Saturday Cup of Joe: a lending and techish newsletter

Friends & Colleagues:

Good Morning! Happy Independence Day weekend. I hope you have a long weekend filled with family, friends and fun. This can be the last time we think about work for a few days. Hopefully there’s something in here of wider interest too. Thank you for the feedback on the Saturday CoJ. It’s been great hearing from everyone and trying to make this something that is interesting for me and adds value to your day as well. With that…

Of Interest: This week CFPB announced an order against BancorpSouth for violations of the Fair Housing Act and Equal Credit Opportunity Act. The lender will pay $10.6 million in fines, restitution and penalties. While it appears at first glance to be a fair lending and redlining case (and it is), there are some highlights that are worth our time. First, there is the first (confirmed by CFPB) use of mystery shoppers to investigate a claim of discrimination. Second, there are abnormal (or what I hope are abnormal) practices that I feel like are worth highlighting. These issues fall into 2 categories — bank policy failures and bank personnel failures.

Bank policy failures:

  • The bank allowed loans being underwritten for the bank’s portfolio to be priced and decisioned by individual bank employees (usually the LO) without standard guidelines
  • Bank allowed executives to define their own lending areas and then declared loans outside those areas “undesirable” in their policy
  • The loan officer population was 96.5% white (the bank’s states/areas where generally 50% minority)
  • The bank was given 2 reports from consultants recommending more branches in Memphis and was shown data indicating the fair lending patterns were below their peers for and the bank did not act on the information
  • The combination of discretion without monitoring when less restrictive alternatives (i.e. technology) existed was an issue
  • No documentation for denial or pricing decisions on individual loans was maintained

Bank personnel failures:

  • Audio of bank meetings was obtained by the CFPB were an all-white management team described being fearful of lawsuits by minority communities and limiting resources to minorities for fear of increasing complaints
  • Audio included one white bank manager saying “They should stop paying their damn bills late.”
  • Another meeting of all white employees included the use of the n-word and laughter
  • When the mystery shoppers approach various branches, the shoppers were given different estimates, quotes and recommendations
  • Branches did not treat mystery shoppers consistently among the branches
  • In one case, a loan officer recommended a realtor, a nice neighborhood and good schools to the white shopper and the same loan officer failed to provide the same recommendations to a minority shopper

3 Takeaways: You don’t need a law degree to draw takeaways on this case, that’s for sure. But I do think there’s still some valuable intel here.

  • The CFPB made the clear statement that discretion without equally strong monitoring is going to cause a problem. Where automation, technology or “less discriminatory alternatives” exist, the expectation is that we’ll employ them.
  • I think it is important to note the use of mystery shoppers. Here, CFPB utilized shoppers in response to a specific allegation. Though, it seems proactive mystery shoppers are also likely in the near future (if not already in use).
  • When confronted with questions or allegations, the bank had zero documentation of decisions or thought-processes to fall back on. (As always, the advice is document, document, document.)

Have you heard?: FHFA opened comments on allowing credit risk sharing sales for newly originated loan pools. According to some industry sources, this is a step in the right direction for the GSE’s transition from present state to future state. Granted it’s a small step but it’s a long way till the next administration anyway. The request for comment shows things are moving in the right direction.

Got Me Thinking: Ginnie Mae passed Freddie Mac in total outstanding balance of MBS issued. As of May 31, Ginnie issued $1.624 trillion. Curiously this week also saw several articles about whether large banks were exiting FHA business. If so, there’s no indication the market, as a whole, is losing demand for FHA products. As large banks exit FHA lending, you might expect to see a decrease, especially initially in FHA business, as customers look for other sources of FHA loans. On the other hand, non-banks continue to take market share, overall, which naturally includes FHA lending in some part. It is an interesting time to be watching these trends. Large banks are contending with Basel III capital requirements, risks associated with DoJ lawsuits, and competition from non-bank and marketplace lenders. Non-banks are contending with the increasing cost (and risk) of making loans but seem better situated (I know that will get a comment from Thanh) and more willing to engage in FHA lending. Perhaps the Ginnie Mae securitization milestone is more a sign of the rise of non-banks than anything else.

A Look Ahead: Fast forward 90 days. The UK has no way of undoing the troubling Brexit vote, Britain has a new Prime Minister, and the global shifts in finance, talent and other economies are underway. If true, this Monday’s Wall Street Journal article may be the first story in a line of many. According to WSJ, London was a critical partner in payment transfers, payment methodology, and talent management within Fintech companies. Since a subscription is required to access the full article, here’s a quick highlight:

“Europe is a key region for payments experimentation, with licenses allowing technology upstarts to make digital transfers across borders, a contrast to state-by-state regulation in the U.S. Several fintech firms such as TransferWise Ltd., Klarna, PayPal Holdings Ltd. and Circle Internet Financial Ltd. do business across the EU.

But the U.K.’s exit from the EU could add hurdles and disrupt discussions about how upstart firms and technologies can work with incumbent banks and networks.

“Nothing’s changed yet, but everything’s changed,” wrote Taavet Hinrikus, chief chief executive and co-founder of TransferWise, a London-based cross-border payments startup, in an email. “This is likely to affect regulation and the movement of talent: two massive issues for business.”

The “Brexit” vote has “plunged Britain and the rest of Europe into the unknown,” said Erik Engellau-Nilsson, global head of communications at Klarna, a Stockholm-based fintech firm. “A lot of fintech peers are thinking about moving to Germany, removing the uncertainty of being based in London.”

In some ways this could be good for the US fintech market as well, since capital and talent will be looking for stability. We might see a flood of Brits and other Europeans to NYC and San Francisco instead of Germany.

Sidenote: Found an interesting article on partisan marriage this week. The blog FiveThirtyEight investigated the numbers. For those of you not familiar with FiveThirtyEight, it is the brain child of Nate Silver, formerly of The New York Times, and moved to Grantland under Bill Simmon’s direction before moving to ESPN.com once Grantland ceased operations. One of the highlights that goes beyond politics (or sports) is where individual data falls short and what data can help us understand communities and households. Here’s a quote:

“Individual data and geographic data do not capture the essential networks in which we all live — households and friendships and communities. But other and newer kinds of data — such as voter files that connect individuals to their households or network data that capture online connections — revolutionize how we understand politics. By the end of this election cycle, expect to see many more discoveries about the social groupings that define our lives.”

How much more are we about to learn about our customers and our consumers given the rapid expansion of data collection and analysis? I don’t know but I predict within a few years we’ll be able to tell who you are and what you watch/listen to/buy/consumer, etc. from the data available online and within individualized network data like this.

Today’s Thought: What you focus on, you’ll find. Ever have an experience where you ended up saying, “I’d never heard of that before and now I’ve heard about it 3 times this week.” Sometimes it’s a great book or movie that’s sweeping the country. More often than not it’s because you are focused on that idea or that concept. When we’re thinking about something, we are more likely to “find” it everywhere. This is the basis of Scott Adams’s theory that you should write down what you want to be or what you want to accomplish, physically write it down, 200 times a day until you internalize it/own it/accomplish it. The point is less about the writing and more about the focus.

As leaders we’ve all heard the maxim, you get what you measure. It’s the same basic idea. If you are measuring it, then you are forcing your staff to focus on it. Then, they find it. Whatever “it” is for you in your organization this week, focus on it and you’ll find it.

Continued success,

Written by

Thinker, curious leader, once an attorney…always trying to answer well.

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