licenses in Colorado in order to provide loans to in-state residents, while the banks have agreed to follow certain safe harbor procedures to ensure loans are captured under the “valid when made” doctrine applicable across the country.
Friend-of-the-firm Gilles Gade, CEO of Cross River, emphasized that “This agreement serves to confirm the validity of the consumer lending model Cross River has been utilizing since inception,” underlining the importance of regulatory clarity to allow “responsible innovation [that] creates safe borrowing opportunities for consumers otherwise left behind.”
The focus of the settlement is on Specified Loans – loans exceeding Colorado’s rate cap of 21%
Here are some takeaways:
- Lender’s cannot originate loans up to but not exceed 36%. This is a big win for lenders as it acknowledges a role for federal pre-emption / rate exportation
- The CO settlement approaches “true lender’” principle by ensuring there is “skin in the game” via various funding protocols:
- Uncommitted Forward Flow Arrangements
- There is no commitment by the platform to purchase loans offered by the bank
- The bank can retain sell, or securitize loans that the platform does not purchase
- Maximum Transfer of Specifies Loans in a Forward Flow Commitment
- Bank can transfer up to 49% of the economic interest in the Specified Loans in a committed forward flow arrangement, or 25% of the Specified Loans on a committed basis (including whole loans, participations, or sale of receivables on an uncommitted basis)
- Program Loans – Banks can sell 85% of loans to the FinTech, but no more than 35% can be Specified Loans
- Uncommitted Forward Flow Arrangements
We recommend looking at the excellent Chapman and Cutler LLP summary for more details.
Who are the winners? This is a voluntary settlement so there’s something for everyone:
- Borrowers in CO should expect greater competition and access to credit
- Partner banks. The partner banks are intimately tied to platforms in terms of risk oversight and also funding capacity
- Securitization markets – Loans from CO can now move into securitizations
- State AGs – have an acknowledge legitimate role in supervising lenders operating in their state
Other states and federal regulators in a Biden administration might look at the CO settlement as a template. If it’s possible that the CO settlement “goes federal” then partner banks with the largest balance sheet and distribution capabilities would stand to benefit.
That would make Cross River stand-out as the biggest winner. Cross River has the most balance sheet capacity across the partner bank landscape, a capital markets capability, and a proven ability to lean in and fund partner loans when capital markets breakdown.
…but Regulatory Uncertainty Moves to Other States
American Banker reports that a number of state AGs have filed suit against the FDIC, alleging that the recent final rule clarifying “true lender” in transactions across state lines violated proper procedures and should be stopped. The states – California, Illinois, Massachusetts, Minnesota, New Jersey, New York, and North Carolina, joined by Washington D.C. – are following the path of a suit launched against the OCC last month, which similarly looks to unwind clarifications of “true lender” transactions.
That’s a Wrap for 2Q Earnings
We’ve now come to a close on the 2Q 2020 earnings season, and as with past quarters, we wanted to share our takeaways from these past few weeks.
Couple key themes jump out to us during this quarter’s release:
- Concentrated, balance sheet heavy lenders suffered, as credit loss provisions swamped revenue at many of the leading consumer lenders
- Largest banks showed the power of diversification, with trading, home loan origination, and other parts of the business helping to offset loan loss provisions
- Tech-oriented, balance-sheet-light businesses continue to power ahead as COVID-19 era lock-downs (& general unease about in-person shopping) accelerated the shift towards a digital-first financial future
As with everything else in the post-COVID-19 world, none of the themes should surprise readers – we’ve been talking about these ideas for months, if not years! – but COVID-19 has accelerated the moves that we knew were coming. Or as PayPal CEO Dan Schulman put it (here focusing on e-commerce), the shift has “outpaced prior external forecasts by an astonishing 3 to 5 years.”
AmEx Develops a Taste for Kabbage, and Other Industry News
On the industry and product front, American Express announced that it would acquire small business lender Kabbage for an undisclosed sum (though in prior weeks, the price was rumored to be “up to $850MM”). AmEx is getting the technology, people, and data of Kabbage – but not taking the loan book along.
It’s a comedown for Kabbage CEO Rob Frohwein & Kathryn Petrelia – the firm raised $250MM in 2017 from SoftBank at a valuation between $1.25Bn and $2Bn – but in the COVID-19 (and compared to ONDK) looks like a solid outcome all things considered. Congratulations Kabbage and AmEx!
Samsung announced the launch of the Samsung Pay Card in the UK, in partnership with FinTech card issuer Curve and payments leader MasterCard. With Curve’s technology, the Samsung Pay Card brings users’ debit and credit cards together in one place, accessible from their devices within the Samsung ecosystem.
In the News:
- Fed Close to Making Its New Inflation Strategy Official (Bloomberg, 8/17/2020) The Fed will soon reveal a profound shift in how it conducts monetary policy for the world’s largest economy.
- Cross River Collaboration and Settlement with Colorado Attorney General Will Promote Responsible Bank-Fintech Partnerships (Business Wire, 8/18/2020) Colorado Attorney General settlement validates Cross River’s lending model and resolves the issue of “true lender.”
- States Sue FDIC Over ‘Rent-a-Bank’ Partnerships (American Banker, 8/20/2020) Eight Attorneys Generals filed suit against an FDIC final rule related to ‘rent-a-bank’ partnerships, which is a similar suit filed against the OCC last month.
- Covid-19 Bringing In New Mobile Payment Users (Forbes, 8/17/2020) The pandemic has been shifting consumer behavior toward mobile payments.
- Curve and Samsung Launch the Samsung Pay Card Today (FinTech Finance, 8/18/2020) Samsung announced the launch of the new Samsung Pay Card, which is powered by Curve and in conjunction with payments firm, MasterCard.
- How Banks Can Beat Aggressive FinTechs for Business Deposits (The Financial Brand, 8/18/2020) Ecommerce FinTechs have introduced small business bank accounts that compete with traditional financial institutions, but banks still have a fighting chance.
- Jack Ma’s Ant Said to Target $225 Billion Valuation in IPO (Bloomberg, 8/20/2020) Jack Ma’s Ant Group plans to file for listings in Hong Kong and Shanghai in the next few weeks and they are targeting a valuation of about $225Bn.
- Why Amex is buying Kabbage (American Banker, 8/18/2020) The American Express is acquiring Kabbage’s team and technology, but not the company’s loan portfolio.
- It’s Official: American Express is Acquiring Kabbage (Lend Academy, 8/17/2020) American Express announced that it will acquire Softbank-backed small business loan platform, Kabbage.
- Biologists Found A Supergiant ‘Sea Cockroach’ And Named It After Darth Vader (All That’s Interesting, 8/20/2020) The “Darth Vader Isopod” is a newly discovered Isopod with a spacesuit-like appearance.