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Blue Ridge "Explores Options" For Capital Raise As It Reduces BaaS, Fintech Exposure
WI & CA EWA Updates, Plaid Launches CRA Subsidiary, Enova Fined (again), FDIC Finalizes Special Assessment Amid "Toxic" Workplace Fallout
Hey all, Jason here.
The holiday season is nearly upon us! I’ve already ordered my turkey — given Thanksgiving isn’t a holiday here in the Netherlands, you can’t typically find one at your local grocery store. Jury is still out on whether or not I’ll include mac & cheese as a side dish this year!
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Blue Ridge “Exploring Options” For Capital Raise As It Reduces BaaS, Fintech Exposure
Blue Ridge Bank, which has been a major player in the banking-as-a-service space, is looking to reduce its fintech exposure as the fallout from its 2022 OCC consent order continues to reverberate.
The bank’s recently released 10-Q revealed a new requirement from its regulator: that Blue Ridge maintain a leverage ratio of 10.00% and total capital ratio of 13.00%. Per the 10-Q filing, the bank currently has a total risk-based capital ratio of 10.93%.
Blue Ridge notes in the filing that “[a]s of September 30, 2023, the Bank did not meet these IMCR requirements, which could subject the Bank to additional regulatory requirements or directives, including developing and maintaining capital plans, asset sales, limitations on growth, further regulatory sanctions and/or other regulatory enforcement actions.”
Faced with the heightened capital requirement that Blue Ridge currently does not meet, it is “exploring options for raising additional capital.” (More on this in the always excellent Bank Reg Blog here.)
According to the company’s investor presentation, it had approximately 50 “sub-partners (BaaS)” as of the end of October.
Blue Ridge intends to offboard smaller partners and to limit those with “high account volume and/or small deposit balances per account” in order to “reduce significant compliance oversight.”
As compliance expectations and costs have increased, the risk/reward calculus for working with smaller fintech programs has shifted.
Given the cost of BSA/AML compliance is correlated with the number of accounts and transactions, it makes sense that Blue Ridge would focus on retaining a smaller number of fintech partners that drive a significant share of its BaaS program’s economics.
Just three fintech partners — all of which focus on business users, rather than retail — comprise 7.7% of the bank’s overall deposits and nearly 30% of its fintech-related deposits:
Blue Ridge isn’t the only BaaS bank that is de-risking by offboarding smaller and/or higher-risk programs, while seeking to retain larger programs that drive the bulk of the economics by bringing cheap deposits, fee income, and lending opportunities.
Recent weeks have seen Evolve Bank & Trust poach Mercury from troubled middleware platform Synapse, as first reported by Fintech Business Weekly, and Coastal Community seek to slim down its fintech portfolio, per reporting in The Information.
While a logical move for the banks, an industry-wide change in risk tolerance is likely to mean smaller fintech programs, especially those serving niche and lower-income retail users, find it increasingly difficult to find a bank partner willing to work with them.
Earned Wage Access Regulatory Update: California & Wisconsin
Individual US states are increasingly moving to regulate earned-wage access (EWA.)
On the one hand, this is a positive for EWA providers, as it legitimizes the category and providers some level of clarity around regulatory expectations and how their products will be treated.
On the other hand, state-by-state regulatory regimes for financial products are somewhat of a nightmare, as they generate significant compliance overhead and may require tailoring products to the requirements of each jurisdiction.
Just ask any company that maintains money transmission licenses (MTLs) or lenders that operate on state lending licenses: it’s an administrative and logistical headache.
In recent weeks, the California DFPI revised its previously proposed rule that would govern EWA, and the Wisconsin legislature rolled out its own bill.
California DFPI Releases Updated Proposed Rule
This spring, the California financial regulator, the Department of Financial Protection and Innovation, proposed regulation that would, among other things, govern EWA products.
Notably, California is taking a different approach than other states by seeking to explicitly treat such advances as “a sale or assignment of wages and a loan” subject to the California Financing Law (CFL.)
The proposed regulation would also define voluntary or optional payments, including so-called “tips,” as a “charge” under California law:
A voluntary or optional payment, including, without limitation, a tip or gratuity, paid by a borrower to a licensee or any other person in connection with the investigating, arranging, negotiating, procuring, guaranteeing, making, servicing, collecting, and enforcing of a loan or any other service rendered, is a charge under Financial Code section 22200.
California’s move to define EWA as a “loan” and associated payments as “charges” has no bearing on federal law and regulation — like TILA Reg Z — which the revised proposed regulation states explicitly by saying (emphasis added):
This section shall not be read to interpret what is considered a wage assignment under the Labor Code, consumer credit under the federal Truth in Lending Act (15 U.S.C. § 1601 et seq.), or a loan or forbearance of money under the California Constitution, article XV, section 1.
However, there remains concern about how the proposed EWA regulations will intersect with other state lending laws, particularly those limiting permissible APRs on small loans in the state.
By defining EWA as a “loan” subject to the CFL and “tips” and other fees as “charges,” the maximum an EWA provider can charge is presumably subject to the CFL’s rate caps.
The revised version of the proposed rule removes the entire section on subscription fees. With the removal of mention of subscription fees from the proposed regulation, it’s unclear how California regulators will view cash advance providers that use a subscription-based model.
The comment period for the revised rule runs until November 27th.
Wisconsin Legislature Introduces EWA Bill
The Wisconsin legislature recently introduced Assembly Bill 574, which would amend existing statues in order to regulate earned wage access.
AB574 defines EWA as “the business of delivering to consumers access to earned but unpaid income that is based on 1) the consumer’s representations and the provider’s reasonable determination of the consumer's earned but unpaid income; or 2) employment, income, or attendance data obtained directly or indirectly from an employer.”
Notably, this means Wisconsin’s approach would encompass both “direct to consumer” advances as well as “employer-integrated” approaches.
Direct to consumer offerings attempt to estimate and verify a user’s earned-but-not-paid wages, whereas employer-integrated approaches have direct access to a user’s wage data via integrations with employers’ time and attendance/payroll systems.
The legislation would require EWA providers:
to be licensed in the state
to implement policies and procedures to respond to customer complaints
to offer users at least one “reasonable option” to obtain proceeds at no cost and explain how to access such an option
to inform users of their rights and obligations and disclose all fees before a user enters into an agreement
to inform users of material changes to terms and conditions before implementing them
to allow users to cancel services at any time, without incurring a cancellation fee or penalty
if the provider accepts “tips,” to make clear such tips are optional and that services are not contingent upon tipping
if the provider causes a user to overdraft by attempting to collect repayment before the agreed upon date or in excess of the agreed upon amount, the provider must reimburse the user
Under the proposed law, EWA providers are prohibited from:
sharing any fees or tips with a user’s employer
accepting repayment from users via credit card
charging late fees, deferral fees, interest, or any other penalty for failure to pay
reporting to a consumer reporting agency or debt collection agency
compelling a user to pay through a lawsuit in court or sale of the obligation to a third-party debt collector
misleading or deceiving users about the voluntary nature of tips or making representations that tips will benefit any specific individual
advertising any statement or representation that is false, misleading, or deceptive
The proposed bill further clarifies that EWA products are not and do not fall in the scope of current Wisconsin laws or regulations, including of any of the following:
1) a payday loan, or any other form of loan or form of credit or debt;
2) the Wisconsin Consumer Act;
3) money transmission (which current law refers to as a “seller of checks” business); or
4) a violation or noncompliance with state laws governing the sale or assignment of an individual's wages or other compensation earned or accrued but not yet paid.
Any fees or “tips” are also not considered to be interest or finance charges under the proposed legislation.
The measure passed in the Wisconsin Assembly last week and is awaiting a vote in the Wisconsin Senate.
Plaid Launches CRA-Regulated Subsidiary To Offer Cash Flow-Underwriting-As-A-Service
On the heels of the CFPB’s much-anticipated proposed open banking rule, Plaid recently announced the formation of a subsidiary that will function and be regulated as a consumer reporting agency (CRA.)
The move isn’t entirely a surprise — the company has had job listings for compliance personnel with experience in CRAs and who are familiar with the Fair Credit Reporting Act (FCRA) for some time.
The decision to create a CRA is a further step in the infamous “volcano” diagram that came to light during the Department of Justice’s suit to block Visa’s acquisition of Plaid:
By creating a CRA-regulated offering, Plaid is moving from the “dumb pipe business” — facilitating the movement of data from one place to another (a good business, to be sure!) — to the value-add business of credit underwriting.
While many lenders already use bank transaction data for underwriting, they’ve had to build the capability to do this internally — a complicated and time-consuming undertaking.
Now, for lenders that don’t want to do this internally, they’ll be able to use Plaid’s cash flow-underwriting-as-a-service (CFUaaS, I guess?)
Referring to the challenge of turning bank transaction data into an actionable underwriting tool as a “usability” problem, Plaid’s head of credit, Mike Saunders, wrote:
“Plaid has formed this new entity to tackle the usability problem head-on. It enables a future where customers can get actionable and differentiated cash flow insights from open banking transactions data to better predict a borrower’s ability to pay.”
Plaid isn’t the first to offer cash flow underwriting to third-party lenders.
Prism Data, spun off from credit card startup Petal, offers similar capabilities, including an out-of-the-box “CashScore” derived from transaction data. Prism’s products are built to enable lenders to comply with FCRA, including by returning reason codes that can be used on notices of adverse action, though the company itself, like FICO, is not registered as a CRA. Prism doesn’t ingest PII from lenders and does not create a “consumer report.”
Still, Plaid has a distinct advantage in this market, as, in many cases, it already has relationships with lenders who use its core capabilities.
CFPB Fines Repeat Offender Enova $15 Million
In 2019, sub- and near-prime online lender Enova entered into a consent order with the CFPB and paid a $3.2 million penalty for debiting borrowers’ bank accounts without their permission. (Full disclosure, I worked at Enova from 2011-2013.)
But the company doesn’t seem to have solved the root problem that allowed for the erroneous and illegal debiting of consumers’ accounts without their permission.
The new enforcement action alleges the company has continued to withdraw or attempt to withdraw funds from borrowers’ accounts without their permission.
The CFPB complaint further alleges that Enova deceived borrowers by failing to inform them a partial payment would result in the cancellation of previously granted loan extensions; that it cancelled loan extensions it had previously granted; and that it failed to provide copies of signed authorizations to initiate recurring electronic funds transfers from users’ accounts.
The enforcement action requires the company to:
cease its illegal practices, including attempting to debit users’ accounts without their express informed consent
provide redress to more than 111,000 impacted users, including returning funds that were inappropriately debited and associated fees, costs, and interest
pay a civil monetary penalty of $15 million
reform its executive compensation practices
The order also prohibits Enova from offering close-ended short-term loans of 45 days or less. While this measure sounds significant, the company had ceased offering such products some time ago, as it transitioned to longer-term high-APR installment and revolving line of credit loans instead.
FDIC Finalizes Special Assessment, Rocked By Allegations Of Toxic Culture
Last week, the FDIC approved a final rule to replenish the deposit insurance fund following this spring’s bank crisis that saw SVB and Signature Bank abruptly fail — costing the fund a total of $18.5 billion.
The vote had been scheduled to take place at a public board meeting, but it was abruptly cancelled after an explosive Wall Street Journal story detailed a toxic and alcohol-soaked culture at the bank regulator.
A follow up piece painted an unflattering picture of FDIC Chair Martin Gruenberg, alleging the tone he set allowed harassment and discrimination to go largely unpunished.
With the meeting called off, the rule was finalized via a notional vote, with Gruenberg, CFPB Director Chopra, and Acting Comptroller Hsu voting for the measure, and Vice Chair Travis Hill and Director McKernan voting against it.
The finalized rule will, as required by law, recoup expenses tied to the invocation of the “systemic risk exception” used to cover all depositors of SVB and Signature. Per the FDIC, the rule attempts to apportion the cost in such a way that institutions that “benefitted the most” from the agency’s actions foot most of the bill — specifically, large and regional banks with large amounts of uninsured deposits.
The assessment is based on an insured depository institution’s (IDI’s) estimated uninsured deposits as of December 31, 2022, adjusted to exclude the first $5 billion. The special assessment will be collected at an annual rate of 13.4 bps over the course of an expected eight quarters, beginning Q1 2024.
The FDIC estimates 114 banking organizations will be subject to the special assessment, including 48 with assets over $50 billion and 66 with assets between $5-$50 billion. No banks with less than $5 billion in assets will be impacted.
Other Good Reads
Listen: The Fed's Michael Barr on Real-Time Payments and the Basel Endgame (Odd Lots)
All Right, Let’s Do This One Last Time (Fintech Takes)
How Wall Street Makes Millions Selling Car Loans Customers Can’t Repay (Bloomberg)
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