Concerns on CRA Updates; FDIC Looks at CRE Loans; Truework Raises $50Mn

PeerIQ Analytics Platform
7 min readAug 15, 2022

Greetings,

Inflation cools, but wage gains continue to pressure prices. Concerns mount on CRA updates. FDIC to scrutinize banks’ commercial real estate loans. Truework raises $50Mn. Caution on subprime debt grows.

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Inflation Cools, Slightly

There was some relief in last week’s CPI print. Inflation eased to 8.5% in July from 9.1% the month prior. Falling energy prices helped lower the overall rate. Gasoline prices fell 7% from June to July.

Rapid wage growth, however, is keeping the pressure on. Average hourly earnings grew 5.2% in July vs. the year prior. Annual wage gains have exceeded 5% each month this year.

Banks’ Tone on CRA Updates Shifts

As the process to modernize the Community Reinvestment Act chugs along, some corners of the industry have grown increasingly weary. While there was some optimism when the proposal was released earlier this year, comment letters from some trade associations filed in the lead up to last week’s deadline were more critical.

One area of complaint was the short time period for comment itself. Industry participants had 90 days to weigh in on the 700-page proposal. The timeline for implementation also raised concerns. Regulators have proposed a 12-month implementation period, which “suggests that the agencies are not seeking informed feedback on the rule,” the ABA said in its comment letter.

Banking trade groups indicated that if the rule is finalized as-is, legal challenges to the rule are possible.

While some trade groups have brought criticism, many banks and fintechs alike encourage and support the intent behind expanding CRA assessment areas as well as proposed efforts to modernize the CRA. However, that does not mean that there aren’t areas that the CRA can be improved upon.

FDIC to Scrutinize Banks’ Commercial Real Estate Loans

It’s a new world of work, post-pandemic.

And the FDIC is concerned about what the impact could be on banks’ commercial real estate portfolios. While the worst of the pandemic is in the rearview mirror, some changes in consumer and employer habits are enduring. More employees are working from home. Ecommerce, while down from its peak early in the pandemic, remains elevated.

Not to mention elevated inflation, rising interest rates, and ongoing supply chain problems.

The FDIC cited all of the above as factors in taking a closer look at banks’ commercial real estate loan portfolios. Specific segments drawing attention include office space, shopping malls, and hotels.

The FDIC’s proposed policy statement, “would build on existing guidance on the need for financial institutions to work prudently and constructively with creditworthy borrowers during times of financial stress, update existing interagency guidance on commercial real estate loan workouts, and add a new section on short-term loan accommodations.” Additionally, it would focus on addressing accounting changes to estimating loan losses and “account for loans modified or affected by loan accommodations or loan workout activity”.

The extra scrutiny only applies to institutions the FDIC supervises. Though the smaller banks more commonly supervised by the FDIC often have outsized exposure to commercial real estate. At the end of 2021, FDIC-supervised banks held around 41% of all bank-held commercial real estate loans.

Truework Raises $50Mn

Income and employment verification startup Truework announced it has raised a $50Mn Series C round. The round was led by G Squared, with participation from existing investors Sequoia, Activant, and Khosla Ventures. Truework provides automated verification of income and employment data, replacing manual processes that historically required paper documents or phone calls. The company currently has coverage of about 35Mn employment records.

Investors Grow Cautious on Subprime Debt

Despite solid job numbers and wage gains, the mood on Main Street is increasingly grim. With the fear of a recession on the horizon, debt investors have taken notice. As investors have backed away from certain bonds backed by consumer loans, those still willing to invest have demanded higher yields to do so.

If consumers’ budgets become stressed, they will be forced to prioritize certain bills and debts, paying others late — or not at all. Historically, borrowers have prioritized auto loans and credit cards toward the top of the stack. Unsecured personal loans, which may cause less fallout for consumers if they don’t pay, may be less of a priority.

Delinquencies, while still low by historical standards, have begun to creep up from their pandemic nadir. This is particularly true for lower-income and subprime borrowers across personal loans, auto, and credit cards.

Investors’ pullback is already being felt. Upstart has already pulled back on originating new loans due to funding constraints. Other non-bank lenders, particularly those catering to lower credit score borrowers, are likely to be feeling the pinch as well.

Image: Wall Street Journal

Fintech Lenders Tighten Credit, Exercising Caution Amidst Uncertain Environment

Investors acted on their worries over the credit quality of subprime consumers, sending fintech lenders lower on earnings (Oportun (28.5)%, Upstart (11.8)%, MoneyLion (9.3)%, Curo (8.8)%, Elevate (1.7)%). Coinbase was down in after-hours trading on its earnings release, but rallied +7.4% as broader markets popped on flat monthly inflation data.

Source: PeerIQ

We continue to see origination growth in the consumer lending space, with Elevate +22.2%, Oportun +9.8%, Curo +9.5%, and MoneyLion +7.6% increasing originations from the first quarter. In contrast, Upstart reported a (28.0)% decline in its originations from bank partners.

In addition to growing its originations, MoneyLion was able to improve its unit economics, increasing average revenue per user to $76 for the quarter, from $74 a quarter prior, and by decreasing its customer acquisition cost to $9, from $16 a quarter prior.

Upstart reported that several lenders/institutional investors have temporarily paused or reduced their originations due to market conditions. Upstart saw its conversion rate drop to 13.3%, from 21.4% a quarter prior. The decline in conversion rate is likely driven by the rise in rates, which may decrease the likelihood approval or dissuade consumers from borrowing, due to the higher cost.

Despite the disappointing results, Upstart continued to grow, adding 14 new banks and credit unions to its marketplace as vendors, and reported the first $10Mn in retail loan originations for its auto business in the second quarter.

Oportun has shifted its origination focus to return customers that have successfully repaid at least one loan over new customers. CEO Raul Vazquez reported that, “In July, 35% of our loans were to new borrowers as compared to 51% in the first quarter.” Elevate and Upstart have also made moves to tighten credit and towards more cautious, strategic lending.

Fintech lenders are tightening lending standards, as cracks in the non-prime market are beginning to show. Consumers are facing inflationary pressures, and those that serve the non-prime market are likely to see the effects more than prime lenders.

Oportun’s NCO rate remained flat at 8.6%, but management increased full-year charge off guidance by 80bps, representing a 120bp bump to Q2 levels. Curo’s U.S. NCO rate fell, but this was due to the impact of their Heights Finance acquisition, which brought higher credit quality consumers to their business. Stripping out the impact of the acquisition, charge-offs would have increased by 290bps from the first quarter.

Coinbase continued to feel the effects of a crypto bear market, with quarterly trading volume down close to (30)% and assets on its platform down around (62)%. The company shed 200k monthly transacting users from the first quarter, ending with 9.0Mn.

Coinbase keeps forging ahead, announcing a partnership with BlackRock to provide institutional clients of Aladdin with direct access to crypto through connectivity with Coinbase Prime. Additionally, they began offering Ethereum staking for institutional clients. Between these moves, and adding 37 new assets for trading, Coinbase continues to focus on the growth of its offering.

In the News:

The Humbling of Coinbase (New York Times, 8/5/2022) Coinbase has faced recent struggles, largely stemming from the decline in crypto market prices.

Understanding the Retail Bank that Apple Has Quietly Built (The Financial Brand, 8/9/2022) Apple has been building out a suite of financial services, which may have the potential to disrupt players in the banking industry.

How Neobanks Can Become Profitable Despite the Odds (American Banker, 8/8/2022) Some neobanks are shifting away from a reliance on interchange, getting more into lending.

Cross River Bank’s Strategic Plan: BaaS, Crypto and Fintech Investments (The Financial Brand, 8/9/2022) Profile on Cross River, a “BaaS” pioneer.

Embedded Finance, Alternative Underwriting Options Allow BNPL Services to Support Easy Checkouts: Report (Crowdfund Insider, 8/8/2022) BNPL users are expected to surpass 900Mn globally in 2027, up from 360Mn in 2022.

Upstart Seeks More Stable Funding After ‘Unacceptable’ Revenue Drop (American Banker, 8/8/2022) Upstart projects a revenue decline in the third quarter, as fewer of their loans are being purchased by banks and other investors.

The Companies That Take Money Straight From Your Paycheck (New York Times, 8/6/2022) Certain lending and retailers draw directly from paychecks, using “allotment” and “split deposits” to do so.

Figure Announces Collaboration with Visa to Add Issuing Processing to its Banking in a Box Platform (PR Newswire, 8/10/2022) Visa DPS will be a key component of Figure’s online banking service (Banking in a Box).

US Bank Delivers Real-Time Payments to Auto Dealers (Finextra, 8/10/2022) U.S. Bank can now provide loan funds to auto dealers instantly after the loan contract is finalized by the bank.

Lighter Fare:

Scientist Admits ‘Space Telescope’ Photo is Actually Chorizo in Tasty Twitter Prank (Space, 8/7/2022) No, the James Webb Telescope is not in your local deli.

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PeerIQ Analytics Platform

PeerIQ, a Cross River company, offers online Software as-a-Service risk analytics for owners and operators of consumer credit risk.