Saturday Cup of Joe: a lending and tech(ish) newsletter
Friends & Colleagues:
Good Morning! I’m sending this from Stratton, Vermont where I’m meeting with other Board members of CATIC Financial as we lay out the next year(s) for the company. It is an honor to be here and serve on the Board at CATIC. I’m learning a lot and hopefully contributing value where possible. It’s thrilling. After this, it is off to Boston for the MBA’s Annual Meeting. My schedule is packed particularly since I’m chairing a state law committee this year and speaking to the convention on Tuesday afternoon. MBA Annual is always a great opportunity to meet with folks who I haven’t seen in some time, reestablish relationships, explore new opportunities and get a sense of the future (both short and long term).
This week we look at:
· Changing landscape of financial services innovation and regulation (Of Interest)
o This is the long one today, so for anyone not interested in how social media is changing lending and how regulators are unsure how to address it, please skip ahead to Sidenote or Have You Heard?
· Whether Hartford should consider bankruptcy like Detroit did (Have You Heard?)
· How can we make more mortgages in Detroit (Got Me Thinking)
· Beware the false duality (Today’s Thought)
Of Interest: I spent some time this week working on how social media could be used for providing better, more accurate offers to consumers. As you can probably imagine, it is not as easy as simply copying and pasting direct mail collateral or email content onto social media. Beyond that, the power of data integration and analytics means we can leverage more about our markets, potential customers and current clients than ever before. Some marketplace lenders are developing models that attempt to account for a variety of data pulled from social media sources. We are in a risk industry and information means better risk calculations. Public data, especially on social media, means more information. Companies are moving fast to figure out how to use it. Whenever that happens, there are times when the regulators and consumer advocates struggle to keep up. More on that in a moment.
There are both practical and legal concerns to utilizing social media for new purposes like making offers or gathering additional data. For instance, from a practical perspective, trying to fit a full truth-in-lending disclosure into social media, especially on a mobile platform, can defeat the purpose of the ad. From a legal perspective, there are really 2 main concerns. First, attempting to apply statutes (like truth-in-lending) that were written for an entirely different type of advertising / disclosure method. Not only that, the Truth-In-Lending Act (TILA) was written with completely different consumer expectations (or should I say expectations of consumers) in mind. Second, there is a fair lending concern around where/how you place certain offers and who is mostly likely to respond. Even if social media helps isolate those most likely to qualify for your product or service, there is still a responsibility to make sure the process for reaching the market accounts for possible discriminatory results. It is not always easy to educate marketing folks who are incentivized to prioritize ads and spend where the results are most valuable.
Similarly, data analytics types (engineers, analysts, etc.) and marketing folks do not always have a background in mortgage or even lending. As we all become technology companies first and providers of a product or service second, the talent we attract can range far and wide. As a result, your software engineers and business intelligence team is not generally concerned with somewhat obscure mortgage regulations.
I have found an interesting conversation going on in academic circles and on blogs (shout out to Debbie Hoffman at DigitalRisk for the assist) around how public, social media data can be used or misused. For example, we generally think of big data as providing more information about the consumers who are left out by traditional credit models but who, because of social media imprints, we can see would be a reasonable credit risk. There is also danger is unintentionally discriminating by how we create the models that go beyond traditional credit scoring. Along the same lines, any data model includes basic assumptions. So, when (if ever) is it appropriate to make an assumption about someone based on their social circle or social factors? We all agree that lending is a highly personalized evaluation yet if you treat each credit application as an unique snowflake it is more difficult to provide credit to everyone who deserves it.
This brings me to a fork in the road. We want companies to innovate in this area. It means more creative thinking around providing traditional financial services in a new way. An example of this would be the announcement late last week by Goldman Sachs that it would be launching a consumer loan product directly to Main Street. Previously, the investment bank serviced corporate, commercial and high wealth individuals only. The business is called Marcus, named after Marcus Goldman the firm’s founder. It also means innovation in available products or services by bringing more options to a wider audience. An example of this would be the fintech company, EarnUp, which is another example (remember, LendUp from last week) of a model that allows consumers to build large credibility on small transactions over time.
This makes regulators nervous. Partly because some of these Silicon Valley start-ups have trouble articulating their business, partly because the same firms have trouble speaking the language of regulatory compliance where appropriate, and partly because many financial start-ups or flashy new trends ended up harming consumers (whether intentionally or not) over the years, the regulators are struggling with a key question. Are new regulations needed or can we apply/adapt existing law? As I mentioned earlier, I do not think these regulations were written for a world with small, unsecured loans being requested, approved and funded from the palm of our hand. We need additional guidance particularly in the marketing, advertising and fair lending space about how to be forward thinking and innovate while not running afoul of 30 year old rules.
The Takeaway: There is so much opportunity to rethink both the delivery of our products and services and the consumer’s ability to repay. We should feel confident to explore new opportunities and work with regulators to help them understand how these things work. Our industry can use data and innovation to become better providers and partners in our client’s goals. We just have to get it right to avoid public distrust and additional regulation.
Sidenote: Here is an interesting video on the future of money. And two helpful links about a word we’re gonna start hearing all the time (if you haven’t already). Blockchain. Blockchain is the architecture allowing companies to have an independent validation method/system for exchanging currency, or any value exchange over the web. Here is the homepage.
Have you heard?: I was particularly pulled into a story this week published by the Hartford Courant comparing Hartford, CT to Detroit, MI. For starters, I used to live a few miles from Hartford and now live in the city of Detroit. My company, Quicken Loans, was mentioned in the article because part of the narrative in Detroit’s comeback has been the efforts of billionaire owner Dan Gilbert. Meredith and I are trying to decide how role we can play in the community and how to best contribute to Detroit while we’re here. Lastly, I have been following the ebbs and flows of Detroit, as many of you know, since 2005 when Brad Frost moved here after we both graduated from Mary Washington. In my time here, I have never heard anyone say the bankruptcy was a cure all or a complete disaster. It is always seen as part sad, part silver lining and part challenge. Whether it is the right solution for Hartford is definitely not for me to say, but the fact that it is becoming a story worthy of the Hartford Courant must mean that the situation in Hartford is dire. Hartford has so much potential (and history, much like Detroit) and yet cannot seem to solve a few key pieces. One that I always heard was around real estate values. Landlords and property owners wanted too much for vacant buildings or empty spaces; as a result, new businesses, younger workers and a creative class could never capitalize on the city’s character and unique qualities.
A Look Ahead: You think I’d miss an opportunity to include an article on millennials and home buying? Think again. Here it is. There are a few interesting tidbits here. Speculators may have collected an overabundance of single family homes making it hard for millennials to by smaller homes. As a result, millennials are skipping starter homes (guilty as charged). Lastly, there are a variety of factors that may also be at play here. We do not have enough data to know whether millennials are “more conservative” than previous generations in their opinion of homeownership (for example, it seems like they believe in home ownership in strong numbers) or “less conservative” in that they’ll perhaps own more homes and move more often. If true, this could be attributable to the widening gap between rich and poor. Assuming some people continue to have access to credit, millennials might have established unrealistic expectations about how easy it is to buy and sell their homes. Essentially believing in home ownership but not in settling down in one spot.
Interestingly as a minor footnote, here, the Wall Street Journal published a story this week that starter homes are surging among homebuilders particularly in the South and Southwest. Putting these stories together, you may see that upper middle class and upper class millennials are skipping right over starter homes and middle or lower class families are choosing the starter homes as the first (or only) option.
Good Advice: I’m attending several business dinners over the next few nights and thought this was well timed for conference season: business dining etiquette. Generally folks that have worked together a long time share a more friendly experience when dining out at conference, so there’s obviously a grain of salt with this, but I did appreciate this line…”and you’ll avoid that awkward moment when Bob orders dessert, and no one else does.” That Bob, always ordering dessert.”
Quick Hit: If you lend in Nevada, there might be an explanation as to why you haven’t heard from your examiner lately…the Division of Mortgage Lending has an average delay of 13 months for the almost 60% of exams that are not timely.
Got Me Thinking: When I moved to Detroit, I asked my friend Brad who has lived here since 2005, what can Quicken do to help in Detroit? His response: “do more of what you do.” In other words, make more mortgages in Detroit. For context, in 2012 there were 203 mortgages in Detroit. 203 in the whole year! I’ve come back to that quote and that number several times in the last few months when thinking about my role at Quicken and my company’s role in the community. Along these lines, I thought you might appreciate an article that came out this week. Urban Institute provided 5 ways the housing industry could assist including home improvement lending and small loans.
Today’s Thought: Danger of false duality. You’ve heard it said, “it’s not what you don’t know that can hurt you, it’s what you don’t know that you don’t know.” In some ways that thought process speaks to the danger of false duality. As leaders we are constantly gathering information, evaluating options, selecting a strategy and executing. It can be extremely costly if you believe a decision to be between A and B (duality) when in reality the decision is between A, B and C. But we cannot see option C. The danger, obviously, is that decision was made without all the information and perhaps the wrong decision was made. There is a second, subtle risk here as well that we refused to accept a duality and continue to search for a C that doesn’t exist. That would waste time and resources. My suggestion to avoid a false duality is to invent solutions or options that do not exist. If you are feeling cornered between A and B, and you are not certain whether you have only two options, begin theorizing or inventing options (even those that are not physically or financially possible) because the thought process alone can trigger variations on a theme. Another way is to always include an option of “do nothing.” Often times we overlook doing nothing because the incentives are so strong to act, change, update, etc. Do nothing can sometimes because the option C that either confirms you are able to make the right decision or offers the breathing room to continue to explore (i.e. doing nothing is not the worst case scenario so let’s give it another few weeks, etc.).
Quote: “The harder you fight to hold on to specific assumptions, the more likely there’s gold in letting go of them.” — John Seely Brown
Bonus article: An extensive expose on Chipotle. While long, it offers really interesting lessons on working with the Board, managing public relations and how delicate a corporate reputation can be.