KT Fintech Blog

The KT Fintech Blog provides insights into how the emergence of fintech is fundamentally changing virtually every aspect of the financial services landscape and how traditional businesses navigate this rapidly evolving industry.

Category: Compliance

Posted on Tuesday, September 26 2017 at 9:00 am by
Acting Comptroller of the Currency Discusses Marketplace Lending and Responsible Innovation

Written by Eamonn Moran

Acting Comptroller of the Currency Keith A. Noreika discussed online lending and responsible innovation at the 2017 Online Lending Policy Summit in Washington, D.C. on September 25, 2017. His remarks shared his perspective on the opportunities and challenges facing online lenders and efforts to promote economic opportunity.

With respect to the emergence of online lending, Mr. Noreika observed that he sees the growth of online lending and marketplace lenders as “the natural evolution of banking itself,” rather than a response to the nation’s banking industry not being sufficiently agile to fully meet lending needs. He noted that online lending a certain entrepreneurial spirit to seize economic opportunity that begins with a new idea (such as leveraging the lending power of groups, using new data to assess creditworthiness, finding a way to make decisions faster, or giving consumers more control of their financial lives), which in turn becomes a business through “[s]weat and talent” and product delivery.

In terms of the growth of marketplace lending, Mr. Noreika noted that over the last decade, “marketplace lenders have originated about $40 billion in consumer and small business loans in the U.S.,” and that “[o]nline lending has doubled every year since 2010.” There remains a difference of opinion within the analyst community in terms of how large this market will grow – some analysts suggest that the market will reach nearly $300 billion by 2020, and others suggest as much as $1 trillion by 2025 (which, according to Noreika, “would be a substantial piece of all outstanding unsecured consumer credit in the United States, which alone was $3.7 trillion at the end of 2016”).

While Noreika observed that overall delinquency rates in the country have declined “steadily since 2012, with minor increases in credit card, auto, and student lending delinquencies in the last year, and the consensus expects the economy to expand through 2018,” he cautioned that there has been an increase in consumer unsecured charge-offs for marketplace lenders since the fourth quarter of 2015. “It remains to be seen how online lending companies and loans originated using new models will perform under stress,” he commented.

Regarding “regulatory sandboxes” and bank pilots, Noreika stated that the OCC “generally supports agency participation in bank pilots as a useful way to gain valuable regulatory insight and to provide banks a better means of developing products and services in a controlled environment. However, any program we pursue will be voluntary for banks and cannot provide a safe harbor from many compliance requirements. We are still in the early stages of developing our approach and will share additional details as we make progress.”

In addition, he stated that the OCC remains undecided as to whether it will use a particular statutory authority to issue special purpose national bank (SPNB) charters to nondepository fintech companies engaged in the business of banking, but the agency will continue to defend its authority in any litigation challenging such.

Noreika remains “very optimistic about the power of innovation to improve banking, expand access, and deliver better products and services in more affordable and sustainable ways.” He credited the innovation as coming from both within the banking system itself, and from outside the system (including from marketplace lenders). As the marketplace lending industry continues to grow, Noreika noted that some companies would like to become a bank and many others are choosing to partner with banks, while others are pursuing different paths. “Whatever business model and long-term path you choose to achieve your business goals, the future is bright. You are changing how financial services are delivered, and in some ways, you are raising the bar for what consumers of financial services should expect. The market domestically and internationally has plenty of room to grow, and today in Washington there is real energy around reducing unnecessary regulatory burden and promoting economic opportunity. Those are good reasons to be optimistic,” he stated.

Posted on Thursday, September 14 2017 at 9:00 am by
CFPB Issues First No-Action Letter To Marketplace Lender

Written by Eamonn Moran

On September 14, 2017, the Consumer Financial Protection Bureau (CFPB or Bureau) issued its first no-action letter to Upstart Network, Inc., a company based in San Carlos, California that provides an online lending platform for consumers to apply for personal loans, including credit card refinancing, student loans, and debt consolidation. Upstart evaluates consumer loan applications using traditional factors such as credit score and income, and incorporates alternative data (non-traditional sources of information) such as education and employment history in making credit and pricing decisions.

According to the CFPB, the objective of the no-action letter program is to “facilitate consumer-friendly innovations where regulatory uncertainty may exist for certain emerging products or services.” The CFPB’s Project Catalyst, an initiative designed to encourage consumer-friendly developments in the consumer financial marketplace, facilitates the no-action letter program.

Under the terms of the no-action letter issued by Bureau staff, Upstart will regularly report certain information to the CFPB regarding the loan applications it receives, how it decides which loans to approve, and how it will mitigate risk to consumers, as well as information on how its model expands access to credit for traditionally underserved populations. The CFPB states that it “expects that this information will further its understanding of how these types of practices impact access to credit generally and for traditionally underserved populations, as well as the application of compliance management systems for these emerging practices.” The no-action letter expires three years from its issuance, but the company may seek a renewal.

From a compliance perspective, the CFPB’s no-action letter signifies that Bureau staff has no present intent to recommend initiation of supervisory or enforcement action against Upstart with respect to the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B, as they specifically relate to the company’s model for underwriting and pricing applicants as described in the company’s application materials. The CFPB cautions that this no-action letter is specific to the facts and circumstances of Upstart and “does not serve as an endorsement of the use of any particular variables or modeling techniques.”

This action marks an additional step in the CFPB’s exploration of the use of alternative data to help make credit more accessible and affordable for consumers who are credit invisible or lack sufficient credit history. In February 2017, the CFPB issued a request for information to solicit information concerning the use of alternative data (which could include things such as bill payments for mobile phones and rent, electronic transactions such as deposits and withdrawals, and other information that may be less closely tied to a person’s financial conduct), modeling techniques in the credit process, and the use of emerging technologies for underwriting.