3 FINTECH NEWS STORIES
#1: Boom!
What happened?
Boom, a financial services platform for renters and property managers, launched a new product:
Built to tackle the complexities of modern tenant screening, BoomScreen features unparalleled configurability for your portfolio.
We built BoomScreen because property managers, like you, told us they needed more than a one-size-fits-all approach to underwriting applicants. We listened—and now, with configurable scoring criteria, application templates, and flexible screening settings, BoomScreen is enabling property managers to underwrite smarter, move in the best renters faster, and improve operating income.
So what?
This is interesting.
Think of BoomScreen as a combination of a mortgage point-of-sale (POS) system, a mortgage loan origination system (LOS), and a consumer reporting agency (CRA), but entirely focused on tenant risk evaluation.
The product provides a front-end interface for prospective tenants to apply and upload required documentation. It provides a back-end data acquisition, workflow orchestration, decisioning, and case management platform for underwriting applications. And Boom acts as a CRA under the Fair Credit Reporting Act (FCRA), generating adverse action notices for declined applicants and handling all consumer disputes.
The product looks compelling and is a nice complement to Boom’s first product (rent reporting). With the combination of the two, Boom has multiple paths to start working with property managers, as well as a longer-term potential to capture and monetize opportunities in data (as a CRA, could Boom evolve into a fully-fledged competitor to the traditional credit bureaus?) and cross-sell (imagine a neobank using Boom to help its customers find and apply for new, cheaper housing directly within their apps).
#2: Is Fractional Reserve Banking a UDAAP Violation?
What happened?
The CFPB is suing Capital One for “cheating” customers out of interest on savings accounts:
The Consumer Financial Protection Bureau (CFPB) sued Capital One, N.A., and its parent holding company, Capital One Financial Corp., for cheating millions of consumers out of more than $2 billion in interest. The CFPB alleges that Capital One promised consumers that its flagship “360 Savings” account provided one of the nation’s “best” and “highest” interest rates, but the bank froze the interest rate at a low level while rates rose nationwide. Around the same time, Capital One created a virtually identical product, “360 Performance Savings,” that differed from 360 Savings only in that it paid out substantially more in interest—at one point more than 14 times the 360 Savings rate. Capital One did not specifically notify 360 Savings accountholders about the new product, and instead worked to keep them in the dark about these better-paying accounts. The CFPB alleges that Capital One obscured the new product from its 360 Savings account holders and cost millions of consumers more than $2 billion in lost interest payments.
So what?
I put the term “cheating” in quotation marks because, as Matt Levine already pointed out, this is how fractional reserve banking (in which banks take in deposits that can be withdrawn at any time and lend them out through structured repayment arrangements … a process known as maturity transformation) works.
Banks will use dry, technical-sounding terms to describe this strategy, such as “deposit franchises” and “deposit betas,” but those are essentially code for “we have lazy customers who won’t constantly monitor our interest rates, and thus we can take advantage of them when rates change to maximize our revenue.”
It’s not very nice, but it’s very much how banking works (and I say this as a former Capital One savings customer who lost out on quite a bit of interest myself when rates went up).
Clearly, the CFPB disagrees. This may be how banking has historically worked, but it’s not (the bureau argues in its complaint) the way that banking should work. It’s not fair.
This poses some interesting questions:
- Are all commonly accepted business strategies from the world of fractional reserve banking now UDAAP violations? When banks don’t lower the interest rates on their lending products as fast as the Fed, are they cheating their customers out of potential savings?
- Should the CFPB care about the ability of banks to make money? The prudential bank regulators (FDIC, Fed, OCC, NCUA) certainly do. Their job is to ensure a stable financial system. The CFPB under Rohit Chopra has, by contrast, been very focused on cracking down on banks’ ability to make money. We’ve seen this in their war on junk fees, their pursuit of lower bank switching costs (via open banking), and now this suit against Capital One. Is this the proper role of the CFPB? Or should it care (at least a little bit) about the stability of the financial system in addition to protecting consumers?
- Should more restrictions exist on consumers’ ability to take money from savings accounts? There used to be, under Reg D, but the Fed removed those restrictions during the COVID-19 pandemic and never put them back. Should they? Should we go further? In a world where account switching is becoming more technically feasible (all money will be hot by default!) and some regulators are concerned about the fairness of deposit pricing strategies, perhaps all savings products should look more like certificates of deposit (CDs). Perhaps our framework for deposit stability needs to be based more on contractual constraints and less on assumptions about depositors’ preferences and behaviors.
The chances of the CFPB winning this lawsuit (or even continuing to pursue it) seem small, but we shouldn’t let that prevent us from wrestling with these bigger questions.
#3: Portfolio Lending Is Slowly Dying
What happened?
WaFd Bank, a $28 billion bank based out of Seattle, is exiting the single-family mortgage lending business (a business it had been in for more than 100 years):
[WaFd CEO Brent] Beardall, in a Thursday post on LinkedIn, called it “one of the most difficult days I have had as CEO.”
“I am deeply saddened for the impacted employees and their families, but I am proud to work for a bank strong enough to acknowledge when the world has changed and bold enough to pivot [accordingly],” Beardall wrote in the LinkedIn post.
“Home loans are seen as a commodity with nearly 70% of originations sold to US government sponsored enterprises like Freddie Mac and Fannie Mae, which has caused profitability to decrease and credit risk to increase.”
Further, refinancing – which technology has made simpler for consumers – raises interest rate risk for banks holding mortgages, Beardall said.
So what?
WaFd was a portfolio lender, meaning that it kept the mortgages that it originated on its books rather than selling the conforming ones to the GSEs. However, as WaFd’s CEO indicated in his comments, portfolio lending is becoming an increasingly unworkable business.
According to data from the Urban Institute, as of late 2023, around 26% of all U.S. mortgages originated from portfolio lenders, down from 37% in 2019. The primary reason for this steady decline is (no surprise) the combination of interstate banking and the internet.
Community banks are the primary practitioners of portfolio lending. They originate and service mortgage loans as part of their broader relationship-based banking strategy, which depends on building deep relationships with a narrow and difficult-to-reach customer base. The fact that mortgage loans are, for the most part, a commodity product doesn’t matter to portfolio lenders, as long as they have a differentiated strategy for acquiring and retaining customers.
Obviously, the combination of interstate banking and the internet completely upended portfolio lenders’ acquisition and retention advantage. Now, any consumer living in any small town in America can (and, for the most part, does) use the internet to find and obtain the lowest price mortgage, and, whenever interest rates go down, the lowest price mortgage refinance loan.
This evolution has been great for non-bank mortgage lenders like Rocket, which depend entirely on the securitization market. And it hasn’t been terrible for the largest banks, which also lean heavily on securitizations and have large, diverse business models that can adapt to changing market dynamics.
However, it has been a body blow for regional and community banks, which often lack the resources and sophistication necessary to capitalize on the mortgage securitization market the way that their bigger competitors do.
All that said, here’s the most important question — is this evolution good or bad for the market overall?
I don’t know.
In general, the shift to digital mortgage lending dominated by non-bank specialists would seem to encourage efficiency, convenience, and better pricing for borrowers, all of which sound good to me!
However, I do wonder if there is a subtle benefit to the old school originate-and-hold model of portfolio lending that we’re not appreciating. Is it possible that community banks’ ability to make a premium on low-risk, conforming mortgages helped to offset some of the unknown or difficult-to-quantify risk posed by first-time and non-conforming borrowers?
2 FINTECH CONTENT RECOMMENDATIONS
#1: Credit scores are hazardous to your financial health (by Sheila Bair) 📚
The theme of today’s content recommendations is “but what if Alex is wrong?”
I disagreed with Sheila Bair’s original tweet on this subject, but given the disparity between her and I’s resumes (which is obviously massive), I figured it was appropriate for me to share with you her longer-form argument for why the FICO Score is a scourge.
I still don’t agree with her, but to each their own!
#2: New CFPB rulemaking makes no distinction between custodial and self-custody wallets (by Peter Van Valkenburgh, Coin Center) 📚
In a recent newsletter, I argued that the crypto industry should embrace the responsibilities of the Electronic Funds Transfer Act (as the CFPB says that they must) because that’s what you do if you are in the payments business and are serious about earning and keeping customers’ trust.
This argument from Mr. Van Valkenburgh is a fair counterpoint to my argument, as it focuses on the potential application of Reg E to self-custody wallets, which the CFPB’s proposed rule does not clearly include or exclude from its scope.
He makes a good point! Including self-custody wallets in the rule might not make sense. The EFTA was signed into law in 1978, quite a few years before decentralized finance was a thing!
1 QUESTION TO PONDER
What consumer protections, if any, should apply to self-custody crypto wallets?
