CFPB’s Small Business Lending RFI is Now Closed
September 18, 2017The window to share your two cents on the CFPB’s quest to collect data on small business lending has closed. The extended deadline to respond to the RFI was September 14th.
The agency received 2,668 comments, 650 of which you can read online. Most responses that AltFinanceDaily reviewed asked the CFPB to exempt certain businesses such as community banks from the law. Others denounced the CFPB’s objective as misguided or poorly thought-out from the get-go.
Nevertheless, Section 1071 of the 2009 Wall Street Reform and Consumer Protection Act directed the CFPB to collect data on small business lending presumably to determine if women and minorities are treated differently.
Some observers expected this initiative to be derailed when Richard Cordray, the Director of the CFPB, resigned to campaign for Governor of Ohio. However, the governor’s race is now in full swing and he has yet to resign, and could now possibly remain in his position until it expires next year.
The implementation of any resulting rule from the RFI would likely not take place until some time in the 2020s, sources contend.
Catching Up With Marketplace Lending – A Timeline
August 13, 20175/17 – Funding Circle surpassed Zopa in cumulative lending to become the UK’s biggest marketplace lender
5/18 – Breakout Capital announced appointment of Douglas J. Lanzo as EVP and General Counsel
5/22 – The New York State legislature held a joint hearing on online lending
5/25
- OnDeck had the maturity date of its $100M credit facility extended
- China Rapid Finance reported Q1 net revenue of $10.5M
- Prosper Marketplace closed $495 securitization transaction
- SoFi co-founder Dan Macklin announced his departure from the company
5/31 – IOU Financial reported Q1 results, had $1M loss on $4.3M in revenue and lent (CAD) $22.1M
6/2 – Zopa began allowing investors to sell loans that have previously been in arrears
New York State legislators proposed the formation of an online lending task force
6/6 – AltFinanceDaily and Bryant Park Capital published their Q1 confidence index in which industry CEOs scored their confidence in the continued success of the MCA and small business lending industry at 73.8%, the lowest level since the survey started in Q4 2015. It peaked at 91.7% in Q1 2016.
6/8 – Amazon surpassed $3 billion in loans made to small businesses since their lending program launched
6/9 – RealtyMogul announced that they had exited the residential fix-and-flip market
6/12 – The US Treasury published a report that called for the repeal of Section 1071 of Dodd Frank
6/13
- SoFi applied for a bank charter, specifically an Industrial Loan Company charter
- Lendio announced a pilot agreement with Comcast business
6/14 – Patch of Land expanded its debt facility from $10M to $30M
6/19 – Goldman Sachs’ online lender Marcus surpassed $1 billion in loans made since inception
6/20 – Former Lending Club CFO Carrie Dolan joined Metromile, an insurance company, as CFO LendingTree acquired MagnifyMoney
6/21 – Pearl Capital secured $15M in financing from Chatham Capital Management
6/27
- Square Capital announced that it will pilot a consumer loan program
- Former RapidAdvance CFO Rajesh Rao became the CFO at Beyond Finance, Inc.
6/29
- Funding Circle hired Joanna Karger as US Head of Capital Markets and Richard Stephenson as US Chief Compliance Officer
- Pave suspended lending operations
- Ron Suber, president of Prosper Marketplace, announced that he was stepping down from the company
- The SEC announced that all companies will now be able to submit draft IPO registrations confidentially, a perk previously only reserved for businesses designated as “emerging growth companies” under the JOBS Act.
6/30
- PayPal Holdings Inc announced that it had invested in LendUp
- Yellowstone Capital announced that they had funded $47 million to small businesses in the month of June
7/3 – Funding Circle announced that Sean Glithero had joined the company as its new global CFO
7/5 – Lending Club appointed Ken Denman to its Board of Directors
7/6
- CAN Capital announced that they had been recapitalized and were resuming funding operations
- Orchard Platform and Experian announced a strategic collaboration on data
7/7
- CFPB announced that it was extending the deadline of its small business lending RFI from July 14th to September 14th
7/10
- China Rapid Finance announced that they had made 20 million cumulative loans since inception
- CFPB announced new arbitration rule that effectively bans class action waivers from consumer finance contracts
- Former OnDeck VP of External Affairs and Associate General Counsel Daniel Gorfine, was appointed by the Consumer Future Trading Commission to be Director of LabCFTC and Chief and Innovation Officer
7/11
- dv01 and Upgrade (Former Lending Club CEO Renaud Laplanche’s new company) announced a strategic reporting partnership
- PayPal hired former Amazon executive Mark Britto to lead its lending business
- Fora Financial expanded its credit facility led by AloStar
See previous timelines:
4/6/17 – 5/16/17
2/17/17 – 4/5/17
12/16/16 – 2/16/17
9/27/16 – 12/16/16
The CFPB is Asking The Wrong Questions, Bank President Says
July 13, 2017David Ludwig, the Bismarck branch president of Security First Bank of North Dakota, responded to the CFPB’s small business lending RFI earlier this week. In his written comment, he points out the futility of examining race, gender and ethnicity to judge how a lender is approving business loans. These data points are what the CFPB is hoping to gather pursuant to Section 1071 of Dodd-Frank to examine potential discrimination.
“The bureau appears to only want to know the applicants’ income, sex, race, amount of request and if the loan was approved or not,” he wrote. “Some people have less education, less ability, less equity and not so good credit history. These are not sex or race issues.”
Ludwig says there is no place for discrimination in lending and that if the CFPB was really interested in attributes about business owners that may be impacting their approvals, they should be asking about the owners’ work history, education, equity in the business, loan purpose and other related questions.
CFPB Pushes Back Small Business Lending Comment Deadline
July 7, 2017The CFPB has pushed back its small business lending comment deadline from July 14th to September 14th. The Request for Information is the first step of its initiative to monitor business loans to women and minorities, as directed by Section 1071 of Dodd-Frank.
Only 15 comments have been submitted so far, a number likely too small to even be helpful to the CFPB. Nonetheless, the comments have been overwhelmingly negative with respondents mostly asking to be exempt from the law or to repeal it.
The Director of Business Lending at a credit union for example, said that the law “puts our staff in the unenviable and unfair position of making an assessment of a borrower’s ethnicity when this information is not provided as if often the choice.” Between that and the cost burden of compliance, he also said his credit union is seriously considering the discontinuance of all small business lending going forward.
The total and complete discontinuance of small business lending is probably not what legislators wanted when they wrote the law.
Prior to that, the Puerto Rico Bankers Association questioned the value of spending big bucks to collect data on minorities when 99% of Puerto Rico’s residents are legally classified as minorities. “The potential complexity and cost of compliance with the minority-owned businesses data collection and reporting requirements of Section 704(B), will impose on our banks an unintended and unreasonable burden,” they said in their public comment.
Catching Up With Marketplace Lending – A Timeline
June 13, 20174/11 Regions Bank recruited Kabbage’s chief technology officer, Amala Duggirala, to become its chief information officer
4/12 Federal Reserve Published their 2016 Small Business Credit Survey
4/13
- Marathon Partners, a minority shareholder of OnDeck, publicly called on the company to make changes
- Fifth Third Bank partnered with Accion to support lending to underserved small businesses
4/17 Affirm surpassed the mark of making more than 1 million loans since inception
4/20 YieldStreet surpassed $100M in loans funded since inception
4/21 Glenn Goldman stepped down as Credibly’s CEO
4/25
- SmartBiz Loans announced partnership with Sacramento-based Five Star Bank
- CommonBond begins offering loans to undergrads directly
4/26 State regulators sued OCC over fintech charter proposal
4/28
- IOU Financial announced that they loaned $107.6M to small businesses in Q1
- China Rapid Finance announced their IPO
5/2
- Funding Circle closed their online forum
- Elevate’s Debt facility with Victory Park Capital increased from $150M to $250M
5/3
- Prosper Marketplace disclosed that it miscalculated returns shown to retail investors
- Square announced that they loaned $251M to small businesses in Q1
- Nav raised $13M from investors that include Goldman Sachs and Steve Cohen’s Point72 Ventures
5/4
- Vermont governor signed into law new licensing requirements for anyone soliciting loans to Vermont borrowers.
- Lending Club announced that they loaned $1.96B in Q1
5/5 Thomas Curry steps down as OCC head, replaced by Acting Head Keith Noreika
5/8
- OnDeck announced it was substantially reducing its workforce as part of its plan to achieve profitability. The stock price proceeded to hit record lows.
- Dv01 announced reporting partnership with SoFi
- With no IPO on the horizon, SoFi revealed that they began letting their employees sell some of their stock
5/9
- In the United States District Court, The Southern District of New York ruled that a purchase of future receivables was not a loan largely because it was not absolutely payable. Colonial Funding Network, Inc. as servicing provider for TVT Capital, LLC v. Epazz, Inc. CynergyCorporation, and Shaun Passley a/k/a Shaun A. Passley
- The value of 1 Bitcoin surpassed $1,700.
5/10
- CFPB announces that it will begin work on small business loan data collection pursuant to Section 1071 of Dodd-Frank.
- CFPB publishes a white paper on small business lending
- SoFi revealed that they will apply for an industrial bank charter
5/12 NY’s banking regulator sued the OCC over its proposed fintech charters
5/15
Prosper announced that they lent $585M in Q1 and had a net loss of $23.9M
5/16
- Media outlets reported that SoFi is expanding into wealth management
- Lending Club named PayPal’s former head of Global Credit Steve Allocca as President
- OnDeck’s share price hit a new all-time low
See previous timelines:
2/17/17 – 4/5/17
12/16/16 – 2/16/17
9/27/16 – 12/16/16
The CFPB’s Small Business Lending RFI Has Already Received Responses
May 28, 2017Three responses to the CFPB’s Request For Information on small business lending have already been submitted and here’s what they say.
Kent Franzen, a career banker, said that the law limiting an underwriter’s access to an applicant’s minority-owned or women-owned business status is “literally impossible.”
“Considering that in every small bank I have worked in or am otherwise familiar with the loan officer is the primary borrower contact, the loan data collector, the primary underwriter, the author of the loan documents, the notary public for collateral documents and the loan servicing agent. This requirement is literally impossible to comply with in a community bank.“
Franzen again in regards to what concerns does he have about the possibility of misinterpretations being drawn by regulators from the collection of data pursuant to Section 1071:
“[…]I am very concerned that the so called disparate impact analysis will be used as a persecution instrument against smaller institutions that present a political expedient target of opportunity. I point out the total absence of new bank charters since Dodd Frank was enacted as proof that the country has already amassed an amount of bank regulation that is slowly choking community banks. The only institutions that thrive under this crushing regulation load are those already too big to fail.”
Jayne Lovig, a loan officer, said this:
“Your request for business lending data collection is duplicating what we are already compliling and submitting to: USDA, SBA, CDFI (Community Development Financial Institutions), OFN (Opportunity Finance Network), and the Microenterprise Census Tracker. Your data collection will compound existing regulatory reporting burdens, and again, DUPLICATES WHAT WE ARE ALREADY PROVIDING TO FEDERAL LENDING AGENCIES. Why explore size standard approaches that are ALREADY defined with EXISTING agency reporting? By coming up with new definitions you will be adding unnecessary confusion. I suggest that since ALL the data you are requesting is ALREADY BEING REPORTED that you interface with the USDA and SBA (who have already “invented the wheel”) and compile the data from them electronically.”
And lastly, 13 trade associations penned a joint letter asking the CFPB to extend the RFI deadline from July 14th to September 12th to allow them adequate time to fully formulate their answers. Those associations are:
American Bankers Association
American Financial Services Association
Consumer Bankers Association
Credit Union National Association
Electronic Transactions Association
Equipment Leasing and Finance Association
Financial Services Roundtable
Independent Community Bankers of America
National Association of Federally-Insured Credit Unions
National Federation of Independent Business
Small Business & Entrepreneurship Council
Truck Renting and Leasing Association
U.S. Chamber of Commerce
Learn more about the purpose of this RFI (which is voluntary) here.
What You Need to Know About The CFPB and Small Business Lending
May 10, 2017
On Wednesday, the Consumer Financial Protection Bureau (CFPB) held a hearing on small business lending. Here’s why it mattered and what you need to know:
Why: The 2010 Wall Street Reform and Consumer Protection Act, aka Dodd-Frank, empowered the CFPB to collect data on small business lending. The CFPB is just now getting around to rolling this out. The purpose is to facilitate enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses. In short, to determine if women and minority-owned businesses are operating on a level-playing field when it comes to accessing credit.
Who: “I’m an MCA funder, factor, equipment lessor or other, and this only applies to lenders right”?
Maybe, maybe not. Although Section 1071 makes several references to loans and credit, it doesn’t refer to the companies subject to data collection as small business lenders. Instead it says financial institutions which it defines as “any partnership, company, corporation, association (incorporated or unincorporated), trust, estate, cooperative organization, or other entity that engages in any financial activity.” That sounds incredibly broad.
What: What are they trying to collect?
- the number of the application and the date on which the application was received;
- the type and purpose of the loan or other credit being applied for;
- the amount of the credit or credit limit applied for, and the amount of the credit transaction or the credit limit approved for such applicant;
- the type of action taken with respect to such application, and the date of such action;
- the census tract in which is located the principal place of business of the women-owned, minority-owned, or small business loan applicant;
- the gross annual revenue of the business in the last fiscal year of the women-owned, minority-owned, or small business loan applicant preceding the date of the application;
- the race, sex, and ethnicity of the principal owners of the business; and
- any additional data that the Bureau determines would aid in fulfilling the purposes of this section.
How: Great question. The law says that where feasible the underwriter or analyst isn’t allowed to know if the business is woman-owned or minority-owned and that this information must be captured separately and kept secret from the underwriter. The section is actually called the “NO ACCESS BY UNDERWRITERS” section. Oddly, as this applies to all small business lending, not just faceless transactions, one wonders how an underwriter is supposed to avoid discovering the gender or ethnicity of the applicant. It is possible that in 2009 when this section was drafted, the architects could not imagine a business lending universe that looked beyond FICO scores and balance sheets.
When: It’s still early days. Right now the CFPB just wants to know everything about what these “financial institutions” do and how they do it before they start requiring the data be collected. To that end, they’ve published a Request For Information, seeking voluntary responses so that they can start formulating the data collection framework in a way they believe best.
Where: Where can you read and watch more about this? We’ve got some information on this page here, including a video of the hearing.
What should I do? Should I do anything?
Join an industry trade association. When it came to the proposed regulation in New York, they did most of the heavy lifting. There are many to choose from depending on your business model. In New York though, the regulations were purely proposed. Under Dodd-Frank, the CFPB already has the power to collect data. They’re just finally getting around to using it.
For Factoring, Different Spin, Same Issues as MCA
April 10, 2017
They called it the 2017 Factoring Conference, but an MCA professional would’ve hardly noticed. On the agenda was news about Dodd-Frank’s Section 1071, the now-dead NY lending legislation, usury litigation, confessions of judgment, stacking, fintech and gripes about brokers. And yet factors and MCA companies still largely live separate lives.
The underlying differences between the two industries are as much cultural as they are contractual. The International Factoring Association’s directory reports having nearly twice as many members from Texas as they do from New York. They also list having more members from Utah than they do New Jersey. Compare that to our own readership at AltFinanceDaily in which website visitors and magazine subscribers are most heavily concentrated in New York, California, Florida and New Jersey. Texas ranks 8th for subscribers and Utah is much, much farther down. And while purely based on my unscientific observation, I’d wager a bet that the average age of a factoring company owner is at least a decade older (probably much more) than the average age of an MCA company owner.
Differing philosophies between the two industries are perhaps exacerbated by this generational and demographic gap.
On a fintech disruption panel at the factoring conference last week, Pearl Capital CEO Sol Lax told attendees that the MCA industry was not only innovative but ultra competitive. “You either need to evolve or become a phone booth,” he said. Other panelists explained that today’s average small business is focused on speed and simplicity and that they’ve built their models around that.
But factoring has survived the test of time. In the latest issue of The Commercial Factor, Jeremy B. Tatge traces the first factoring agreement in America to 1628. “This spirit has endured and survived wars of independence, such as the American Revolution, two World Wars in the Twentieth Century, and even down to the present day (NATO being but one of many examples),” he writes.
Will technology finally break that spirit or will today’s stereotypical young MCA company owner from New York and Florida eventually find themselves becoming older, wiser, and ready to lay down roots in the midwest? Will they trade the Las Vegas conferences for honky tonks in Cowtown?
I don’t believe that such a transition even has to happen. Whatever differences the two industries have, they are united by common causes and issues and can evolve together.
