The payday lending industry has been a fixture in the common American’s financial life since the 90’s, but it enjoyed rapid growth and success after the 2008 financial meltdown. Today, as per industry analyst estimates, there are approximately 20,600 payday advance locations across the U.S., and the industry has lent around $38.5 billion in short-term […]
The payday lending industry has been a fixture in the common American’s financial life since the 90’s, but it enjoyed rapid growth and success after the 2008 financial meltdown. Today, as per industry analyst estimates, there are approximately 20,600 payday advance locations across the U.S., and the industry has lent around $38.5 billion in short-term loans to approximately 19 million American households. Not only that, the industry makes significant contributions to the U.S. and various state economies by providing employment to 50,000 Americans who earn $2 billion in wages and generate more than $2.6 billion in federal, state, and local taxes. But late last year, the industry was rocked when the Consumer Financial Protection Bureau (CFPB) released a regulation knows as the “payday lending rule”. The rule put the onus on the lender for determining whether a borrower can repay a loan and restricted the number of loans a lender can make to the borrower.
What is the Payday Lending Rule?
Lending Times had a chat with Quyen Truong (partner at Stroock & Stroock & Lavan LLP) to discuss the ramifications of the payday lending rule to the alternative lending market.
The payday lending rule was finalized because the CFPB believed that high interest and continuous refinancing of payday loans was leading to borrowers getting stuck in a never-ending debt trap. Borrowers who refinance or roll over an existing loan in turn pay additional fees and high interest, which flows into the lender’s bottom line.
Truong believes the new rules are too onerous for payday lenders because lenders are forced to conduct an analysis on a borrower’s ability to repay debt. Such analysis is unfeasible for small dollar loans. Additionally, there is a 30-day cooling off period, which means lenders can not provide follow-up/rollover loans during that period. The idea behind this cooling off period is to prevent borrowers from getting stuck in a vicious debt trap.
The Impact On the Payday Lending and Alternative Lending Industries
The regulation is expected to impact the payday lending industry adversely and may wipe out two-thirds of industry revenue, Truong said. But she believes that online lenders are more innovative when it comes to underwriting, and because they are agile and nimble, they are better equipped to adapt to the new rule. Having said that, the rule will still adversely impact the industry and many lenders could go out of business because of their inability to comply with the new regulation. On the other hand, it will be an opportunity for sophisticated lenders to devise an efficient process to conduct a repay analysis using technology. As for installment lenders that do not fall under the scope of this regulation, this rule is an opportunity to increase their market share, Truong said.
Will the Rule See the Light Day or Be Shut Down?
Given the backlash the regulation received from payday lending industry players, Truong believes the regulation will go through a major revamp and might even get completely eliminated under the Republican-controlled Congress.
Since it is threatening to wipe out the majority of payday lenders, there is a real possibility the CFPB will do a major overhaul to the repay analysis requirement, which will significantly improve the ability of payday lenders to conduct their businesses. In fact, CFPB Director Mick Mulvaney recently sent a memo to his staff stating the bureau’s focus will be on focus on ‘quantifiable and unavoidable harm to the consumer’ and the bureau ‘won’t go looking for excuses to bring lawsuit’. And the bureau has recently dropped more than one lawsuit against payday lenders, even online lenders, it had targeted before Mulvaney’s appointment.
Truong also believes the 30-day period clause will at least undergo some modification where the cooling off period will either be reduced or a sequence of loans after which the cooling off period will be triggered might be increased to three short-term loans or more.
The Future of Short-Term High-Interest Lending
Truong believes the CFPB, under Republican leadership, will try to bring a semblance of normalcy to the business environment. But if states step up regulatory action or start adopting new laws, or state attorneys general start suing payday lenders for compensation, it can prove to be extremely problematic for lenders, especially online lenders.
The payday loan industry had been relying on the Congressional Review Act to address payday rule inequities, but the chances of success seemed limited given the congested congressional calendar. The fact that the CFPB is reconsidering the rule and is open to amending it is a major relief for the industry.
Truong also believes that, in order to overturn the rule, the industry needs to play a pivotal role. In that endeavor, payday lenders (including online lenders) need to provide additional evidence and analysis to the CFPB. Only hard data will force the bureau to change its stance on the payday lending rule.
Who is Quyen Truong?
Established in 1876, Stroock & Stroock & Lavan LLP is one of the oldest law firms in the U.S. Headquartered in New York City, the firm has nearly 300 lawyers.
Stroock & Stroock & Lavan LLP provides legal services to various financial institutions like investment banks, commercial banks, insurance and re-insurance companies, mutual funds, multinationals and foreign governments, industrial enterprises, and entrepreneurial ventures. Truong provides regulatory compliance counseling and defense for clients in highly regulated industries with a main focus on CFPB, FTC, and the DOJ. Prior to this, she served as additional director and deputy general counsel for CFPB and legal counsel at the Federal Deposit Insurance Corporation (FDIC).
The firm has represented online lenders and Truong has personally represented clients in the payday lending industry. She has also represented investors in the industry.
The fact that the CFPB has revisited the rule making process means half the battle has already been won. Considering the political and legal complexities, online lenders still have a long road ahead of them. There is still a big question mark on which way the pendulum will swing, but expert advice from experienced law firms like Stroock & Stroock & Lavan LLP is a prudent investment for online lenders looking for protection from a regulatory crackdown.
News Comments Today’s main news: SoFi seeks to poach Twitter COO for CEO slot. Zopa increases investor interest rates. SoftBank considers IPO in London. TransferWise launches borderless bank account. Spotcap partners with BAWAG Group for same-day financing. Today’s main analysis: Super high-interest loans in California have boomed. Today’s thought-provoking articles: How online branding can help businesses get a loan. Today’s […]
SoFi offers Twitter COO top slot. AT: “I’m sure they’re making a lucrative offer, but the indication here is that Anthony Noto may decline. I would imagine this would be a good move for him, a high-profile move in a growing industry with a chance to make a historical mark. Of course, if Twitter counters with a more lucrative offer to keep him, then the ball will be in SoFi’s court.”
How businesses can use online branding to get a loan. AT: “To my knowledge, no alternative lender in the U.S. is using social media as the primary source of credit data. It’s more than they use alternative data as additional information to traditional metrics, but this could change.”
California’s super high-interest loans are booming. AT: “I’d be curious to see how they’re doing in other states, as well. Given that Texas-based Elevate Credit is one of the top three lenders in this segment, it’s likely that other states have seen a similar increase in these types of loans.”
Anthony Noto, a top Twitter Inc. executive, is in discussions to become the next chief executive of Social Finance Inc., according to people familiar with the matter, as the online lender grapples with accusations of improper workplace culture.
The San Francisco-based company has offered the job to Mr. Noto, currently Twitter’s operations chief and before that a top Silicon Valley banker atGoldman Sachs GroupInc.,people familiar with the matter said. Mr. Noto is likely to make a decision in the coming days, the people said.
He may turn down the offer, as terms haven’t yet been completed, or Twitter might lobby hard to keep him, especially with CEO Jack Dorsey splitting his time between the social-media service and Square.
An increasing number of the largest online lenders, such as Kabbage (a ValuePenguin affiliate) and Funding Circle (also a ValuePenguin affiliate), are relying on online data in addition to traditional data points to gain a fuller picture of a business’s health.
Kabbage, which recently received $200 million in funding from Credit Suisse, uses a fully automated underwriting process (involving no humans) to approve applicants and requires business owners to link online accounts, which run the gamut from bank accounts to vendor accounts, to complete an application.
Even traditional lenders are getting in on this trend. JPMorgan Chase (a ValuePenguin affiliate), which recently renewed its partnership with online lender OnDeck (also a ValuePenguin affiliate), the largest online lender to small businesses, uses the latter’s underwriting technology, which considers online data points, to help it offer online business loans.
Not long ago, personal loans of this size with sky-high interest rates were nearly unheard of in California. But over the last decade, they’ve exploded in popularity as struggling households — typically with poor credit scores — have found a new source of quick cash from an emerging class of online lenders.
These pricey loans are perfectly legal in California and a handful of other states with lax lending rules. While California has strict rules governing payday loans, and a complicated system of interest-rate caps for installment loans of less than $2,500, there’s no limit to the amount of interest on bigger loans.
In 2009, Californians took out $214 million in installment loans of between $2,500 and $5,000, now the most common size of loan without a rate cap, according to the state Department of Business Oversight. In 2016, the volume hit $1.6 billion. Loans with triple-digit rates accounted for more than half, or $879 million — a nearly 40-fold increase since 2009.
The number of loans between $5,000 and $10,000 with triple-digit rates also has seen a dramatic 5,500% increase, though they are less common. In 2016, loans of that size totaled $1.06 billion, with $224 million carrying rates of 100% or higher.
Many of the loans can be tied to just three lenders, who account for half of the triple-digit interest rate loans in the popular $2,500-to-$5,000 size range. LoanMe, Cincinnati firm Check ‘n Go and Fort Worth’s Elevate Credit each issued more than $100 million in such loans in 2016, as well as tens of millions of dollars of loans up to $10,000 with triple-digit APRs.
Within this large document, there are four key actions being proposed:
Affordability test: This imposes two burdens on payday lenders. First, conducting an affordability analysis would increase the cost of underwriting a loan. Second, people generally turn to payday lenders when they are broke.
Limit payday rollovers
Exemptions made for alternatives to payday lenders, including credit unions and community banks: If a lender derives less than 10% of its revenue from payday loans, it is exempt from some of the most onerous rules. This particular restriction is odd. Why is the hated payday lending product acceptable, so long as the institution making the loan only generates 9.99% of its revenue from such activities? Are high rates and frequent rollovers acceptable when coming from a bank? Or is there a presumption that payday lenders are evil while bankers are not?
Limit on the number of times a checking account can be debited. This rule limits the lender to two unsuccessful debit attempts. Afterwards, the lender can only attempt to debit the account if it receives authorization from the borrower.
The outrageously high APRs paid on payday loans can make anyone’s stomach churn. But why are APRs so high? I believe there are three main drivers:
Risks are high: The people using payday loans are very high risk borrowers.
Price competition is absent: For a payday loan, people value speed and access.
Good behavior does not get rewarded: Payday lenders generally do not report to credit bureaus.
The Consumer Financial Protection Bureau on Thursday dropped a lawsuit against four payday lenders.
Since 2012, two of the firms — Golden Valley and Silver Cloud Financial — offered online loans between $300 and $1,200 with interest rates of up to 950%. The other two firms — Mountain Summit Financial and Majestic Lake Financial — also offered similar terms on loans, according to the bureau.
BofA added about 2 million users to its digital channels, predominantly to mobile. The bank’s active digital users jumped from 32.9 million to 34.9 million annually, an increase largely driven by mobile banking users, which increased by 2.6 million users year-over-year (YoY).
Engagement is rising too. Mobile channel usage rose 34% YoY to reach 1.3 billion interactions in the quarter.
BofA consistently updated its digital and mobile offerings throughout 2017, adding contactless ATM functionality, for example, and integrating tools like the popular peer-to-peer (P2P) offering Zelle. These innovations have likely contributed to rising interactions.
Just under 30 percent of U.S. households are underbanked or unbanked, according to the FDIC. What these terms mean has been up for debate and subject to misconceptions. Let’s look at some of the most pernicious myths regarding underbanked Americans and debunk them:
The person-to-person payments service Zelle differentiates itself from rivals by promising users that transactions sent over its network will clear in near-real time. Yet in recent months, the service has faced a number of complaints from consumers who say they are having problems sending or receiving money or setting up accounts in the first place.
Zelle has acknowledged the problems, but says the occasional delay is the price some users will have to pay as the big banks’ rival to PayPal and Venmo aims to create one of the industry’s strictest fraud-prevention programs.
One of the biggest (and most unique) new companies working in the online lending space is Loanable – a platform that brings together crowdfunding and peer-to-peer lending, but with a twist.
According to Bernard Worth, who created Loanable along with co-founder Justin Straight, there is a whopping $1.3 trillion in American student loan debt.
This system, which just launched in October of this year, is designed specifically for loans from friends and families. Loanable is an innovative way to get a low-interest loan from multiple friends and family members, without of lot of the awkwardness and tension that’s typically involved with borrowing from people you know.
The friends and family loan set-up process is pretty straightforward. You simply need to enter some information:
The full amount of the loan
Each lender’s name, address and email
The borrower’s name, address and email
The interest rate – which is usually between 2% and 10% for friends and family loans
With tax season around the corner you might have noticed a deluge of Jon Hamm commercials for interest free tax refund advance loans. This is a newer product used by tax preparation firms to build their customer base around tax season.
Zopa, one of the largest peer to peer lenders in the UK, has announced an increase in interest rates paid to investors. Zopa currently offers two diversified investment tiers: Zopa Core and Zopa Plus. Returns have increased from 3.7% for Core and 4.5% for Plus respectively. The higher rate reflected by Plus is indicative of an increase in risk profile. Zopa said this is the first time target returns have increased since 2015.
Softbank Group, the Japanese technology conglomerate, is considering the sale of 30 per cent of the shares in Softbank Corp, a subsidiary that is Japan’s third-biggest mobile phone operator, in an initial public offering.
The mega-deal could raise up to two trillion yen (£13 billion) and may take place this year in Tokyo and London, with the proceeds channelled into investments in new technology businesses, the newspaper Nikkei reported last week.
Research from an independent senior recruitment specialist firm, Tindall Perry, reveals that 74 per cent of finance directors describe their knowledge of alternative finance as average or above. However, only a quarter said they were comfortable with accessing crowdfunding or peer-to-peer lending.
In contrast, 85 per cent of companies said that they understood how best to access asset-based lending (ABL), while invoice finance, trade finance and venture capital all saw a positive response rate of between 55 and 75 per cent.
Despite this, traditional bank lending remained the funding of choice for financial directors, with 83 per cent suggesting that they would approach their bank for finance in the first instance.
Envestnet | Yodlee has launched a single API solution to make it easier to comply with the UK’s PSD2 and open banking API specifications for account information services, reports David Penn at Finovate (FinTech Futures’ sister company).
“We’ve recruited more than 1,000 specialised consultants across BCG working on topics which didn’t exist just five years ago,” says Mr Morel. They are technologists, data scientists and process specialists who help banks decide what to prioritise and how to design and implement solutions. Most of those newcomers work in financial services, including 100 who work with UK institutions.
In fact, with real estate crowdfunding services like Fundrise Reviews you can invest with as little as £500 in commercial real estate. Something that means you could be looking at a return of over 10 per cent, not bad for such a small investment.
Peer to peer lending is another fantastic option for investors that have a smaller pool of capital to work from.
The past New Year’s Day holiday might not have been a time of celebration for some Peer-to-Peer (P2P) investors in China.
Several Chinese online lending platforms announced a repayment delay or liquidation amid tightening government regulations.
On Dec. 26, 2017, a Beijing-based online lending platform ishoutou.com made an online announcement that it was going into liquidation due to compliance risks. It promised to pay back all loans by 30 percent, 30 percent and 40 percent respectively in the three months from February to April.
However, the company owner, Yang Yinghua, went missing the next day.
And yet it is Orange that has launched one of the most audacious attempts to break into mainstream banking and challenge tarnished incumbents. A couple of months ago Orange Bank was launched with a mission to attract 2m clients and shake up the staid world of French finance.
The shift to smartphone banking should put telecom operators, handset makers and the big technology groups in a strong position to go head to head with the traditional banks.
Springhouse today announced that it has received Morningstar Credit Ratings, LLC’s MOR RV2 residential-vendor ranking as an asset valuation provider. Morningstar’s forecast for the ranking is Positive.
As a member of the Altisource Portfolio Solutions S.A. family of businesses (“Altisource”), Springhouse leverages Altisource’s shared services.
Eiffel Investment Group actively supports the development of digital lending throughout Europe.
We are excited to sponsor the first EUROPEAN DIGITAL LENDING AWARDS.
The event will take place on February 1st, 2018, in Paris (25 Rue du Petit Musc, 75004 Paris) at 7 pm. If you would like to attend, please send us an email at firstname.lastname@example.org (advanced registration is mandatory).
Launched in January, the company’s ‘borderless’ account – coupled with a debit card – allows users to hold up to twenty-eight currencies. Once signed up, account holders can carry out transactions in a currency of their choice as they travel around the world.
But there are other new players in the market. For instance, Revolut – which styles itself as a digital banking alternative, offers a prepaid debit card that allows users to hold up to sixteen currencies. Again, transactions can be carried out in the currency of choice.
Meanwhile, WorldFirst – a foreign exchange broker serving companies and relatively wealthy individuals – last year announced that it was launching a World Account, Aimed at SMEs, the new account offers the ability to open local bank accounts overseas and hold dollars, sterling and euros.
To Illustrate the potential demand for its service, Worldfirst cited research suggesting that small and medium-sized companies were carrying out foreign-exchange trades to a value of £76bn every month.
According to Bank of America’s Year-end Millennial Snapshot, 49% of Millennials believed that the Great Recession drastically altered their attitudes about banks, specifically with regard to their saving, investment and expenditure.
According to PwC’s Global FinTech Report 2017, FinTech startup funding is over $40 billion in cumulative investment, growing at a compound annual growth rate (CAGR) of 41% over the last four years.
Embrace the Millennial Banking Revolution
59% of Millennials interviewed by BNY Mellon says they’ve never come across a financial product specifically meant for them. A report by The Millennial Disruption Index cited that all the four leading banks in the US are among the least-loved brands by millennials.
AlfaToken, a service enabling startups and innovative entrepreneurs to create their own ICO tokens and smart contracts without coding skills, is gearing about to conduct its Initial Token Offering with the help of ICOBox, the world’s leading provider of ICO solutions. AlfaToken plans to offer services in 14 smart contract areas, from initial coin offerings and real estate rentals, lending and insurance, to business process management, smart homes and property transfers.
Founded in 2017, AlfaToken identified a gap in the ICO market where initial coin offerings are forecast to rise from 43 in 2016 to 537 in 2017, according to coinmarketcap.com. In particular, the company perceived an opportunity for its Ethereum smart contracts in the real estate rentals market, worth $2.8 billion (Airbnb forecasts), in the peer-to-peer lending market (including mortgages), worth up to $180 billion according to Business Insider, and also the insurance market valued at $4.5 trillion according to a 2016 report by the Institute of International Finance.
Every digital financial transaction you’ve ever made in your life has had to go through a bank or large financial institution at some point. They authorise, facilitate and record the transaction, often taking a cut along the way. Blockchain essentially replaces the middleman in this process. It’s international, unregulated, instant and unhackable.
94% of economists surveyed by finder.com.au in November 2017 expect blockchain will have widespread use in the financial sector and economy.
2. Biometric payments
Although biometric payments are increasing, finder.com.au research shows 60% of Aussies – over 11 million people – either feel uncomfortable using biometric identification when logging on to their mobile banking apps, or aren’t really sure about it.
3. The end of our low-interest world
Australia’s cash rate sat stagnant throughout 2017 at a record low of 1.5%, producing low savings rates, cheap mortgages and escalating property prices.
4. The declining human face of banking
A sharp rise in mobile and online banking has meant Australians are less likely than ever to need to visit their local branch. We expect the number of branches to fall further in rural, regional and remote areas.
5. The rise of one-to-one lending
For example, the average three-year term deposit in December 2017 paid 2.55% interest. However, peer-to-peer lender RateSetter are currently offering 7.4% for the same period.
6. The disappearance of ATMs and cheques
The number of ATM withdrawals per month has fallen from a high of 73 million in 2010 to just 47 million in 2017.
It has been noted that youngsters are averting eyes towards quick personal loans with lesser interest rates rather than the credit cards, says Aditya Kumar, founder of Qbera, a Bengaluru based fintech company. They recently compiled a stats on spending on travel loan trends in 2017. “Millennials, covering more than 50 percent of the Indian population are constantly looking for online digital platforms to plan their finances for holidays; unlike their predecessors who’ve always relied on savings. It has been a regular practice to narrow down their search to fintech lenders for financing their travel needs,” he adds.
According to his company’sstatistical report, out of 1700 applicants of travel loans till last year November, the age of 728 applicants is below 28 years and 105 female applicants within the age span of 20-28 years (both single and married), he adds.
The Financial Services Authority (OJK) is planning to issue a policy in financial services institutions, including guiding principles for Digital Financial Services Providers that include registration and licensing mechanisms as well as the application of regulatory sandbox and policy on crowdfunding.
Not only has the US Federal Reserve started to raise interest rates – a move mirrored by China’s central bank and the Hong Kong Monetary Authority with more developed countries expected to follow suit – but a market correction may be in the works following a strong run in both the US and Malaysian stock markets.
Yet despite its prices taking a plunge recently, its demand is still going strong. Similarly, ethereum, ripple, litecoin and Zcash continue to enjoy the mania status garnered by anything related to cryptocurrency. Equally enticing opportunities are abound with the rapid growth of equity crowdfunding (ECF) and peer to peer (P2P) lending platforms.
Russia’s biggest lender Sberbank plans to help small firms raise funds from private investors with a peer-to-business platform, three sources familiar with the plans said, competing with two other ventures that support the cash-starved companies.
The state bank’s foray into p2b lending suggests it sees a revival in fortunes for small businesses as consumer spending picks up.
It also reflects the commitment of chief executive German Gref to enhance the bank’s use of new technology.