Transcript of CFPB Hearing on Small Business Lending
May 10, 2017Transcript of the CFPB hearing from earlier today courtesy of: https://www.captionedtext.com/client/ViewTranscript.aspx?EventId=3263140&ParticipantId=ad67099c-16c3-40cf-885a-7e0a1468a30f
Event ID: 3263140
Event Started: 5/10/2017 1:50:29 PM ET
Please stand by for real time captions.
We are delighted that you were here and we are delighted that you are in the city of Los Angeles. We are grateful to have the Honorable Mike fewer. City attorney for the city of Los Angeles. The Honorable Commissioner Jan Lynn , Commissioner of business oversight and California’s Attorney General. We are grateful to be representatives of the small business Association and the Federal Reserve.
That we tell you about what you can expect today. You will hear from city attorney Mike fewer and then Commissioner Jan Lynn and the attorney general. You will hear from the consumer bureaus director Richard Cordray. Following the remarks David Silberman the acting deputy director and associate director to four markets and regulations will frame the discussion with the panel of experts. There will be an opportunity to hear from members of the public. Today’s field hearing is being live streamed at Today’s field hearing is being live streamed@consumerfinance.gov.
Let’s get started. Los Angeles city attorney Mike Fuehrer has long been one of California’s lighting — leading lawmakers. As his chief since July 2013. He has brought an innovative problem-solving focus to the office that combines tough and effective execution with creative initiatives to improve public safety and the quality of life throughout the city. His efforts have also sparked change throughout the state and the nation. Under the city attorney’s broad authority Mister fewer has secretly — frequently secured. He announced in historic settlement against Wells Fargo for opening unauthorized customer accounts. He and the CFPB joined forces to get restitution for its customers, put protections and place and in penalties. Previously he served as majority policy leader and chair of the judiciary community worry — he authored the homeowners Bill of Rights. You may now have the floor. [ Applause ].
Thank you. The introduction was longer than remarks. That was generous. Thank you. I want to on behalf of all of us welcome our director Richard Cordray to our city. Just a word about the collaboration. I was extremely proud of the work of our office, some of whose lawyers are here with us today. In pursuing the Wells Fargo littered — litigation. That aesthetic evolution — catalytic affect. And want to underscore, there is no way that litigation could have had the profound impacted has had without the deep collaboration with the consumer financial protection Bureau under Mister Cordray’s leadership. We also worked with the leader of the office of currency. This collaboration was essential. In that regard, I must say while we’re here in Washington, their efforts underway to either diminish the authority of the CFP be or eradicated altogether. I have the opportunity to be in Washington including discussing how we should work together to ensure the continued viability and strength of the CFPB. Director Cordray leadership has been remarkable and it’s been instrumental in protecting consumers across the nation. I would say, anybody who cares about consumer protection should be standing up and loudly denouncing efforts to undermine the CFPB. I did a radio interview this morning cuppa I did get some applause. [ Applause ] that applause was for Richard and his team. I was interviewed this morning on the radio and I was asked, the purpose of which was not about this but the commentator shifted to what was happening here today and said to me, do you think in light of what’s happening in Washington, the attacks on the CFPB , is a Trump administration to business friendly? Given this is the focus on small business, I want to focus on that. We should all be business friendly. That is a key role for government to play. Being business friendly does not mean protecting businesses violate the rules, at the expense of consumers. Being business friendly does not mean protecting businesses who violate the rules who are in competition with those who play by the rules. That’s what being business friendly means, supporting businesses who are playing by the rules to do better. Which is why I am pleased to be here, as we focus on access to capital and other issues that focus on small businesses, especially those in disadvantaged areas of our nation. With this is my special assistant, Capri Bad Axe. — Mattox. Capri is in charge of my office outreach to the business community. We are working to connect businesses that are trying to improve and expand and hire more people, especially in disadvantaged areas to capital and training on how they could do better. I am eager to hear what more we need to know and what more we need to do, to assure that small businesses can succeed, especially in neighborhoods of our city and our nation, where we should be compelled to do better. Everybody who wants a job should have access to a job. Our small businesses are the way that we will assure that an America, we are a nation where the dignity of work is elevated to a place where it needs to be. Thank you Mister Cordray. You will be hearing from two other partners with who I am extremely proud to share this room today. I am eager to learn more today so we can do better. Thank you very much.
Map grant — [ Applause ]
Thank you for your remarks. Our next speaker is Jim Leonard 01. — Commissioner Jan Lynn . She was appointed in 2013 and previously’s served as the Commissioner as the Department of corporations appointed by the Governor in December 2011. Part two that Ms. Selin was that — Commissioner Owen was a manager at Apple ink from 2009 two 2010. Vice president at J.P. Morgan Chase, state director of government industry affairs at Washington Mutual from 2002 through 2008 and executive director of the California mortgage bankers Association from 2000 until 2002. She also has extensive experience in public service. She was acting commissioner of the Department of financial institutions from 1999 until 2000 after serving as deputy commissioner from 1996 to 1999. She also said as exactly director of California investment network program after serving several years as consultant to the Senate, state banking community. Commissioner Owen you have the floor. [ Applause ]
Every time I hear that introduction, I think holy moly I am really old. I will spend a few minutes to think my partners, Mr. Feuer, the attorney general and my partner in crime Director Cordray. I want to give you some data. We have done some data collecting. We get some information that I think is important for you to look at as we discussed this issue the Department of business oversight overseas over 360,000 licensees from banks, credit unions, mortgage lenders, pay day lenders, securities brokers, dealers and investment advisers. Also, we supervise franchisees and we approve proposed state securities permits. Our job is daunting, exciting and rewarding. With my partners, it is truly a challenge I wake up and want to do every morning. In 2015, California’s GDP surpassed $2.5 trillion. Hence, were the six largest economy in the world. That same year our non-bank licensees reported to us that they originated 400 that they originated 412 that they originated $412 billion in loans, in California. That’s more than the total of 35 states GDP. These non-bank lenders make more than 78% of their loans to commercial enterprises. Most of which are small businesses. California is home to more than 3.8 million small businesses. These firms employing 50% of California’s workforce and drive our economy. Our small businesses are respected globally for their innovation and their fortitude. The vast majority employee 500 or fewer workers and collectively make up 99% of all the businesses in California. Two years ago the U. S. small business administration reported California leads the country in several different categories. The number of small business employees, 6.5 million. The number of self-employed individuals, 2.5 million. The number of self-employed minorities, 1.1 million. The number of self-employed women, 900 973,000. According to the U.S. Census Bureau, California leads the nation with 1.6 million minority owned businesses. LA County leads the nation with 55% of local businesses, minority owned, more than half of those by Latinos. California is also proud to be the nation’s greatest number of women owned businesses, nearly 1.5 million. Women owned firms employing more than 1 million people and generate more than 200 222 $222 billion in annual revenue. Women-owned firms is larger than the number of employees, because many are one-woman ventures and many women owned more than one firm or multiple firms. To assist them, the governor created an office to service California’s single point of contact for economic development and job creation efforts, especially for small businesses. Affectionately, this department is called goby is. — Last week to Governor proclaimed May to be the small business month in California. California’s is the nation’s leading market for online landing. We are home to headquarters for several most prominent players in the sector. Lending club, Prosper, a firm, funding Circle and others. I bring up online lending because from 2010 until 2014 companies reported online consumer and small business financing activity increased over 900% to $2.3 billion. State regulators are getting a bad rap. The industry says that a state-by-state regulatory system is too costly and carries too much compliance risk and inhibits innovation. State regulators do not totally agree with these criticisms. I will tell you, we do acknowledge the companies have some legitimate concerns about the state system and we are moving to address them. As the state’s main financial regulator, let me tell you what I expect from the sector as it stands today. In many ways, we treat them no different than any other licensee we expect the same from all of our licensees, compliance transparency accountability, sound financial practices and most important, fair and honest treatment of our consumers. No one should think that they can gouge small business borrowers are any consumers, because they operate online. I know the CFPB agrees that regulators will work hard to keep up with technological innovations and consumer protections will be as sharp and clear as ever. As the bank regulator or financial services regulator, I am committed to serving the needs of California’s small business community and to being a partner to small business stakeholders in California. We welcome your feedback. Call us, call me. Let me know what you are thinking and what we can do to help. Thank you. I look forward to a fruitful day. [ Applause ]
Thank you, Commissioner Owen for the generous remarks. Our next speaker is Xavier Becerra. He is the 33rd attorney general of the state of California and is the first Latino to hold the office in the history of the state. The state’s chief law enforcement officer, Attorney General Xavier Becerra has decades of experience serving the people of California through appointed and elected office. He has fought for working families, the vitality of Social Security and Medicare programs, and issues to combat poverty among the working poor. He is also championed the states economy by promoting and addressing issues impacting job generating industries such as healthcare, clean energy, technology and entertainment. Attorney General Xavier Becerra previously served 12 terms in Congress as a member of the U. S. House of Representatives. While in Congress, Attorney General Xavier Becerra was the first Latino to serve as a member of the powerful committee on Ways and Means. He served as chairman of the house Democratic caucus and was ranking member of the Ways and Means subcommittee on Social Security. Prior to serving in Congress, Attorney General Xavier Becerra served one term in the California legislature as a representative of the 59th assembly District in Los Angeles County. He is a former Deputy Attorney General with the California Department of Justice. The attorney general began his legal career in 1984, working in the legal services offices representing the mentally ill. Attorney General Xavier Becerra, you have the floor. [ Applause ]
I have to make sure I take her wherever I go. I love the way she pronounces my name, Xavier Becerra. I don’t even say it that well. I know that Director Cordray hired her for more than the fact that she can pronounce my name . We are thrilled that you are here representing us on behalf of the consumer financial protection Bureau on the West Coast, the forward leaning movement of America. I want to say a few things, I have to cheer the man who is our quarterback when it comes to providing consumers, whether you are a small business person, an immigrant family trying to navigate your way through this country or you are a recent graduate from college, hoping to open up your rings. Richard Cordray is our quarterback. We should do everything we can to make sure he can take the team down the field and scored touchdowns all of the time for the men and women who want to make America work. If Richard Cordray succeeds as our director of June 20, he is keeping doors open and that’s all we need. You talk to almost anyone and all they want to know, is there some predictability behind what they will do whether it’s taxes, regulations, the business climate — if they have a way of knowing how to get there they will do it. It’s the uncertainty that causes the real difficulties for small businesses. Richard Cordray is a guy who make sure that that door remains open and we can all shoot for that point on the horizon. We have an obligation to help our quarterback comic he has been spectacular even under some of the most difficult circumstances. I am thrilled that Mike Feuer is my partner in crime. That word is used often, in this case it is really true. I love committing crime with Mike Feuer. He knows how to do it well. We are very fortunate in Los Angeles to call him our city attorney. He is served us in so many different places. He does it so well. Whenever I am with Mike Feuer, I feel like the marathon runner that just came in the top 10 and Mike is the Ironman contestant who does the triathlon like nothing and just passes me by. It’s hard to keep up with them, he is the best. Commissioner Owen, thank you for what you do for giving us the perspective so that we need to know why California is so important not just to us but to the nation. You have made it clear why the numbers count, but why the people make the numbers count. I just want to mention the micro, it is this, it’s you if you have a business, if you do spend — defend small businesses or people like my parents who started their own business, not knowing what they were getting into. My father had a sixth grade education my mother did not come until she was a teenager. They did it. They knew the micro of starting a business. They bought a small house and they rented it and then they bought another and rented it. Before you know it, they were making more in retirement than when they were both working. I consider myself a small businessperson. Island for my parents. I know this, I don’t have time to navigate everything going on in the business world. It’s like “Ghostbusters”, who are you going to call? When it comes time to making sure your business is doing okay, Consumer Financial Protection Bureau and Richard Cordray is who you call. We need them to be there for us every step of the way. The Attorney General’s office will do everything to partner with the consumer financial protection Bureau with our partners at the state level, Commissioner Owen and all those at the state who work on behalf of the people and with our city attorneys and district attorneys who try to protect does daily. We need your help. This is where these types of workshops and forums are so important. The get to connected to the people who are willing to help. My job is to enforce the laws for 40 million bill bill — people in the state of California. We have a very robust consumer protection division in the Attorney General’s office. One of the people who are just hired to be my special assistant, dealing with the issues involving consumers is Ellie Bloom, whom I stole from the Consumer Financial Protection Bureau. Yes. She is here. I also have Alyssa I had of the external affairs, so we can reach out to people and find out what you need us to know. Under the Constitution of the state, I have the authority to begin independent investigations of any activity where Californians are impacted and harmed. I intend to use that authority to the hilt. On behalf of the people of this country, who are like my parents, who worked very hard and were able to establish a business and now I’ve done so much to make it — in the past college was unknown to the family and to make it in the past, that forever we will only dream of being able to do things for our kids and make it something that’s in the past to believe like my father as a young man could not walk into a restaurant because of a sign that said no dogs or Mexicans allowed. That is all in the past. California’s forward leaning. One of the reasons we have succeeded is because we do not stop, we do not look back, we understand this is a tough place to do business. Our environment makes it difficult for businesses to establish her, our air and water are tough to keep clean. We must impose requirements on the gasoline we pump into our cars on how much we can put into this LA basin before gets a polluted your kids cannot go out and play or they get asthma. 40 million people, that is tough to organize. All of that we do, we’re high-cost state and we are high quality as well. That requires a lot of effort on the part of all those willing to work with quarterback Richard Cordray to make sure we keep those doors open. That’s our job. No that you got the Chiefs on form is — chief law enforcement officer of Los Angeles with you, the person the Governor has appointed to make sure businesses have the opportunity to have those doors open and Commissioner Owen with you. Know that the Attorney General is willing to work with them and with you but most importantly, I will do everything I can to make sure that regardless of Washington we don’t abandon our quarterback at the can — Consumer Financial Protection Bureau . We know what success means when you have Richard Cordray fighting for you. We won’t stop scoring and we will work with Richard Cordray to make sure everyone in America benefits the way California has by having a forward leaning policy in the way we do with consumer issues and help our people. Thank you, Director Cordray. They think all my colleagues and I thank you for knowing it was important to be here this morning. Have a great day. [ Applause ]
Thank you, Attorney General Xavier Becerra. I am now extremely pleased to introduce Richard Cordray. Prior to his current role he led the CFPB’s enforcement office, he served on the front lines of consumer protection as Ohio’s Attorney General. In this role he recovered more than $2 billion for Ohio’s retirees, investors and business owners and took major steps to protect its consumers from fraudulent foreclosures and financial predators. Before serving as Attorney General, he served as an Ohio State Representative, Ohio Treasurer and Franklin County Treasurer. Director Cordray . [ Applause ].
Thank you. My football career peak in the seventh grade, I do remember Vince Lombardi saying that when the going gets tough the tough get going. It’s great to be here with three of our closest and most productive and for me personally, our most dear partners anywhere in the country. I think them all for being here. I think them and their teams for the work they have done, are doing and will continue to do with us to stand up for Americans who expect and deserve the right kind of support and protection for their government officials. Thank you. Thank you all for coming it’s good to hear — be here today the Consumer Financial Protection Bureau is announcing an inquiry into ways to collect and publish information about the financing credit needs of small businesses. Especially those owned by women and minorities. We are aware of the role they play in the our lives. Small businesses dropped the — drive the economic engineering. It is estimated they’ve created two out of every three job since 1993 and they now provide work for almost half of all employees in the private sector. We perceive large gaps in the public’s understanding of how well the financing credit needs of these entrepreneurs are being served. As you probably know, the Congress provided the consumer bureau with certain responsibilities in the area of small business funding. There is a strong logic behind this. When I served as the Ohio Attorney General we recognize the need to protect small businesses in nonprofits by accepting and handling complaints on their behalf, just as we did for individual consumers. And approach that proved to be very productive. The line between consumer finance and small business finance is quite blurred. We heard that at a roundtable this morning with community and consumer advocates. Or than 22 million Americans are small business owners and have no employees. According to data from the Federal Reserve, almost 2/3 of them rely on their business as their primary source of income. This is embedded in many people’s lives. Congress has charged the consumer bureau with the responsibility to administer and enforce laws including the equal credit opportunity act. Unlike others, it governs not only personal learning but some commercial lending as well. We have now conducted a number of supervisor examinations and small business lending programs at financial institutions. Through that were learning about the challenges they face in identifying areas where risk may exist and were assisting them developing the property to manage that risk. In the Dodd Frank Wall Street Reform and consumer priest — protection act Congress took a further step to learn more about how to encourage and promote small businesses. To determine how well the market is functioning and facilitate enforcement of the fair lending laws, Congress directed the Bureau to develop regulations for financial institutions that went to small businesses, to collect information and report. The request for information will be released and asks for feedback to help us understand how to carry out this directive in a way that is careful, thoughtful and cost-effective. We have considerable enthusiasm for this project. In my own case, I’ve seen how small business financing can have a number — economic impact. I will tell you a story, when I served as a treasure of Ohio, we had a reduced interest loan program to support job creation and retention by small businesses. The way the program worked was that the state could put money on deposit with banks at a below market rate of interest in this deposit will send link to the same size loan to a small business and a correspondingly below-market rate. This link to posit has been authorized more than 20 years earlier but it had fallen into the disuse. At its core, the program maintenance. Small businesses are often in need of financing to update and expand. Often not at large amounts of money, if they can get an expensive financing they can fertilize their ideas for growth and be more successful. We diagnosed this program and found after its initial success it had become too bureaucratic. We heard from both banks and businesses that the program which was the paper-based was so slow and cumbersome, nobody wanted to bother to use it. We changed it. We put the process online, rebranded it and made specific commitments to those who wanted to participate. We told them they could fill out an application and less than 60 minutes and promised they would have a yes or no answer within 72 hours. That was not easy. It required very close coordination with the bank that took heart. We did it and the Grow no program took off. Only $20 million was advocated but in two years we deployed more than $350 million helping 1500 small businesses create and retain 15,000 jobs across the state. It was also exciting to see how the businesses were able to use the loan funds. I can recall a construction business that needed a loan to about — bike a piece of equipment. They got the money, the got the equipment and they thrived. I recall a manufacturer that needed money to turn their factory sideways to utilize more space and employ more people. We found the put, revenue and jobs. I recall a company in Western Ohio that started as a caterer and begin to make their own tents for events. They recognize they might succeed is tentmakers and needed financing to bid on a project with the U. S. Defense Department. We got them that loan, they got the bid and they were named as one of the 500 fastest growing businesses of the year. The moral of this story is business opportunity, especially those for small businesses often hinge on the availability of financing. People have immense reserves of energy and imagination. Nowhere is that more true than in the state of California. Human ingenuity is the overwhelming power that allows human beings to reinvent the future and make it so. These forces unleashed what Joseph Schumpeter called the gales of creative construction a constantly mold our economic life. Innovation has sharpened our nations edge for generation after generation. When credit is unavailable, creativity is stifled. To make the meaningful contributions that are capable of making to the economy, small businesses particularly women and minority owned need access to credit. Without it they cannot take it vantage of opportunities to grow. With small businesses so deeply woven into the nation’s economic fabric it is essential that the public along with small business owners themselves can have a more complete picture of the financing that is available to this Key Center — sector. We are releasing a white paper today that lays out the limited information we currently have about key dimensions of the small business lending landscape. According to census data and depending on the definition use, there an estimated 27,600,000 small businesses in the United dates. We estimate that together they access $1.4 trillion, that’s trillion not billion in credit. Businesses owned by women and minorities play an important role in the space. Women-owned businesses account for over one third, 36% of all non-farming private sector firms. The 2012 survey of business owners, the most recent indicates that women-owned firms employed more than 8.4 million people and minority owned firms employed more than 7 million people. Those are huge numbers by comparison in 2014 fewer than 8 million people were employed in the entire financial services sector. That was the big paragraph on the facts and figures, I was inspired to get through it by you Commissioner Owen. When small businesses succeed they send ripples of energy across the economy and throughout our communities. 2013 study by the Federal Reserve Bank of Atlanta found that counties with higher percentages of the workforce employed by small businesses showed higher local income, higher employment weights and lower poverty rates. In order to succeed they need access to financing to smooth the cash flows for current operations, meet contingencies and invest in their enterprises to take advantage of opportunities, as they arise. Another study found the inability to obtain financing may have prompted one in three small businesses to trim their workforces and one in five to cut benefits. Unfortunately, much of the available data on small business lending is to dated or two spotty to paint a full picture. Especially, those owned by women and minorities. We do not know whether certain types of businesses or those in particular places may have more or less access to credit. We do not know the extent to which mall business lending shifting from banks to alternative lenders. Nor do we know the extent to which the credit constraints that resulted from the great recession persist and to what extent. The beige book produced by the Federal Reserve is a survey of economic conditions that contains huge amount of anecdotal information about business activity around the country. It has no systematic data on how small businesses are fearing and whether they are being held back by financial constraints. Given the importance of small businesses to our economy and the critical need to access financing if there are to prosper and grow the Porton to fill in the blanks and the how-to’s on how they can engage. That is why Congress required institutions to report about applications in accordance with regulations to be issued to the consumer bureau. That is why we are here today. The inquiry we are launching is the first step towards crafting this mandated rule to collect and report on small business lending data. To prepare for the project we’ve been building an outstanding team of experts in small business lending. We are enhancing our knowledge and understand based on our equal credit opportunity act complaints work with small business lenders just helping us learn more about the credit application process, existing data collection processes and the nature and extent and management of fair lending risk. We have learned more work on the reporting of home loans under the home loans mortgage act which has evolved considerably. At the same time, we recognize a small business lending market is much different from the mortgage market. It’s more diverse in its range of products and providers which range from large banks and community banks to Marketplace lenders another emerging players and the Ventech space communities play an outsized role in making credit available. Unlike the mortgage market, many small business lenders have no standard underwriting criteria or widely accepted models for scoring. For these reasons and more we will proceed carefully as we work toward meeting our responsibilities. We will seek to do so in ways that minimize the burden’s on industry. I request for information released focuses on several issues, we wanted to determine how best to define small business for these purposes. Despite the importance of these firms to our economy, the surprisingly little consensus on what constitutes a small business. The small business administration and overseeing federal contracting sometimes looks at the number of employees, receipts and applies different thresholds for different industries. For our part the consumer bureau thinks about how to put — develop a definition that’s can this — consistent and can be tailored to the purposes of collecting data. We looking at how the lending industry define small businesses and how that affects the credit application process. Having this information will help us develop a practical definition that advances our goals and aligns with the common practices of those Inland to small businesses. Second, we want to learn more about where small businesses seek financing in the kind of loan products made available to them. Our research tells us term loans, lines of credit and credit cards of the all-purpose products used most often by her small businesses. They make up an estimated three fourths of the data in the small business finance a market, excluding the financing of merchants for service providers extend to their customers to finance purchases. We want to find out if other important financing sources are being tapped by small businesses. Currently we have limited ability to measure accurately of the prevalence of wonders in the products they offer. We also want to learn more about the roles that Marketplace lenders, brokers, dealers and other third parties may play in the application process. At the same time, we are exploring whether it’s specific types of institution should be exempt from the requirement to collect and submit data on small business funding. We are seeking comment about the categories of data on small business lending that are currently used, maintained and reported by financial institutions. In the statue, Congress identify specific uses of information that should be collected and reported. Include the amount and type of financing applied for, the size and location of the business, the action taken on the application and the race, ethnicity and generate — of the owners. The reporting of this information would provide a major boost in understanding small business funding. At the same time, were sensitive to the fact that various institutions may not currently be collecting and reporting all of this information. We understand that the changes imposed will create implementation and operational challenges. We will look into clarifying the precise meaning that some of these require dellavedova — data elements to make sure they are understand and reported. We will be considering whether to add a small number of additional data points to reduce the possibility of misinterpretations or incorrect conclusions working more limited information. To this and were seeking input on the kinds of data different types of lenders are currently considering in their application process as well as any technical challenges posed by collecting and reporting this data. We will put all of this information to work and think carefully about how to fashion the regulation mandated by Congress. Finally come of the request for information seeks input on the privacy implications that may arise from disclosure of the information that’s reported on small business funding. The law requires the consumer bureau to provide the public with information that will enable communities come a government entities and creditors to identify community development needs and opportunities for small businesses come especially those owned by women and minorities. We are also authorized to limit the data dismay public to advance privacy interest. We will explore options to protect the privacy of applicants and followers and the Compostela — confidentiality. The announcement we are making today and the work we are doing cure reflect central tenants of the consumer financial protection Bureau. Were committed to evidence-based decision-making. We aim to develop rules that need our objectives without creating unintended consequences or burdens. We went to see a financial marketplace that offers fairness an opportunity not just to some, but to all. The marketplace it does so without regard to race, ethnicity, gender or any other element of our fabulous American mosaic. Small businesses are powerful they supplied jobs, teach skills and service backbones of the community. We need to meet obligation to develop data that will shed light on their ability to access much-needed financing. It is essential to their growth and prosperity and therefore to the growth and prosperity of us all. What Cicero observed an agent Rome, still holds true today. He said, nothing so cements and holds together all the parts of our society is faith or credit. Our communities depend on both of these precious things just as much today. As we launch this inquiry want to remind you that we value the feedback we get. We take it seriously, consider carefully and integrated into our thinking and our approach as we figure how to go forward with his work. We ask you to share thoughts and experiences to help us get there. We thank you for joining us here today. Thank you. [ Applause ]
Thank you Director Cordray. I would now like to invite the panelists to take the stage. While they are doing so, I will introduce them. David Silberman is the bureaus act in director and associate director to her. Cheryl Parker Rose Sirs at the assistant director for the bureau’s office of intergovernmental affairs. Grady Hedgespeth serves as the assistant director for the bureau’s office of small business lending markets. Our guest panelist include Elba Schildcrout , East Los Angeles Community Corporation . Makin Howell , Main Street Alliance . Josh Silver, Kate Larson , U.S. Chamber of Commerce . Todd Hollander , Union Bank and Robert Villareal , CDC Small Business. David.
Thank you. I can still say good morning but just barely. I am David Silberman the acting deputy director and associate director for research marketing regulations. It’s a pleasure to be here and share this portion. As you’ve heard, we will hear from a number of respected panelist consumer advocates and industry participants. Each panel member will give us some background and provide perspective. We will then post questions to our panelist and engage in discussion. The panel discussion will be followed by public testimony. Before we begin, let me frame the issues we will talk about. Is Director Cordray noted, and as we discussed today in the white paper we released. Small businesses play a key role in fostering community development and fueling economic growth both nationally and in their local communities. To do so, these businesses and particularly women and minority owned be fair and equal access to credit to allow entrepreneurs to take advantage for the opportunities for growth. As the director explained in section set 10.7 one of the Dodd Frank act Congress amended the equal credit opportunity attack to require institutions to compile, maintain and report information concerning credit applications made by small businesses. Congress directed the bureau to it — issue a regulation to govern and report. The purpose is twofold, to facilitate enforcement of the fair lending laws and second to enable communities, governmental entities and creditors to identify needs and opportunities of women-owned, minority owned and small businesses. Is Director Cordray explained were in the early stages and were focused on outreach and research. Today’s hearing and the our five we issued our them Porton steps as we seek to enhance our understanding of the 1.4 train dollars small business financing to discharge our abilities. As context, I will provide — invite our panelist. They will each of 10 minutes for a statement and we will moderate a discussion with the panelists. We will start on my far left, Elba Schildcrout , East Los Angeles Community Corporation .
I am privileged to be here. I’m thinking of my mother on Mexican mothers today. I am privileged to be here and while we came here from Guadalajara. At East Los Angeles Community Corporation , we advocate for economic and social justice in the greater LA area by building grassroots leadership, developing affordable housing in providing access to economic development opportunities for low and moderate income families. In 2013 we began working with local businesses to preserve the vitality of the small business community. Our commercial corridor project is part of a strategic effort towards responsible community economic development by developing leadership connecting Rick and Morty businesses with technical assistance and hosting monthly meetings. We are empowering our business community to take ownership and be involved in their community. In 2015, we held a shared vision of economic stability and inclusive 50 for all residents including two brick-and-mortar businesses, street vendors and mariachi groups. To help them thrive, they need new resources such as micro-lending and lines of credit. Many rely on friends and families limited resources for loans. The also need case management to ensure they can make use of resources that already exist, such as technical assistance for writers and others doing business to support — business support services. It is through this relationship building with small business owners who are primarily Latino, immigrant, and women that we have learned of their needs and challenges. Some of these challenges have been difficult in getting credit from banks, especially small loans under $250,000, some of these owners need anywhere from $5000-$10,000 to get started. They also need data transparency to show which lenders are making loans and to which groups and where they are being made. We think things should partner and do joint outreach and address specific needs such as language access. The data should be segregated for Latino and other groups. Small business owners need greater protections to prevent discrimination. We’re excited and supportive of tran 20 ‘s efforts — tran 20 — we’re excited and we thank you.
Makini Howell , Main Street Alliance .
Hello. I am a member of the Main Street Alliance of Washington coalition of 2000 small business owners. I have been running my family’s business for 13 years. We have been in business for a total of 40 years, were a food service. I am six vegan restaurant concepts in Seattle. I employ over 40 people. I offer health coverage, I start my minimum wage at $15 an hour. I have grown our family business from grossing $200,000 in last year we close to $3 million. I did nothing without a bank loan. When I went into apply for a loan, I don’t know if it was because I was a woman or if it was because I was black. It could be any number of things that are risks for a banker. I understand when I speak to consultants that they had no concept of why it wasn’t doing stake and people would ask if I would ask fish. My menu is 100% plant-based. Anyone of these things I can understand would be a reach, not only did we succeed but I toured as Stevie Wonder’s personal chaff — chef in 2015. Nothing was possible without lending. We have to change our understanding around what can be successful. As opposed to framing it is let us collect data and let some well deserving minorities and women in, people of color and women are the majority of people that are providing jobs. They are the majority that are small business owners. Bankers and banks have to change their framing around who is deserving and who actually can provide jobs for the community. Small businesses are the engine of the economy. The engine of the economy currently is being run by people of color and by women. That Pinkie Master change. That lending will then change along with what is happening in Washington. Someone told me when you go into a bank they decide right away whether they will lend to you. That I dress well enough, Amite fallen off, — the change has to come from understanding who helps to run the economy. I would still love to get a small business loan. I haven’t tried because they don’t need money and I am 13 years in. I am attractive to a lender at this point that I don’t need money now. I needed money then. I won’t ask a bank for money now, in order to get to where I am, I had to use predatory lending, cash advances, my father gave me $10,000. I did get one from a community lender that took me months of rewriting my business plan to get that. It’s a challenge and I feel I would’ve been a $6 million company if I had gotten the lending necessary at the beginning. I had the education and the support necessary from the banks. That’s my story. Thank you.
Thank you. Josh Silver.
Good morning I’m senior advisor of the National Community Reinvestment Coalition. I thank you for this hearing today. There are some lending’s those lenders on the panel that may be encouraged to give you a loan after this. I think there are well-intentioned lenders. Last week USA Today reported a survey showing improved small business confidence. Things are looking up for small businesses after the great recession. Not so fast. The survey was sparse and on which businesses were surveyed. Research shows that women minority owned and very small-businessess experience difficulties growing because barriers accessing credit. Considered the following, women-owned firms are significant force but they remain small. 90% of women-owned small businesses have no employees other than the owner. Part of the difficulty women faces lack of credit. Just 5% of women-owned businesses use bank loans to start their businesses compared to 11% of mail and businesses. Minorities also faced difficulty starting and growing a small business. Nonminorities are twice as likely as minorities to own employer businesses. If minorities owned businesses at the same rate as nonminorities, our country would have 1 million additional employer businesses and more than 9.5 million additional jobs. Surveys have found that African American small businesses are more likely than a why don’t business to not apply for credit, due to fear of rejection. And CRC researchers from the smallest businesses, those with revenues below $1 million at the most trouble accessing credit. In 2010, 8% of these businesses received loans compared with 20% of all small businesses. Access to credit is critical yet inequalities in access contribute to overall inequality. NCRC found in a report that in 2010, the business funding let an economically distressed counties in Appalachia was 44% of national rates. The Woodstock Institute found that in Los Angeles and San Diego, businesses and minority census tracts were 31% of all businesses but they received only 21% of the loans under $100,000. A variety of reasons exist for these disparities, some due to the characteristics is also do two on — discrimination. In section 10.71 of the Dodd Frank act it will be on — they will draft a predecessor appearing in bills in the future. It requires data collection from lending institutions regarding demographic characteristic of small businesses including race and gender into report the data publicly. The active data collection and dissemination is a powerful motivator for lenders to increase responsible lending to underserved businesses. As Director Cordray says, former justice Louis Brandeis talks about sunlight and the electric light of data disclosure. No lender wants to be highlighted for shirking any part of the community and they want to get up to speed with the lenders that are doing a better job. Use data for a spur of competition. We have saying that data drives a movement for economic justice. In the arena, better data will respond — result in more employment and more wealth building in underserved communities. Isn’t that what we are about? Making capitalism work. Thank you.
Thank you. Kate Larson, U.S. Chamber of Commerce Good afternoon. As a proud Trojan I’m happy to be here today and LA. I would like to thank the Bureau for holding this hearing on this important issue and especially to Grady for their outreach over the past few months. They have been fantastic. We are excited to engage with them on the request for information. As previously mentioned, I’m the director at the U.S. Chamber of Commerce , the largest business Federation representing more than 3 million companies. We represent all small businesses and lenders. We have a unique perspective of seeing the entire picture of small business market and how it affects the end-users. More than 96% of business come when he said fewer than 100 employees. Small businesses are the lifeblood of our economy. Not only to produce goods and services we depend on but to create jobs, provide stability to millions of Americans. Remarkably, 28 million mainstream institutions account for over half of the sales of the United dates, 55% of all jobs in the country and are responsible for 65% of all new job creation. I’m sure you can all recite these data. It is hard to overstate the importance of credit for small businesses and support their inventory, open locations and hire more employees, manage downturns and otherwise push forward. We asked the Bureau to conduct a comprehensive sound report on potential barriers to small business lending in the United it’s including regulatory burdens that it may fully understand the credit products used by small businesses, inform forthcoming rulemaking to ensure it promotes, not inhibit small business funding and propose a tailored rule to include not only necessary business and products but also fulfilling the well-meaning purpose of statute. We hope the SPA will also lend their expertise in this area. Unfortunately, small business lending is not fully recovered from the great recession. The most recent small business credit survey that was mentioned jointly conducted by the Federal Reserve banks found cash flow remains a challenge for small firms, only half of applicants were seen — received financing and 18% received nothing. 32% had to delay expansion as a result of the shortfall. 21% had to reach into their personal finances. This is not okay. Much of this and I know we will all have differing opinions. We think it’s due to post crisis over regulatory overhaul and increasingly risk adverse financial institutions, that have to meet safety and soundness and know your customer requirements when issuing alone. Asked — as we begin the fact-finding process we hope to consider the true spirit of the statute and include in the definition to be tailored to only the most vulnerable populations, specifically the SBA definition of 500 employees does not seem small at this juncture. Every small business has different needs and approach credit differently. This market is different than the mortgage lending and data collection is not close to the home mortgage disclosure act. It’s a misnomer. The needs are different and small business lending is a complex market with many sources. Depending on the needs of the small business, owners may turn to friends and family, home equity lines of credit, credit cards, SBA loans,’s private loans or a combination of multiple sources. Larger and middle-market firms get more complicated. This is why the definition needs to be tailored. Employee training will be incredibly complicated, given the sources of business credit. Home-equity credit officers issuing a HELOC, flight attendants and a credit card, a trucking company offering leasing for trucks, retail clerks offering branded credit cards, they may not understand they will have to capture small business lending data. Without a firewall, — it will be difficult to create a firewall between the employee accepted credit application and the one making the underwriting decision. Without a firewall institutions will violate the equal credit opportunity act. That will be more difficult at smaller institutions. Business representatives applying for loan, if this applies to more than just the owner of the business, may not have the information to create confusion and prolonged credit application. They may not know how much they have for annual revenue or the other data points. It is unfeasible for lenders to know if the business changed in status. That is a hurdle. It will be impossible for institutions to report individual credit transactions. My wonderful mother who drove 2 1/2 hours to be here is a small business owner. If she’s buying something on a credit card for her business, is that also going to be the same thing as home goods? That is difficult way if you are going credit by credit transaction. In conclusion, we think the Bureau for soliciting information but stressed the importance of the Bureau conducting a sound, robust study on the roadblocks inhibiting small business lending, including potential regulatory considerations. To understand where small businesses are attaining credit and where they are not, ensure the rulemaking will not curtail the sources and an environment where access to small business credit is constrained, it’s imperative we energize that marketing encourage growth. I appreciate the opportunity to stuff I and thank the Bureau for its approach. Look forward to working together and I’m happy to answer any questions.
Thank you. Todd Hollander from Union Bank.
Hello. I am also currently serving as the chairman for the small business community for the consumer bankers Association and a serve on the California bankers Association. I’m proud to represent all the groups in this testimony. We wish to express our appreciation for the collaborative and transparent manner in which the CFPB — tran 20 is under Katy — undertaking these rules. The environment, private lending groups and lenders share a common goal. We want to provide loans to small businesses to help generate jobs, tax revenues and economic growth and prosperity. Lent to all market segments without bias or discrimination enable identification of business and community development needs, ensure regulatory has the ability to hold lenders comfortable and avoid saddling lenders with rules that are unnecessarily costly to implement and execute and that could generate misleading data or curtail access to needed capital. In terms of the current small business lending environment the CBA seen signs of improvement. Members say charge-offs and delinquencies have decreased from the great recession and are currently at all-time lows. SBA programs are still vital. In 2016 they had to record your exhausting their appropriation of $30 billion. From the peak in 2008, small business lending saw a steady decline until early 2011. Small business lending has seen sharp decline, while the Elba Schildcrout proved it is still significantly less than prior to the downturn as evidenced by utilization rates. Historically, 40%. I’ve been doing this for almost 30 years, I’ve worked for large banks and I’ve worked for community banks. Between those you could, usually when you loan to a large population you could set your watch by 40% utilization in that population. After 2008, we saw those rates come down and businesses weren’t borrowing what they had available. Postrecession we have more conservative population of business owners then we had going in, they felt the pain of firing people they felt the pain of downsizing and those things. Not only is the lending environment important, the optimism that businesses feel when they are confident, they feel economic growth and borrow and by and do all the things they need to do. Small business credit card utilization is also declined yearly since 2008 but one. New accounts have been well below levels in the past. FDIC numbers reported decline from 2008. In our view, there’s a miss conception that the decline and small business lending. If banks don’t lend money we don’t make money. Our job is to deploy capital and we want to continue to do that. We noted a decline in demand on such loans. The next her to will be the 10.71 action while the CBA supports the goals we believe they should keep in mind that although it mandates the role it is not a can to data collection on others — lending products such as mortgages. The CFPB needs to take great care in the creation of these regulations. We are pleased to see that they are pursuing formal information gathering processes to ensure it is well-informed which will enable it to put forth regulations that the mandated proffering requirements while avoiding costly and burdensome regulations that could be drier cost and less credit available. Specific to the challenges the notion that some old that business lending parallels nicely to residential mortgages is misplaced. Residential lending has the same collateral type and business collateral types can vary. Residential lending has with rare exceptions, consumers as applicants and businesses have all sorts of applicants limited liability sky missiles — sole proprietorship’s, all of these things run the gamut of borrowing and lending business owners have a much shorter and varied duration than mortgages. 3 to 5 years as opposed to 1530 years. — The address of the business had come up with have to unofficial owner the applicants to be debated and have no easy answer. Residential mortgages typically have wanted to borrowers. Small businesses have multiple borrowers, large partnerships, and that also runs the gamut. These challenges must be considered when constructing these loans and it’s daunting and twofold. Determining which data fields to collect that will yield meaningful conclusions from the small business lending community is likely to be more challenging. In light of these issues and current lending trends, to streamline credit processes in order to extend credit with greater speed to qualified applicants, the CBA and member institutions cannot stress enough the importance of a well-balanced to avoid overly extended data requirements. While the CFPB has discretion under 1071, in order to issue fair and achievable rules the result in these meaningful useful data, they may need to request from Congress changes to certain aspects of the rule. Examples of well-meaning definitions or requirements are outlined in the rule, but must be made optimum. First, primary address of the business whether it serves a business minority for the address of the borrowers regardless of the location. The definition of minority women, necessitates the determination of both ownership and earnings allocation. Access to this data including incidental access, unlike the mortgage-based is thickly prohibited for underwriters and in the event they do not those they do have access mandates disclosure to applicants. This is impractical and unnecessary. Thank you for the opportunity to testify and we look forward to continuing to work with you for a successful outcome.
Thank you. Robert Villareal . That’s what I said.
Thank you to all of you. We appreciate you coming to Southern California and Los Angeles. It’s important that you are here, in the city 50% of the businesses are minority owned and in the county it’s 55%. That’s five years old and we know those numbers have changed. It’s a greater amount. I am with CDC Small Business were headquartered in San Diego, that city that gave you that football team that you did not want. [ Laughter ] I am also the Executive Vice President there and the CEO of the bank or small business CDC of California that’s part of the CDC small business family. CDC Small Business finance is a 39-year-old company we are certified development company. We provide the SBA 504 product real estate lending product. We partner with banks such as Union Bank, we as an agent to 40% in the small business only puts 10% down. We’re NSBA community event is under. That is a program that allowed mission based lenders such as ourselves to do is seven a loans — the gentleman to my left created that when he was with the SBA and it’s had a wonderful impact on the small business and minority communities. SBA lenders do lesson 4% of their loans to African Americans across the country. Community advantage lenders to 13% of their loans to Latinos and African-Americans. It’s been a great program. We are the largest organization that does the both — we work in the states of California, Arizona, and Nevada. We are an economic development organization. While we’ve done $13 billion in lending, most of it is been through the commercial real estate area, $2 billion has gone to women, minority and veterans. To our non-504 program we are a micro-lender and at one point we had three different CD FIs and we have done $70 million in lending, particularly in Southern California. I am to the right of the banker. Might take will be different than that industry, I think it’s important that we are here. I think it’s important that those in the audience are here. I look forward to hearing from everyone in regards to why we’re here and why can 71 is important. Let me give you three reasons why I think it is important and why, as a state attorney Xavier Becerra said we need our quarterback and we need his support. Racial discrimination still exists. There was a study done by Utah State, BYU and Rutgers published in the Washington Post in June 2014, they took nine individuals, three African-Americans, three Latinos and three in close and gave them the exact same resume. Just them the same and went into banks. There was clear differentiation in the way the people of color were treated. It still exists in the world. More recently, I think Josh quoted the Woodstock Institute patterns of disparity that was done in January, they looked at Chicago, LA and San Diego and lumped in Los Angeles. He talked about the lack of lending in those census tracts. If there had been lending to the amount of small businesses in those census tracks that were of color, that was a 1.6 that was a $1.6 billion opportunity that was lost, for those census tracts in communities of color. Y 1071 is critical, all we have is that we can look at CRA, we don’t know who is getting or what individual’s are getting the loan. In 2015, there was $4.7 billion — this is reportable on the website. In the same year the SBA there were 750 loans for $136 million. In terms of units, the SBA was let’s then .5% — I’m looking at Michael and I was told him it was 4% and in dollars it was less than 3%. There was 99% of the loans going out in the County of Los Angeles, we don’t know who they went to. We can look at the census tracks and say they are praying all but — predominately minority, we can’t find out who they went to and with 1071, we will find out who applied and what happened to those individuals when they did not get the loan. I am for the folks here — I implore the folks here and my colleagues, this is important and it will take a lot of work. We must come to an agreement. It is very important that we take this mandated rule and implemented. We look forward to working with everyone here to get that done.
Thank you.
Thank you to all of the panelists. Might colleague Grady Hedgespeth and Cheryl Parker Rose will now ask the panelists some questions for further discussion. I get the first question Robert, talk about the challenges that financial institutions face when extending commercial credit to small businesses, particularly minority and women-owned.
I will try to be brief. There are lenders and there are a lot of reasons. I will base it on my 12 years of experience working at CDC small business, I had conversations with my colleagues and CDC Small Business finance just had a report done on Latino small businesses in the state of California . It was done for us by the national Association for Latino community asset builders and hopefully that will be public at the end of the month. While all small businesses face similar challenges, entrepreneurs that are women or are people of color have particular challenges. One is, record-keeping or financial documentation or it’s the lack there of. There could be a variety of reasons, maybe they are cash-based but it comes down to financial literacy. When I say that, I’m not saying that small businesses are financially illiterate. Far from that, with the challenge is that lenders whether you are a Union Bank or a small business finance have certain criteria and documentation that we require. We put people through some awful loops for a loan at the SBA. A lot of folks don’t have the background. Since mothers were used, I will use my father who came with a sixth grade education and ran two very successful businesses. He never received a loan from a bank. He never could have put together the documentation that I know my company asks for from someone. He was not financially literate, he just did not understand the way the system work. As lenders, it’s working with the small business and working around and educate and have the patience to get them through the process. Is a mission-based lender, we put money into paying business advisors to help individuals with that. The second one is also what’s known as a thin credit file or poor credit. Experience did a study that was released in September of last year that showed businesses, minority owned businesses, their business score was five points lower than a nonminority and their personal credit score was 15 points lower. A lot of lenders, one of the first questions asked will be what is your credit score? There is a threshold and if you are not at 680 and you are at 679, a lot will ask you to leave or they will not finance you. That is the challenge as lenders, how do we work with those that have a poor credit, that does not completely dictate their ability to pay and how do we look at other factors. The third and fourth are combined, I have learned from individuals and we have seen it, it takes just about as much money to underwrite and process and $50,000 loan than a $500,000 loan. If you are a profit driven organization, who are you lending to? As a mission-based lender we will work with those that want $5000 or $10,000, how do we build efficiencies with that and how do we deal with fintech? Those competitors are charging 94% and we of refined Tensed — refinance loans, how do we do that when they can answer someone in minutes and finance them within days. That’s difficult and that’s a challenge for reputable lenders who are trying to do right and treat people with respect.
Cheryl.
Josh, what are some of the current barriers to understanding the small business lending landscape?
Thank you Cheryl, current barriers lack of data. Longer answer, 1071 will mandate — I’m sorry it’s hard to swallow and talk at the same time.
Type of lender, large bank, small bank, non-bank, fintech, we need data on the mall because we need to know which ones are making responsible and sustainable loans. We need to know which needs more oversight. The literature talks about smaller banks being relationship lenders and getting to know the small business owner and having more flexibility in their underwriting. The bigger banks tend to use automated underwriting and some of the study suggest it’s a smaller banks that have an easier time reaching an underserved population. We haven’t had the data for the smaller banks for number of years. In the mid to thousands, the bank regulators exempted the smaller banks from community reinvestment act data reporting requirements. We need that to understand the market and to know who is making responsible loans to underserved businesses. I should say NCRC did a study for the Appalachian region and the smaller banks were 20% of the market in several states. It’s important to understand what they are doing. Loan type, this is huge, whether the loan is an origination, whether it’s a refinance, whether it’s a renewal, a line of credit, different credit needs are served by different loans. I talked about the community reinvestment act data which large banks report. This is the most systematic data that we have. There are significant limitations. You can’t — the reporting rules are strange, there is renewals be reported with originations, think it’s mostly originations but there are renewals in there as well and you can’t separate them and that clouds the understanding. Credit card lending is higher cost lending, it is needed. Term loans are also needed and basically there is a crude way to differentiate had a card lending from term lending in the CRA data. We need better data, there has been some SBA studies that have shown minorities rely upon credit card lending. If we had better data, we could use this spur of competition to encourage more term lending by traditional banks. Factoring, a form of high cost lending, the white paper and when you look at the number of transactions it looks like factoring was higher than term lending. We need more data on high cost lending, to make sure it’s not the new subprime lending that is actually stripping wealth instead of responsibly serving credit needs. Loan action, we need data on applications and denials, currently it’s only originations and to really know whether it’s unmet demand or is there low demand and what could be ways to increase the demand in some communities. Revenue size is huge, most small businesses have sales of less than $100,000 as shown in the white paper. The CRA data only tells you whether it’s above — whether it’s made above or below $1 million in revenue. I could go on. We need data on reasons for denial, insufficient collateral, credit history, inadequate documentation, is the business too new, the zip and mentioned. I am not asking for the sky. I am asking for well-defined — there are statutory requirements like race and gender of the owner, the CFPB has some discretion data elements to add and if we do it carefully we can understand weather controlling if there are still disparities that need further investigation. Through robust collection, hopefully we can make American capitalism work better. Isn’t that what we are about? Shouldn’t there be a bipartisan consensus, better data and more transparency increases lending and ultimately people who are working hard and playing by the rules can provide. This should be beyond question.
Grady.
Todd, CBA are always very thoughtful in your remarks. You have mentioned some but what are the unique aspects to consider when you extend credit for commercial purposes or credits, what’s unique about that?
There are a few things that are unique when you extend credit to any small business, first is a complicated ownership structures and how you assess each ownership structure and determine the ability. The next is the difficulty in separating the ability and willingness to repay. As mentioned, especially for smaller businesses, the interrelated nature of their personal credit and business credit make it hard to separate. You would need to consider how they repay their debt after as part of the picture. Very collateral, a lot of lending that we do is unsecured. We don’t put EU cc file on the company. Some is partially secured. We take direct collateral in real estate. There are multiple purposes for the loans, we went for anything from working capital to fixed access — assets, it’s relatively straightforward. As I mentioned, the closely interrelated nature between the personal and business finances are hard separate. The last couple things are relative agent up the balance sheets of small businesses tend to be less deep and with less reliable data than large businesses. It becomes an art and the quality information is less. And as Roberto mentioned, the cost at which we need to process these economically and still make money for the bank and protect our depositors makes it difficult but not impossible to do.
Makini Howell , can you talk about small business owners and their access to credit to grow businesses.
Yes. My name is Makini Howell . It’s like zucchini. Could you repeat the question?
To small business owners have credit?
In my experience, I did not have access to a traditional bank loan. I had access to credit. I had access to a fintech loan, merchant cash advances, which is basically predatory lending. You purchase funds and if you need a $30,000 loan, you can purchase it for $15,000 and pay back $45,000. One question was how do reputable lenders come — combat that and they have to reconsider their bottom line and what they need to make off of a $50,000 loan and a $500,000 loan. When we raised the minimum wage, all business owners said to have a different understanding of their profit margin. If you really want to help, the predatory lenders have gotten a hold of the market, you have to rethink your profit margin as illegitimate lender. There is always available capital. It could bankrupt to, if you take that. If you have to pay it back in two or three months and that’s generous. Some of the problems around it by that you get junk fees which are anywhere upwards of $800 weekly or they will take payments daily. You can get borrowers paid in average of [ Indiscernible ] 44% of small businesses rely on credit cards are financing. Stalled growth, if you’ve taken a cash advance and you hit a slow season and you aren’t making money and your fixed assets those costs have not changed. That could tank your business. You still have to pay back this exorbitant loan and it’s not considered alone, it’s considered purchasing funds. You have to pay that back in addition to your fixed expenses. There is money available, it’s not necessarily the money that will help you grow your business. More than likely it will bankrupt your business.
Thank you.
My question is for Kate, what should small businesses be aware of in terms of accessing credit from financial institutions?
Thank you Cheryl, I will mimic a lot of what Robert said earlier. Documentation, documentation, documentation. You must know your business plan inside and out. Understand that institutions, it’s not that they just don’t want to give it credit, it’s that they have various stringent safety and soundness requirements that are from the regulators. We don’t want to relive the Great Recession. A lot of that was ability to repay, suppose it requires is — regulators are more strict about repayment. That is why we are concerned about maintaining access to credit, while giving it out and is saved in some manner. To small businesses, as prepared as possible with any financials or projections to give institutions the cover to explain to the regulators that we know this person is going to be able to pay this loan back. They cannot just say they seems nice and they have a great idea. It won’t work like that. I would say any documentation that you have available. And really understand your business planned and what would be right for you, is it Marketplace lending, traditional lending or SBA loans, that would be a good avenue for the Bureau and I would be happy to work collaboratively to identify those types of different credit. A lot of people don’t know what is available. That’s also a financial literacy piece.
Albert, what type of credit is available to owners who cannot access loans from traditional lenders?
It’s similar to what Makini Howell mentioned , the predatory loans including cash advances. They are similar to payday lending’s, some of the small business owners use personal credit and credit cards. They get into high interest credit card debt. There’s also loans from family members or friends. Some things that we have worked that along with members of the California reinvestment coalition and others, is looking at how we can expand and help the business owner with technical assistance and helping them with their credit score. A lot of times there is no dissension between personal finance, credit score and their business score. A lot of people are talking about financial literacy and it’s more that they need options and know how they stand and how that can be utilized. A lot of the availability loans can be made, they cannot be made by as much as we would like a lot of them need more funding and there needs to be more education about what is available. With us at East Los Angeles Community Corporation , we have social lending loan, it is for social loans, people lend and borrow to and from each other. We have done in partnership with the Bay area [ Indiscernible ], we have done small loans for them to improve their credit. There is no interest and there are no fees. They are lending to each other and it’s being reported to the credit bureaus. We are starting with some of the micro vendors so they can work towards credit. This comes with financial education, coaching and technical assistance, to help them get to the documentation were talking about. A lot of our people are small business owners are business immigrants and bilingual Spanish speakers. They trust our organization and others like us. We have earned their trust and they are able to come to us and we can speak to them in regards to their options.
One last question which we will ask all panelists and give you all a chance for closing remarks. I will ask you to keep your answers brief. What are the benefits and challenges to conduct small business lending data and make it available to the public?
It’s a good way to distinguish who the good and bad players are and we can see who is doing the loans and who is not into his potentially discriminated against. I see it as an opportunity. It will be an opportunity not only for the traditional institutions, they will see opportunities in new markets. Los Angeles County, 55% of the small businesses are minority owned. We don’t approach this completely as a challenge but as an opportunity to see where you can grow your market, in the next phase of your financial institution.
Todd.
There are definitely benefits to this and challenges. We do a lot of data collection. Whatever we do with the 1071 action, I caution that we not double up on the were getting to the cost. We need to establish a minimum set of data standards to take into account, we did a survey among the 60 banks that belonged to the consumer bankers Association in any would be surprised on how it they matched, if any. I caution you to take all those things into consideration. The risk of inaccurate or drawing a wrong conclusion from the data that’s extract and remains high. If we’re not careful in the way we disseminate the information and the way we interpret it, it’s not completely objective and we run the risk of increasing legal costs leading to incorrect conclusions with the output of the data and how it can be manipulated. In conclusion, it’s necessary and banks want to put capital in the hands of the people who will use it. The better the business community does the better the banks do. We just reflect the community we represent. We look forward to working with you to establish the right rules and thank you for the collaborative nature and engaging in this.
I will be brief. As stated the challenges that we have been looking at. This is a common goal. I totally agree with Director Cordray statement in his opening, when that it is unavailable, creativity suffers. We’re all working together to ensure there are — there is credit for the small businesses that need it. I would like to underscore that we hope to minimize the regulatory hurdles and decrease the cost of underwriting. After Dodd-Frank, the cost of underwriting for any commercial loan has escalated to about $7000 per loan. As was indicated, for $100,000 loan or a $4 million loan. We want to make sure that the hurdles that institution have to go through are minimized to get credit to the people who will repay and so we can grow small businesses. In terms of privacy, there are concerns about the publication in the day of data breaches, governmental agencies are not immune. That is always a concern. Re-identification, in terms of the different loans and there could also be an anti-competitive nature if the loans are re-identified. I am very excited to work with you going forward.
My grandparents were grocery store owners and started shortly after the Great Depression. I wonder how they did it. Did they get loans? If we had more information then I think we would have more economic — it would’ve helped the Great Depression. We are now in the years after the great recession and I want to caution some statements that were made. Overregulation is stifled a retarded lending. In the years before the financial crisis, it was the reverse. It was a lack of regulation the Federal Reserve board had on the books in 1994, they have the ability to curb abusive lending and they didn’t do anything. We all know about the lending beyond people’s ability to repay. We know that not only caused the recession but a global recession. Small business funding — I think has been under regulated. We don’t have the same consumer protections. Yes, it’s a balancing act. It’s a balancing act but if anything there is not enough regulation and oversight in the small business lending arena. More data will not stifle lending, it will not delay loan processing. We have had 40 years of experience with the home or just disclosure act — Homewood — yes, there are costs but even for financial institutions, the benefits outweigh the cost’s. They want to know how competitive they are doing. When the new data becomes available in March and you requested, it’s not consumer groups that are the biggest request these, it’s banks asking other banks so they can see how other competing in all markets. Data, if it’s done well and you have good information on loan terms and conditions, it makes the lending marketplace more competitive. Also, if you do it carefully you won’t get wrong conclusions are unnecessary litigation. We have had 40 years of come to experience, there have been instances where there has been agree just behavior — egregious behavior and it has been stopped before it continued to do damage. We won’t know what the extent of the egregious behavior is if there is no data. If there is more data, there will be less harmful behavior. Lastly, we have a lot of CRA small business data reporting that we can build on to make this — I think we lost $14 trillion in the recession because of abusive lending. If we had better transparency in the marketplace we could gain trillions of dollars in wealth. Thank you.
Makini Howell .
I think it’s a great opportunity to not only collect data, whether it’s a black women or an Asian man Representative flying — applying for loan. It’s an opportunity to create an understanding that education comes before literacy. To change the culture of lending, if we work on the culture of lending and understanding the engine that the people of color and women create for small businesses and understand how much money is sitting there, sometimes lost on the table. We understand that it’s not an unwillingness to pay back, there — the literacy and education must come prior to and that way you can lend safely to a community, understanding that they understand how to pay that money back.
We think the benefits will outweigh the challenges. There will be a better understanding in the market to help the government decide how to allocate resources and identify discrimination. This data is very important. There will be better and more lending once we know where this lending is happening. The evaluation of products are rich in the communities in need and with the right loan products. That is important and we don’t know that right now. Make assessments and address issues and inform policy.
This concludes the panel portion of our program. Please join me in thanking all of our panelists for thoughtful discussion.
Crap crap — [ Applause ]
Panelists, please take your seats. I will note turn it over to Zixta Martinez who will moderate the next portion of the hearing.
Thank you, David. I will now turn to one of my favorite parts which is to hearing from you all. An important part of how the Bureau helps consumer finance markets work is to hear from consumers, state and local partners and community advocates. One way that we gather feedback is through that such as these we have had events across the U. S. events across the U. S. You can submit is consumer complaint through our website www.consumerfinance.gov. Our website will walk you through. We take complaints and we also have another feature called ask CFPB, you can find answers to over 1000 frequently asked questions as well as additional resources. We have Spanish-language website. It provides access to central consumer resources and answers to consumers frequently asked questions. I encourage you to visit our website to learn more about the resources and tools to help consumers make the best decisions. It’s time to hear from members of the public that are here today, a number of you have signed up to provide comments and observations about today’s discussions. The public comment is an important opportunity for the consumer Bureau to learn into your about what’s happening in consumer finance markets in your community. Each person that has signed up to provide testimony will have two minutes to do so and what we hear is invaluable. We want to hear from as many of you as signed up. I encourage you to stick to the two-minute limit, so that everyone who signed up to provide comment has the opportunity to do so. Our first commenters are members of the federal and state community. I would invite Arthur Zaino with the Federal Reserve 10 San Francisco. Our staff will bring a microphone to you.
Melanie winter.
Hello. I’m with the community development group here in Southern California with the Federal Reserve Bank of San Francisco. The subject of data collection, with small business funding is something that between the local reserve banks and the board of governors in Washington is a very important concern. We have extensive data on the subject and in particular we have data around small business ownership and the connection to auto loan financing. Some of our great concern was happening with discrimination in that market, with funders of all sizes large and small and independent auto lease agents or lenders. We are here to listen to what is happening with the CFPB and to provide support and advice, as we do in our responsibility with 1071. Thank you.
Thank you. We appreciate the outreach and we look forward to engaging in substantive efforts with you. Round foam — R Fong.
Good afternoon. My comments on the need to continue to improve the collection of more detailed data. As the nation continues and the population we recommend the nation adopt the national content test for proposed minimums. We recommend these categories be applied in three areas including the home mortgage, small business [ Indiscernible ] and small business administration loans. The data will result in a better assessment of our community’s needs, better targeting of solutions from both public and private sector, greater access to services and capital for our communities small businesses and healthier Asian-American and native Hawaiian Pacific Islander communities. Thank you.
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Re-Banked
April 23, 2017
Just a few years ago, the financial services community was fixing for a battle of David and Goliath proportions—with scrappy, upstart online lenders threatening to rise up and vanquish the fearful and mighty brick and mortar banks. Instead, the unexpected happened: a number of well-respected online lenders and banks set aside their battle arms and began looking for ways to collaborate with their rivals—offloading loans, making referral agreements and establishing more formal partnerships, for example.
“In the real world, sometimes David wins. Sometimes Goliath wins. Just as plausibly, sometimes both sides carve up a market and they often have different offerings that target unique customers,” says Brayden McCarthy, vice president of strategy at Fundera, a New York-based marketplace for small business lending that works with a variety of lenders, including traditional banks.
Certainly, the change didn’t happen overnight. But over time, both online lenders and banks have been forced to tailor their expectations more closely to market realities. Despite their fast growth trajectory, several online lenders have come to realize that they lack several things many banks have, namely a strong, time-tested brand, a solid customer base and ample capital. Banks, meanwhile, have realized that their slow start out of the gate with respect to technology is a severe competitive disadvantage, and that they need more nimble, savvy partners to stay in the game.
Given these shifts, more and more online lenders and banks are taking the approach that if you can’t beat ‘em, join ‘em. Although some industry leaders are actively pursuing strategies that put them in direct competition with banks, partnerships of varying degrees between traditional banks and alternative players are increasingly common. As a result, the lines separating the two are getting increasingly blurry.
“Market forces are acting as a shotgun at the wedding. Whether the two sides are entirely comfortable with the marriage is irrelevant, they need one another,” says Patricia Hewitt, chief executive of PG Research & Advisory Services LLC in Savannah, Georgia. “They’re stronger together than they are alone.”
The evolution of Square is a prime example. The San Francisco-based company really packed a punch in the merchant services world with its mobile card reader designed for small businesses. From there, the payments company sought additional ways to diversify, eventually turning to merchant cash advance as a way to help small business customers obtain funds quickly. Then, in March of last year, Square moved into online lending, teaming up with Celtic Bank of Utah to offer small business loans online. The partnership got off to a running start. In its most recent earnings report, Square said it facilitated 40,000 business loans totaling $248 million in the fourth quarter of 2016—up 68 percent year over year—while maintaining loan default rates at roughly 4 percent.
Even SoFi, the San Francisco-based online lender that has been pointedly outspoken in its anti-bank rhetoric, now has bank-like aspirations. In February, the lender acquired mobile banking startup Zenbanx, giving it the ability to offer checking accounts and credit cards in 2017. Also in February, SoFi teamed up with Promontory Interfinancial Network to enable community banks to purchase super-prime student loans originated by the online lender. Large banks have been buying SoFi loans for several years.
COLLABORATION IS THE WAVE OF THE FUTURE
Many see collaboration between banks and online lenders as a logical step in the industry’s evolution. Online disrupters have forever changed the face of lending—in the same way that online brokerage shaped the financial advisor industry, according to Bill Ullman, chief commercial officer of Orchard Platform.
“There’s a tendency to want to view things as either black or white, online lenders vs. banks. The reality is that the entire financial services industry is undergoing a transformation with technology as the core driver,” he says. “I am of the view that both traditional financial services companies and fintech players can survive and thrive,” Ullman says.
For its part, Orchard recently inked a deal with Sandler O’Neill that provides access to the Orchard platform for the investment bank and brokerage firm’s bank and specialty finance clients. The deal is expected to help small banks better evaluate their options with respect to online lending opportunities.
Partnerships between online lenders and banks take many forms. Some of them are behind the scenes, where marketplaces sell loans to banks or banks informally refer customers. Others are more public. For example, in September 2015, Prosper and Radius Bank of Boston teamed up to offer personal loans to certain customers through the bank’s website using the Prosper platform. Customers can borrow from $2,000 to $35,000 in this manner.
Then in December 2015, JPMorgan Chase and OnDeck joined forces in order to dramatically speed up the process of providing loans to some of the banking giant’s small business customers. In April 2016, Regions Bank and Avant announced a partnership to better serve customers who don’t meet Regions’ credit criteria.
Avant’s customers typically have a credit score between 600 and 700, while Regions sets the bar higher. “The benefit for banks is that they do not need to worry about a platform taking away customers that meet their own credit criteria,” according to Carolyn Blackman Gasbarra, head of public relation at Avant.
She notes that Avant expects to replicate this model with more banks in 2017. “Lately many platforms and banks have come to realize their counterparts are more friend than foe,” she says.
Given the changing tides, industry watchers expect to see more relationships develop between online lenders and banks over time. These could include referral agreements, technology licensing arrangements, formalized revenue-sharing partnerships and perhaps even outright acquisitions.
PARTNERSHIP ADVANTAGES
Certainly, working together can be mutually beneficial for both online lenders and banks. For new online lenders and other fintech players, partnering with an established bank allows them to bypass significant regulatory and compliance hurdles because the necessary requirements are already in place.
“Why jump through all the hoops when you can just have a buddy system with an existing lender?” says Kerri Moriarty, head of company development at Cinch Financial, a Boston-based company dedicated to helping people make smarter investment decisions.
Fintechs that license their technology to banks still have to meet the high standards of third-party vendors determined by bank regulators, notes Stan Orszula, co-head of the fintech team at the Chicago law firm Barack Ferrazzano Kirschbaum & Nagelberg LLP.
“But it’s still less onerous than being a direct lender,” says Orszula, who works closely with banks and fintech providers on legal, regulatory and corporate issues. “They are learning that they need banks. They really do.”
Even seasoned online lenders that have a regulatory framework in place can benefit from bank relationships by using banks’ established brands as leverage. “Everyone knows Chase, Bank of America and American Express,” says McCarthy of Fundera. “They have a solid name and a solid in-built customer base to be able to offer product to them,” he says.
Teaming up with a bank gives added credibility to an online lender, at a time when the public’s confidence has faltered due to highly publicized troubles at certain firms. “Partnering has a very important signaling effect that these online players are here to stay,” McCarthy says.
Banks, meanwhile, need the nimbleness and innovation that online lenders provide. “Banks realize they have to catch up with the fintech disrupters,” says Mark E. Curry, president and chief executive of SOL Partners, which provides strategic management and information technology consulting services to financial services companies.
DIFFERENT TYPES OF PARTNERSHIP OPPORTUNITIES ABOUND
When it comes to partnerships between banks and online players, there are numerous options. In the small business lending space, for example, McCarthy of Fundera says he expects banks to continue buying loans from online lenders, as they have been for many years. He also expects more banks will route declined applicants to online lenders or online loan brokers. “This is a partnership that will allow them to make up some incremental revenue by referring business,” he says.
In addition, McCarthy says he expects banks to make products available through online marketplaces and use an online lender’s technology for online loan applications. He also expects banks will use online lenders’ technology for underwriting and servicing loans.
Years ago, before John Donovan joined Bizfi, he recalls talking to a salesman for a large national bank. The bank didn’t offer a lending product that he could give to small businesses and the salesman was losing customers as a result. “That’s where we see a lot of those opportunities,” says Donovan, chief executive of the online marketplace for small business loans.
For instance in March 2016, Bizfi partnered with Western Independent Bankers, a trade association, for over about 600 community and regional banks, to link small business clients to financing options through Bizfi. Many banks don’t offer small business loans below $150,000, whereas the average loan Bizfi does is $40,000, Donovan says, adding that the company would like to develop additional relationships similar to its agreement with Western Independent Bankers.
In the future, he predicts fintechs will continue to be more receptive to the idea of working with banks and vice versa, as the industry digests the impact of deals that are still in their early days.
FINDING STRATEGIC GROWTH OPPORTUNITIES
As banks and online lenders become increasingly accustomed to working together, there may be more opportunities for strategic acquisitions. For instance, Sandeep Kumar, managing director of Synechron, a global consulting and technology firm, expects to see banks—especially mid-tier players that don’t have the resources to innovate like big banks buying lending-related start-ups. He says banks will likely be most interested in companies that can help them with AI and other techniques to pinpoint where they should spend more efforts on cross-selling and customer profiling, for example. “There are many start-ups in this area that have very compelling technology,” he says.
On the other hand, Chris Skinner, an independent commentator at The Finanser Ltd., a research and consulting firm in London, points out that the two cultures don’t always mesh. “Quite a few startups have young, entrepreneurial founders that would loath the idea being acquired by a bank. So it really depends on the circumstances,” he says.
Valuation differences between large banks and leading online lenders may also be a sticking point for some deals, Ullman of Orchard points out. Banks’ concern over their valuation “will place a certain amount of restraint and discipline on the tech M&A activities they pursue,” he says.
ANTICIPATING TROUBLE IN PARADISE
While increased collaboration between online lenders and banks sounds good on the surface, John Zepecki, group head of product management for lending at D+H in San Francisco, urges both sides to proceed with caution. “You have to find an arrangement where you don’t have conflict,” he says. “If your innovation partner also is a competitor, it’s a challenge. If you have an inherent conflict, it doesn’t get better over time.”
That’s one reason why companies like Chicago-based Akouba have come on the scene. In Akouba’s case, its goal is to provide banks with the technology such that they don’t have to partner with an online lender that has the potential to compete for business. “We don’t compete with the bank in any way whatsoever,” says Chris Rentner, the company’s founder and chief executive.
Akouba’s business lending platform—which the American Bankers Association endorsed in February—provides banks with leading edge technology that integrates the bank’s own unique credit policies into a convenient, online process—from application to documentation— all the way to closing and funding. The bank uses its own credit policies, originates its own loans and owns the entire brand and customer relationship.
Rentner says he started the business with the idea in mind that the online lending model wouldn’t be sustainable long-term and that working alongside banks—as opposed to competing head to head— was the direction to go. “The idea that they could somehow get all of the consumers out of the banking world and onto their platforms was never going to happen. That’s why we exist today,” he says.
Blazing Trails in Unexplored Financial Markets
April 4, 2017
Once upon a time people with health insurance who were treated for medical emergencies, illnesses or chronic health conditions –an illness or accident requiring hospitalization, an appendectomy, or a hip replacement, say – could rest easy. Insurance underwriters like United Health, Wellpoint or Humana would surely handle most, if not all, of a patient’s medical expenses.
Today? Not so much. As healthcare becomes ever more pricey, employers are increasingly offering health insurance plans that are less generous and require consumers to pay higher deductibles. Individuals as well are finding that the same goes for them: The only way to afford health insurance is to purchase a plan with a high deductible.
“We’re at a tipping point where the cost of healthcare is outpacing GDP,” says Adam Tibbs, chief executive and co-founder of Parasail Health, a start-up alternative lender in the San Francisco Bay area. “As a result,” he adds, “the only way health insurance can work is either to raise (the cost of) premiums or opt for higher deductibles.”
Statistics confirm Tibbs’s assertion. As of last autumn, according to a September, 2016, survey by Kaiser Family Foundation, the average deductible for workers’ health insurance policies jumped to $1,478, up by more than 12% from $1,318 in 2015. The survey found, moreover, that – for the first time — slightly more than half of all covered workers have deductibles of at least $1,000. At smaller companies, the average deductible is now more than $2,000.
Parasail, a Sausalito-based alternative lender which opened its doors last September, is angling to fill that void. Funded with seed capital raised from four venture capital firms — Healthy Ventures, Montage Ventures, Peter Thiel, and Tiller Partners, reports online data-publisher Crunchbase – Parasail acts as a go-between, connecting the medical practitioners to third-party lenders.
In partnering with doctors, hospitals, and medical clinics, Parasail employs a business model that resembles an auto dealership. After the customers picks out a four-door sedan or a sport utility vehicle, he or she drives it home thanks to a five-year, monthly-payment plan from, say, Capital One.
Similarly, after agreeing to a costly medical procedure, the patient can strike an arrangement with a medical provider’s billing department for on-the-spot financing. Once the deductible is covered, the patient is cleared to glide into the operating room.
Despite being open for less than a year, Tibbs says, Parasail has enlisted as partners some 2,500 medical practitioners with unpaid patient debt of roughly $4 billion. The typical loan averages $6,000. “Our goal,” remarks Parasails marketing vice-president, Dave Matli, “is to create a normal retail experience” so that financing medical debts is as seamless as swiping a credit card.
Meanwhile, industry experts say that Parasail represents a new breed in the financial technology sector. As online alternative lending and the broader fintech industry grow more established, institutional investors and financiers are increasingly wagering bets on companies that promise more than disruptive technologies or cheaper loans.
Increasingly, they are hunting for companies like Parasail that are introducing new products or blazing trails in unexplored markets. “The area that I find most interesting,” says Phin Upham, a venture capitalist and board member at Parasail, is investing in companies that “are developing products that didn’t exist before, serving people who haven’t been served, and playing a unique role incentivizing long-term behaviors.” (Upham, who is a principal at Peter Thiel’s VC firm, emphasizes that he is speaking only for himself.)
Parasail’s fundraising and launch has taken place against a dramatic drop in both global and U.S. fintech financing, according to KPMG’s annual report on the industry, “The Pulse of Fintech.” The accounting firm reports that total funding for fintech companies and deal activity plummeted by more than 50% in the U.S. in 2016 to $12.8 billion from $27 billion the prior year. KPMG attributed much of the drop to “political and regulatory uncertainty, a decline in megadeals, and investor caution.”
The year “2016 brought reality back to the market” after the banner, record-shattering year of 2015, the report noted.
Venture capital financing in the U.S., however, did not slip as dramatically as overall funding, sliding some 30% to $4.6 billion from $6 billion in 2015. (Almost overlooked in the report was that corporate investment capital was “the most active in the past seven years,” KPMG’s report notes, representing 18 percent of venture fintech financing.)
Steve Krawciw, a New York-based fintech startup executive asserts that “the business has matured and, yes, there have been defaults, but the business model for fintech has stabilized.” The author of “Real-Time Risk: What Investors Should Know About FinTech, High-Frequency Trading, and Flash Crashes,” Krawciw expects more funding to stream into the industry as new players such as banks, insurance companies, hedge funds and private equity get involved. They’ll “go in a number of different directions,” he reckons, “especially direct lending by hedge funds and private equity firms.”
No figures have yet been released by KPMG for the first quarter of 2017, just ended in March, but fintech industry participants are mightily impressed at news of the $500 million financing for Social Finance Inc. (SoFi). Best known for its refinancing of student loans, the San Francisco firm reported on February 24 that it raised a half-billion dollars in a financing round led by private equity firm Silver Lake Partners. Other investors include SoftBank Group and GPI Capital, bringing SoFi’s total investment to $1.9 billion, the company said in a press release.
SoFi, which plans to use the funds to expand online lending into international markets and devise new financial products, is ambitiously transforming itself into an online financial emporium. Along with a suite of online wares that mimic traditional banking and financial products – savings accounts, life insurance policies and mutual funds – SoFi has also invented new online offerings.
For example, SoFi formed a partnership with secondary mortgage lender Fannie Mae and, together, the companies are enabling borrowers to refinance both mortgage and student debt. The SoFi financing, says Krawciw, “is not a seminal deal, it’s a sign of what’s coming.”
SoFi may also be providing a road map for fintech companies like Parasail. After building a customer base with health-care loans at 5.88% annual percent rate — compared with credit cards charging interest rates about four times as much – Parasail could be poised to sell additional products to its built-in audience.
Just as SoFi got big on refinancing student loans, Parasail could use healthcare lending as a springboard for future financial endeavors. Its revenues have been growing by 50% month-over-month.
By the first quarter of next year, Tibbs says, the firm will be breaking even.” And at that point, he adds, it expects to roll out a menu of new products too.
Does Fintech Have a Distinctively British Accent? – From Congressman McHenry’s Speech
April 1, 2017Regulation around technology-enabled lending has generally been a point of contention in the US. Even regulators are finding themselves at odds with other regulators, like the OCC vs. the NYDFS for example. Might relationships like these be contributing to America’s innovative decline?
At LendIt last month, Congressman Patrick McHenry (R-NC) said, “Is it any wonder that Fintech has a distinctively British accent these days? It’s good reason. We have regulatory competition around the globe, but we don’t have the right regulatory competition here in the United States. And while we have a patchwork of conflicting, and overlapping, and confusing regulations, in places like the U.K., they’re creating an entire ecosystem of financial innovation and allowing it to flourish. And they become the model for the rest of the world and the intellectual property center for the rest of the globe when it should be here in the United States.”
Forward-looking regulation has helped a nation like Kenya make the movement of money cheaper in their country than it costs to move money here, McHenry said. “They’ve moved generations ahead overnight,” he exclaimed.
If you haven’t seen the video, check it out below:
Or you can read the full text from our transcription of it:
“And thank you all for being here. This is a wonderful celebration on, you know, a stereotypical February or March day here in New York. Cold as can be. Good to be inside. But thank you for taking the time to gather. The work that you’re about improves the American economy, gives more options for my constituents and for the citizens across this great country of ours, and gives them better options and opportunities to make decisions for themselves and put power back into their hands in a very competitive environment.
In fact, it’s really liberating to be out of D.C. especially at moments like this. You don’t know what the latest news story is gonna be or the latest tweet, so good to talk about something meaningful over the long run. And the reason why I’m here is because my focus legislatively has been around utilizing technology for innovative forms of finance.
I came about this in a very simple way that’s relatable to other people. But you know, the idea of Fintech, in 10 years, in 20 years, the term “Fintech” will be scoffed at kind of the way that we scoff at how they described Amazon 20 years ago. They said it was an e-Commerce site, that it was a webpage. Right? And we laugh at people that would describe it that way today. Every company that’s in the retail space has an e-Commerce site. Everyone is competing in this new form that Amazon represented the new wave of 20 years ago. So, the term “Fintech” may be much like referring to something as not a website, but a webpage. And in time, the way people are interacting with the banking system is going to continue to change in fundamentally different ways.
It’s exciting to think about how consumers and small businesses across America are gonna find these new ways to access capital over the next generation. And you all are at the forefront of that. And at D.C., I’ve tried to lead the change of that change in mindset. And you know, this is not only about helping Fintech companies, but also about fundamentally altering how regulators interact with innovative companies. And so, the focus on lending, helping families access capital as I said in the beginning, I came to it in a very natural way.
I saw my father start a small business as a child. When I was a child, the youngest of 5 kids, I saw my father start a business in the backyard mowing grass. Very simple, relatable thing. Most of us have mowed grass at some point in our life. And my father started that small business in our backyard and he used the great financial innovation of his time to buy his second piece of equipment, which he put on a MasterCharge. Great financial innovation and that helped him start a small business.
Now, that small business didn’t change the world, but it changed my brother’s and sister’s lives and put the 5 of us through college. That’s a meaningful thing and that is the American dream as my father defined it and as I define it. Now, that’s not creating Facebook. It’s not this other sort of revolution of internet technology, but it certainly made a huge difference in our community and for our family.
So, how did we utilize technology and help those small businesses like my father access and grow? The plight of small business in America though right now is real. The next generation of small business owners are struggling to get off the ground. The facts are that small business loans used to make up a majority of bank balance sheets. Now, 20 years— Well, in 1995, they were majority of the bank balance sheets. Now, it’s 20% of bank balance sheets.
Now, you also see small town America, which used to lead the country in small business starts, small counties, small communities across the country have lagged. So, smaller counties used to lead the nation in new businesses even as late as the 1990s, mid `90s. But just in this decade alone, small counties have lost businesses. U.S. counties with 100,000 people or fewer residents lost more businesses than they created. We see stagnation among small business owners and small business starts. This is why Fintech is so vital and so important. Technology is the only way to ensure that we spread and democratize capital outside of Austin, Boston, Silicon Valley, and New York.
How do we get the rest of the country, small town America, and even the urban areas that don’t get the focus and attention? And so, I think the power of harnessing big data is gonna fundamentally change the way we look at debt. It’s already happening. And you’re the leaders of it. Instead of relying on the credit score, which was a great innovation in the 1970s, fixed the problem in the 1970s, today, companies are using big data to better understand who will and who should qualify for loans. And what we’re discovering is that the way we help people out of debt is by understanding the data behind the debt.
Look at the way technology is fundamentally changing lives and places like Kenya. Think of this. In Kenya, the phone, your smartphone, our smartphone is that way to financial inclusion in Kenya. The movement of money cheaper in Kenya than it is here because of this simple device. It’s more powerful in that jurisdiction than in ours because of regulation and forward-looking regulation. And instead of loading buses filled with luggage that’s filled with cash in moving money in Kenya, they’re now doing it through a fast transfer over their mobile device. They’ve moved generations ahead overnight. And in fact, in many ways, they’re leading the world in Fintech deployment. So, we’re living in a new and exciting era in financial services. It’s actually matched the best interest of consumer protection with the demands of global smartphone-led revolution that we, as consumers, are driving. Now, that’s what’s happening in the real world.
So, let me translate back to you what is happening in the analog world of Washington. D.C. The regulatory challenges of Fintech are real. It’s major in Washington. We have a diversity of regulators. That’s certainly part of our American system. And that’s not gonna change any time soon. So, what is the current landscape? If you are in Fintech and you wanna make sure you’re complying with financial laws and regulations, where do you go? Who do you ask? Who do you talk to? Is there an open door in Washington? Do you know who your regulator is? Do you know who your regulator should be? Do they meet with you? Are they willing to meet with you? What’s your legal and compliance cost before you even get a product hashed out? These are major things you have to wrestle with in starting your businesses or growing your businesses. So, believe it or not, the difficult question is who do you talk to in Washington? And there is no simple answer. And because there’s so little clarity on which regulator to go to, often there’s even less clarity of how the underlying laws or regulations are being enforced by that regulator in this new marketplace.
And so, this is the hidden secret of Washington. The regulators themselves are so behind when it comes to understanding technology that they themselves do not really know how to apply regulation to innovations in Fintech. They just simply do not know. And trust me, I realize this as a legislator. 5 years ago, I helped craft what is called the JOBS Act. I wrote a piece of the JOBS Act. It resulted in 14 pages of legislative text around investment crowdfunding. 14 pages of legislative text. 3 years later, the Securities and Exchange Commission wrote 700 pages of regulation around my 14 pages of law. And if you are all involved in investment crowdfunding under Title 3 of the JOBS Act,— three of you, right— there will be a lot more had they written good regulation and actually complied with the mindset of Congress when we passed the JOBS Act.
So, I see this when regulators don’t actually know how to meet the demands of innovation and what’s happening in this information revolution that we have. And so, as a result, America is actually falling further behind the rest of the world. And unlike other areas of the world, which have created regulatory sandboxes for banks and technology companies to innovate and find a light-touch regulation, here in Washington or there in Washington, regulators are struggling to adapt.
And is it any wonder that Fintech has a distinctively British accent these days? It’s good reason. We have regulatory competition around the globe, but we don’t have the right regulatory competition here in the United States. And while we have a patchwork of conflicting, and overlapping, and confusing regulations, in places like the U.K., they’re creating an entire ecosystem of financial innovation and allowing it to flourish. And they become the model for the rest of the world and the intellectual property center for the rest of the globe when it should be here in the United States.
Well, while we’re all trying to figure out whether or not virtual currencies are more like property or money here in the United States, top countries around the world are using digital currency to move payment platforms overnight, change payment platforms, make it cheaper, more affordable to move funds for the smallest and the biggest. So, while the world’s rapidly adopting new financial technology to expand the middle class, our country’s regulators have created capital deserts here in the United States in rural and in urban areas. We understand the notion of an urban food desert. If you can get good food that is close to your home in an urban area, you can actually feed your children wholesome meals. We understand that. That’s a big discussion. Well, likewise, we’re starving off small business innovators in urban areas and let’s say less desirable zip codes in urban areas and less desirable zip codes in rural areas. And so, we’re starving off opportunity and that has a result in small business starts and the rise from the turn in the economy from those that are living on the margins to those that move up to the upper middle class and upper class based off being starved from capital.
We have to fix that. Fintech is the solution, but the regulation has to change. And that is something that I’ve been focused on over the last 6 years. And I think we have a trilogy of good ideas that I would submit to you this morning. First is let me just tell you my mindset in regulating and legislating. And to borrow from startup culture, the bills that I try to focus on are minimal viable bill. It’s a simple idea.
One idea that focuses on solving a discrete problem. Something in the marketplace that needs a regulatory fix in order to flourish. And it will help the greatest number of people and have the greatest impact on tech companies, bank startups, and small business folks and families. So, looking at the headache test, one of the areas of interaction with the government that’s creating unnecessary delay is the IRS not having a piece of technology that will allow people to verify income data.
And so, as a result of that, I’ve — legislation that is called the IRS Data Verification Modernization Act, 45060 for those of you who are in the game on this, but it simply will do this. It will automate a bottleneck manual process that is utilized via e-mail and fax with the IRS in verifying basic information that you, as lenders, need to allow mortgages, student debt, refinancing, and small business loans. It’s the taxpayer’s information. You pay for the service to verify it. We should have better service rather than the shoddy service IRS is currently giving you. You should be able to get this in an instant with an API rather than getting something faxed to you in 7 to 10 days. It’s absurd that the IRS can’t update and we’re gonna force them to update.
Our second bill, it goes directly to returning consistent uniform systems for our capital markets, which I believe is a fundamental thing in our 50-state regime with a variety of regulators. We have to have some base level of understanding on what is valid. And the bill is simple. It codifies the Valid-When-Made Doctrine that we’ve had in this country for nearly 100 years. And that was an established legal precedent prior to the Second Circuit Court’s decision in the Madden case. Madden versus Midland. And our view is the Second Circuit’s opinion was unprecedented. It’s created uncertainty for Fintech companies, banks, and the credit markets; making credit less available and more expensive. So, the simple fix is returning to the Valid-When-Made Doctrine. Congress under our constitutional system has the right to make this very clear to the courts of our intention when we pass the original law and nothing has changed when it comes to this. And this is the second bill that I’ll be pushing this year.
And finally, a third piece of legislation that is broader in discussion and it’s the Financial Services Innovation Act. This bill creates a new paradigm for regulators in Washington. It says in a first of a kind way, it forces regulators to meet the demands of rapid innovation in financial services. Instead of the old analog version of command and control regulation that’s messy and rigid based off of opinion, not fact, my bill requires agencies of jurisdiction to create offices of innovation that will engage with entrepreneurs and provide a regulatory on-ramp for financial innovation. It basically forces all the regulators, all the financial regulators to create a new door for financial innovation. A welcoming door. Come in with your ideas. Let’s talk about regulations that can enable this technology to flourish. And in getting data in return, the agency would be in permanent beta testing mode, which would give them data to prove out consumer benefit or consumer harm. It will give them data to adopt the whole footprint of regulation in all these financial regulators.
Now, that is a major mindset shift for our financial regulators, a major mindset shift for any regulator in our American system of governance. But with thorough analysis, I believe that innovators will be better off in this regime when you have data that is driving the decision making of regulators and regulators driving decisions that are informed rather than opinion based.
Now, saying that we’re gonna base our politics off of fact these days is its own enormous political challenge, but I think it’s important that we all agree facts are important things and we should base our decision-making solely on that set of facts in order to do the right thing for our country, the right thing for our economy, right thing for families, right thing for small business starts. So, permanent beta testing involves continuously evolving, testing, and proving. It’s what you do everyday as innovators.
Now, those are 3 major pieces of legislation that can have an impact, but the mindset in Washington is much— Well, it’s much different than you might think. Legislators are eager for new ideas, for new information. They’re eager to hear what you are about and what you’re doing. And given the nature and the speed of innovation, you have an obligation to be engaged in Washington. If you’re not engaged in Washington, Washington is still gonna be engaged in what you do. You’re just gonna get worse rather than better. So, if you inform decision makers you have data to backup what you’re expressing, what you’re advocating for, we’re gonna be better off, but you all in your pitches, right, have to— The basic startup pitch, you’ve got to answer one question. Why now? Why now? I think American financial innovation is at an inflection point. I really do. We’ll either lead the world in the next few years or we’re gonna be left behind. It’s our choice. It’s our choice. And it’s time that regulators treat innovation no longer as a threat, but as an opportunity to consumers. It’s time to recognize that regulators need to recognize— I think it’s time that they recognize that consumer protection and innovation are not mutually exclusive. Now, that’s the reason why it’s now, but it’s not gonna happen unless you engage in Washington and make your voices heard. You’ve gotta make your voices heard in order to get the results we need so we can have innovation flourish in this country, that we can be the market leader for the world, that we can be an exporter of these ideas rather than having to export ourselves to different markets in order to take that data and that mindset and deploy those resources globally.
Let’s make sure that we can lead this market to better and greater things. With your engagement, we can. Without your engagement, we’re gonna be left behind. So please, please engage in Washington. Make your voices heard. And with your voices being heard, I think we can have change for the better. So, thank you for your leadership. Thank you for the opportunity to be here with you. God bless.”
Upstart Raises $32.5M
March 6, 2017It’s been three years since we launched the Upstart lending platform, and today we’re pleased to announce we’ve raised $32.5M to take our business to the next level. The funding round was lead by Rakuten, a global leader in internet services and global innovation headquartered in Japan, and by a large US based asset manager. Existing investors Third Point Ventures, Khosla Ventures, and First Round Capital also participated. We’re particularly excited to have Oskar Mielczarek de la Miel, Oskar Miel, Managing Partner of the Rakuten FinTech Fund join Upstart’s Board of Directors.
With more than 50,000 loans originated, Upstart has the highest consumer ratings in the industry, has Net Promoter Scores (NPS) in excess of 80, and has delivered industry-leading returns to loan investors.
Leaders in Technology and Data Science for Lending
Upstart was the first platform to leverage modern data science and technology to power credit decisions, automate verification, and deliver a superior borrower experience. In 2014, we were first to launch next-day funding. In the last year, we virtually eliminated loan stacking on the Upstart platform, a central cause of credit issues in online lending. Today, more than 20% of our loans are fully automated, helping us attract the best quality borrowers with a superior experience.
As a result of our efforts, we’ve seen unparalleled credit performance, with 2016 cohorts our strongest yet. Upstart loans are funded in four distinct ways: 1) whole loan sales to institutions, 2) retention by Upstart’s originating bank partner, 3) sales to Upstart itself, and 4) via individuals in our fractional market. Furthermore, we expect our first loan securitization transaction within a few months.
2017 and Beyond!
We’ve focused considerable effort on our credit quality and loan economics, and the results speak for themselves. We aim to originate more than $1B in loans in 2017, and expect to reach cash flow profitability this year.
But that’s not all. We’re also thrilled to announce that Sanjay Datta has joined Upstart as CFO. Sanjay was formerly VP of Global Advertising Finance at Google, having spent a decade to help build and internationally expand Google’s $80B core economic engine.
Those that know my history at Google will understand why I’m excited to tell you about “Powered by Upstart”, a Software-as-a Service offering derived from Upstart’s top-rated consumer lending platform. From rate requests through servicing and collections, this new service brings modern technology and data science to the entire lending lifecycle.
Our beginnings
Anna, Paul, and I founded Upstart to bring the best of Google to consumer lending. Upstart was the first platform to leverage modern data science and technology to power credit decisions, automate verification, and deliver a superior borrower experience. In 2014, we were first to launch next-day funding. As of today, more than 20% of our loans are fully automated and we expect this percentage to increase significantly through 2017. With more than 50,000 Upstart loans originated, we have the highest consumer ratings in the industry and have delivered industry-leading returns to loan investors. With Net Promoter Scores (NPS) in excess of 80, we’re excited about the impact we’re having.
Technology partner
FinTech is disrupting all areas of financial services. As a leading tech platform in marketplace lending, Upstart aims to partner with financial institutions rather than compete with them. Given the pace of change in lending, technology partnerships will be critical in the years to come, and Upstart aims to be a partner the industry can rely on.
But “Powered by Upstart” is not just software – it’s a turnkey solution that provides all necessary document review, verification phone calls, fraud analysis, and (optionally) customer service, loan servicing and collections.
Software-as-a-Service in lending
SaaS has grown exponentially in the last decade because of its obvious virtues: rather than buying, installing, configuring, hosting, and supporting software yourself, the software is delivered over the cloud. It’s more reliable and always up to date. Delivering cloud software can be challenging in any industry. Usability, reliability, and performance are the minimum to play, and effective change management is critical to success. As the team that delivered Google’s SaaS platform before it was called “cloud”, we understand these challenges.
Of course, the regulatory environment in lending raises the bar even higher. We’ve long demonstrated our commitment to trustful and compliant lending, and we’re likewise committed to delivering robust and compliant lending software.
Bond Street Announces Renewal of Loan Purchase Agreement with Jefferies
February 15, 2017NEW YORK (February 15, 2017) — Bond Street, a leading online small business lender, announced the closing of a loan-purchase agreement with Jefferies that renews Jefferies’ prior loan-purchase agreement and expands the size of its loan purchases up to as much as $300 million. This agreement will facilitate Bond Street’s growth and help thousands of small businesses across the country access fair and affordable financing.
“Jefferies has been an outstanding partner and shares our vision for reinventing financial services through technology, data and design,” said David Haber, CEO & Co-Founder of Bond Street. “Jefferies’ continued loan purchases will expand our ability to support entrepreneurs at every stage of their growth cycle.”
Bond Street’s technology and extensive expertise in credit and risk management has enabled the platform to scale, while delivering both a superior customer experience to entrepreneurs and market-leading returns to investors. As a result of this exceptional track record, Bond Street has broadened its term product to include loans ranging from $10,000 to $1 million—a significant expansion from its original $50,000 to $500,000. Bond Street now offers the widest term loan range in the alternative lending industry.
“Supporting entrepreneurs beyond the transaction is the cornerstone upon which we build our technology,” said Peyton Sherwood, CTO & Co-Founder of Bond Street. “We aspire not only to provide seamless access to capital, but also to serve as a proactive financial partner to our customers. Through deep integrations into financial software platforms, we automate financial analysis during underwriting, and programmatically monitor the health of our portfolio over time – surfacing key insights and risks to help our customers succeed.”
Bond Street has raised over $400 million in lending capital since its founding. They are backed by leading investors such as Spark Capital and Homebrew, as well as individual investors including Nathan Blecharczyk (Co-Founder and CTO of Airbnb) and David Chang (Chef/Owner of momofuku).
About Bond Street
Bond Street is revolutionizing small business lending through technology, data, and design. Bond Street provides entrepreneurs access to simple and fair financing to sustain their long-term business growth. Bond Street offers one to three year term loans ranging from $10,000 to $1,000,000 with interest rates starting at 6%. Headquartered in New York, Bond Street was founded, in 2013, by David Haber and Peyton Sherwood. For more information, please visit www.bondstreet.com.
About Jefferies
Jefferies, the world’s only independent full-service global investment banking firm focused on serving clients for over 50 years, is a leader in providing insight, expertise and execution to investors, companies and governments. Our firm provides a full range of investment banking, sales, trading, research and strategy across the spectrum of equities, fixed income and foreign exchange, as well as wealth management, in the Americas, Europe and Asia. Jefferies Group LLC is a wholly-owned subsidiary of Leucadia National Corporation (NYSE: LUK), a diversified holding company.
The LendIt Story
February 12, 2017
The LendIt Conference was supposed to be a smallish local meetup for New York-based members of the online lending community. But founders Jason Jones and Bo Brustkern soon discovered they had the makings of a big annual industrywide national convention. And before long, they found themselves replicating their successful American show on other continents.
To understand how the trade show was born and how it’s matured, flash back about seven years. In 2010, Jones and Brustkern were putting together venture capital deals when they happened onto the fledgling peer-to-peer lending movement. “Consumer credit was something we weren’t all that knowledgeable about, but we could see the market was large,” recalls Jones. “There was a clear opportunity that was structural in the market, and there were stable, consistent returns.” So the two of them launched one of the first P2P funds.
Their lending business soon took off, but Jones and Brustkern felt they were working in a void. The industry lacked community, and they decided to do something about it. Jones contacted his friend, Dara Albright, who had been organizing a series of crowdfunding conferences for Wall Street starting in mid 2011.
To heighten the credibility of the new confab, Jones, Brustkern and Albright decided to seek the help of Peter Renton. They didn’t know Renton personally but considered him “the voice of the industry,” Jones says. Renton had nurtured and sold off two printing businesses and used the proceeds to take up online lending as a hobby. He had also launched the Lend Academy in 2010 to teach the world about peer-to-peer lending. Somehow, he had also found the time to develop a following for himself as a blogger.
In early January of 2013, Jones and Albright cold-called Renton to gauge his interest in putting on a show. As fate would have it, Renton had just made a New Year’s resolution to launch a conference for lenders and was receptive to joining up. Together, they put a plan in action.
The originators put up their own money and worked together daily from January to June of 2013, when the first show convened. They secured space that would contain 220 people and calculated their break-even point as 200 attendees. “This was never intended to be a profitable enterprise,” Jones says of those early days. “This was something we all wanted to do for the community. We thought that if we wanted it, others would want it.”
More than 400 people registered for that first conference. “We had a line literally out the door,” Jones notes. “We had to shut off registration. We ended up squeezing about 375 people into that first event. It was completely shocking to us.” From the beginning, attendees came from all over the world. “That’s when I learned China had a P2P industry,” Jones says.
After the initial event, Jones, Brustkern and Renton formed a unified company. Renton brought in Lend Academy, while Jones and Brustkern added their investment fund. The conference also became part of the united company. Ever since, a holding company has owned all three businesses. Dara went on to launch Fintech Revolution TV and continues to support LendIt.
From the initial attendance of 375, the U.S. conference grew to 975 attendees in 2014, 2,500 in 2015, 3,500 in 2016 and a projected 5,000 for this year. About 33 percent of attendees come from the fintech industry, 23 percent are investors, 23 percent are service providers, 14 percent are banks and 2 percent come from government, the media and other backgrounds, Jones says. At first, many of the attendees come from the ranks of CEOs and managing partners, but that’s changing as the industry comes to view the conference as an annual convention where lower-ranking members of an organization can learn about the business, he notes.
Meanwhile, the exhibition floor is becoming an increasingly important component of the show. The gathering attracted 18 exhibitors in 2013, followed by 47 in 2014, 112 in 2015, 177 last year and an expected 210 this year. “We’re transforming from a conference-led event to an expo-led event,” Jones says. This year, exhibitor booths will occupy a 120,000 square-foot hall in New York’s Jacob K. Javits Convention Center.
The U.S. LendIt conferences alternate between San Francisco and New York City, renting larger spaces as the show has grown, Jones explains. Two years ago, the gathering seemed cramped in the gigantic New York Marriott Marquis near Times Square, he says, necessitating this year’s move to the Javits Center. Javits is designed for conventions with at least 10,000 attendees so the show is a little small for that venue, he admits. But the facility could become LendIt’s long-time New York home as growth continues, he predicts.
Jones traces some of the growth in exhibitors to the expansion of the fintech industry. “You have a meeting of the start-ups with the more traditional players who are rethinking their businesses and how to apply the new technology that’s being developed into their businesses,” he says.
Conferences that compete with LendIt in the fintech category are proliferating because of the nature of industry, in Jones’ view. As soon as fintech companies are launched, the internet quickly makes them national or even international in scope, he says. At the same time, the anonymity of cyberspace creates a need for gatherings that provide face-to-face meetings, he maintains. “They live online,” he says. “The spend their year online so there is a need for a convention to meet with their peers, their clients, their service-providers, their customers, their suppliers. There is a need for that physical connection.”
The increase in fintech conferences is also driven by content-related companies that provide articles on fintech innovation. Those sites have regarded conferences as money-makers that complement their journalistic endeavors, Jones says. For example, TechCrunch, an online publisher of technology industry news, puts on the TechCrunch Disrupt conferences in San Francisco, New York City, London and Beijing. In another example, Business Insider conducts the IGNITION conference.
Those forces – the internet, globalization and web-based publishing – are making themselves felt in the convention business in general, not just in fintech, Jones notes. Event-related companies trade at roughly 12 times EBITDA (earnings before interest, tax, depreciation and amortization), he says, characterizing the convention business as “a very healthy category of our economy.”
Still, the fintech field’s crowded with more than 30 conferences, but LendIt is succeeding because of its early start and an emphasis on community, according to Jones. “We come from the industry,” he contends. “People are happy with what we can produce. They love our content so they come to learn.” Because the conference has become established, the media outlets focus on covering it, which encourages businesses to use it as a stage for introducing products or announcing mergers and acquisitions, he maintains.
Jones views LendIt and Money20/20 as the largest pure-play fintech conferences. The latter, which attracts 11,000 attendees, focuses on payments and contains a “layer” of fintech, while LendIt specializes in lending and likewise offers a “layer” of fintech, he says. Payments and lending represent the two biggest categories in fintech, so the structure of the shows makes sense, he suggests. By chance, Money20/20 occurs in the fall and LendIt takes place in spring, creating what he considers a “nice balance” that encourages prospective attendees to go to both shows.
Finovate holds a rival fintech conference that focuses more narrowly on innovation than do the LendIt and Money20/20 shows, Jones says. A competing bank securitization conference offers information on lending but doesn’t address fintech in great detail, he says.
While LendIt has been coming of age in the U.S., it’s also gained siblings in Shanghai and London. The Chinese edition of the show, which made its debut in 2014, ranks as the largest fintech show in Asia. The Chinese fintech market has grown to at least five times the size of any other market in the world, and it’s home to four of the world’s five largest fintech companies, Jones says. “We were completely blown away,” he says of learning about the industry during a visit to China.
Despite the language barrier and the challenges of dealing with an unfamiliar culture, LendIt has managed to prosper in China. Through a joint venture with a local financial think tank, LendIt helped produce annual Chinese events known as the Bund Summit for two years with attendance capped at 500. For the third year, LendIt parted ways with its partner and recast the show as a larger event. After the change, the confab, now called the Lang Di Fintech Conference, attracted 1,200 attendees, making it China’s largest. “There’s a ton of future opportunity,” Jones predicts of the China endeavor. “We want to be the annual convention for the Chinese fintech industry.”
Although it’s difficult to set up operations in China, cooperation has prevailed there in at least some areas. “The government has been quite supportive,” Jones says of of Chinese officials. “They appreciate what we’re trying to do there.” In January, LendIt launched its Chinese language daily news feed.
Thousands of miles away, the European-based LendIt confab ranks second in size on that continent only to the European version of Money20/20, Jones says. Attendance at the London-based LendIt show numbered 450 in 2014, which was its initial year. It climbed to 800 in 2015 and reached 925 last year.
Putting on the European event requires much less effort than the Asian version because it’s almost an extension of the U.S. original, he says. It’s dominated by firms from the United Kingdom but draws a smattering of companies from other European nations. Crossing borders presents challenges for European fintech companies, which keeps the industry’s companies smaller there than in the U.S. and China, but that may change, he believes. “There’s a lot of innovation there, but they still have a ways to go,” he says.
To handle its far-flung operations, LendIt relies on 20 full-time employees, 11 contractors and 10 people working in a joint venture in China for a total of 41 staff members. “These events are incredibly large shows, and we constantly feel understaffed,” Jones says. That feeling prevails despite recent additions to the staff, he notes.
And additional opportunity beckons in myriad locations. “The challenge is, do you have a bunch of conferences all over the world, or do you do a beachhead and pull people to those three events?” Jones wonders aloud when asked about the future. “For the moment, we have made the strategic decision to stick with these three events and go deeper with them. But there are so many opportunities all around the world. We’re constantly being asked to come to different countries.” Then, too, LendIt could convene smaller, one-day events around the glove as feeders to the three main conventions, he allows. “That’s something we’re batting around now.”
The established two-day conferences could also grow into three-day affairs – but not right away, Jones suggests. “We’re totally running out of time,” he says of trying to cram in all the speakers and exhibitors that LendIt would like to present. Stretching the format could create conflicts because some participants attend other events immediately before or after LendIt.
Notable LendIt speakers have included Larry Summers, who’s served as Harvard president and U.S. Treasury Secretary; Karen Mills, former administrator of the U.S. Small Business Administration; John Williams, president and CEO of the Federal Reserve Bank of San Francisco; and Peter Thiel, venture capitalist and member of the Trump transition team. This year, attendees can look forward to meeting the robot that represents Watson, the IBM computer. Watson will take the stage to field questions about fintech. For Jones, however, creating a conference isn’t just about the big-name speakers be they human or mechanical. “People who are lesser-known can be really fascinating,” he says.
Whoever handles the speaking duties, the LendIt Conference executives vow that they’re in it for the long run as the fintech industry’s annual convention during both boom times and economic slumps. As Jones puts it: “We want to be a reflection of our industry.”
Prosper Marketplace Appoints Usama Ashraf Chief Financial Officer
February 1, 2017
SAN FRANCISCO–(BUSINESS WIRE)–Prosper Marketplace announced today it has appointed Usama Ashraf as Chief Financial Officer. As CFO, Ashraf will oversee the company’s capital markets function, as well as all of the company’s finance activities. As head of the Capital Markets team, he will be responsible for expanding the company’s funding sources by bringing new investors onto the Prosper lending platform.
Ashraf brings more than 18 years of experience spanning corporate finance and global capital markets, including funding, securitization, financial reporting, planning, investor relations, balance sheet management, strategy, and mergers and acquisitions. He has held senior leadership positions at prominent financial services companies, most recently as Deputy Chief Financial Officer and Treasurer at Annaly Capital Management and Corporate Treasurer at USAA. Ashraf will start his new position at Prosper Marketplace on February 27.
“We’re thrilled to have someone with Usama’s experience and track record in finance and global capital markets join our team,” said David Kimball, CEO, Prosper Marketplace. “Usama will be instrumental in bringing new institutional investors onto the Prosper platform, including banks, as we continue to grow the platform in 2017.”
“I’ve watched the online lending industry with keen interest over the past year, and I have been impressed with Prosper’s resiliency and commitment to innovation,” said Ashraf. “I am a strong believer in Prosper’s mission to advance financial well-being, and I look forward to working closely with David and the Prosper team to take the business to the next level.”
Prior to joining USAA, Ashraf spent 13 years in the Treasury and Corporate M&A departments of CIT Group, most recently serving as Deputy Treasurer with responsibility for the firm’s Treasury activities in the U.S. Previously, he worked in the Investment Banking Division of Salomon Smith Barney/Citigroup focused on M&A. Ashraf received a BS in Economics with concentrations in Finance and Accounting from The Wharton School of the University of Pennsylvania.
About Prosper
Prosper’s mission is to advance financial well-being. The company’s online lending platform connects people who want to borrow money with individuals and institutions that want to invest in consumer credit. Borrowers get access to affordable fixed-rate, fixed-term personal loans, and investors have the opportunity to earn attractive returns via the platform’s data-driven underwriting model. To date, Prosper has originated over $8 billion in personal loans for debt consolidation and large purchases such as home improvement projects, medical expenses and special occasions. The award-winning Prosper Daily app offers essential tools to help people manage their financial wellness every day.
Prosper launched in 2006 and is headquartered in San Francisco. The lending platform is owned by Prosper Funding LLC, and Prosper Daily is owned by BillGuard Inc., both subsidiaries of Prosper Marketplace. Visit www.prosper.com and follow @Prosperloans on Twitter to learn more.
Contacts
Prosper Marketplace
Sarah Cain, 415-593-5474
scain@prosper.com
