Fintech Chapter 6: Bank Lending

Primary activity of banks: Loans Resources to Borrower Return to Lender

Monetary Policy Credit creation relies on banks Reserve ratio Money multiplier

Secured vs unsecured loans Collateral Offset adverse selection Unsecured: credit cards

Loans Commercial and Industrial Real estate Consumer loans Interbank loans Other, including securities lending

Nonfinancial Corporate Business; Depository Institution Loans Not Elsewhere Classified

Small Business Administration Loans 7(a) start, acquire and/or enlarge a small business CDC/505 community economic development Microloans Disaster loans Export assistance loans Veterans and Military Community loans Special Purpose loans

Commercial and industrial loans Short term loans Business lines of credit Equipment financing Inventory financing Merchant cash advances Business credit cards Accounts Receivable financing (factoring) Construction financing Real estate Syndicated loans

LIBOR Index used as a base for floating rate loans Survey of banks Manipulation scandal Now administered by ICE Proposal for future changes

Real estate loans Collateral Down payment/term ARM Reverse mortgages Home equity loan Mortgage backed securities

Total Household Debt

Other Sources of Household Debt

Other categories of household debt Credit cards are loans, debit cards are not Defaults 7-10% Total 2016 credit card debt $1 trillion Auto loans $1.2 trillion Student loans $1.34 trillion

Payday lending 12 million American users Bad credit or no credit history $500 or less Short term: next pay check High fees: APR 400%?

FICO Reporting agencies: Equifax, TransUnion, Experian Fair Credit Reporting Act of 1970 Fair Isaac and Co (FICO) Data

Credit data 35% of factors concern payment history 30% reflect amounts owed 15% involve length of credit history 10% new credit: a pattern of opening several new loans at the same time might signal credit problems. 10% credit mix: this is the kinds of loans an applicant may have outstanding

Credit scores 300-850 (NextGen to 950) 800 +: This is the highest range of FICO Score. Approximately 1% of consumers in this category are likely to become seriously delinquent in the future. 740 to 799: This is a range of very good FICO Scores Approximately 2% of consumers with a credit score between 740 to 799 are likely to become seriously delinquent in the future. 670 to 739: This is the median range and consumers in this range are considered an “acceptable” borrowers. Approximately 8% of consumers in this range are likely to become seriously delinquent in the future. 580 to 669: These are below average or “fair” FICO Scores. Consumers in this range are considered subprime borrowers and getting credit may be difficult with interest rates that are likely to be much higher. Approximately 28% of consumers with a credit score between 580 to 669 are likely to become seriously delinquent in the future. 579 and lower: Consumers with FICO Scores are considered to be poor credit risks and may be rejected for loans. Credit card providers and utilities may require a fee or a deposit. A credit score this low could be a result from bankruptcy or other major credit problems. Approximately 61% of consumers with a credit score under 579 are likely to become seriously delinquent in the future.

Vantage Challenging FICO Created by Equifax, Experian, and TransUnion in 2006 Free to consumers

Fintech in Lending Marketplace lenders Peer to Peer (P2P) Peer to Commercial (P2C) Lighter regulation Credit analysis alternatives to FICO scores

Marketplace lenders online application process fast response higher approval rates enhanced credit analysis superior customer experience lower rates than some alternatives (credit cards, payday lenders) both sides of market (borrowers and lenders) online tools lighter regulatory burden low overhead entrepreneurial culture

Loan originations down YOY Q4’16 for key U.S. digital lenders

Fintech Companies Lending Club Kabbage OnDeck Funding Circle LendUp SoFi Kiva

Mortgage market is now dominated by non-bank lenders