- The Trump administration continues to focus efforts on dismantling the Consumer Financial Protection Bureau (CFPB), which is responsible for consumer protection in the financial sector.
- We believe Mulvaney will be allowed to continue to head the CFPB while the nomination is pending in the Senate. In our view, this benefits non-traditional lenders through the 2020 election.
- In an unrelated, ongoing court case where the CFPB sued a firm, a federal judge for the Southern District of New York ruled the government agency unconstitutional on June 21, 2018.
- In our view, Specialty Finance (FCFS), Personal Loans (OMF, CURO, ENVA), and Electronic Payment Processing (GDOT) companies benefit from (1) the Trump administration’s deregulatory agenda and (2) reduced competition from prior regulations.
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CFPB Deregulatory Efforts
As temporary CFPB director, Mick Mulvaney’s assignment ended on June 22. To address the vacancy, the White House recently announced it had nominated Kathy Kraninger to take over as the permanent CFPB director 3. We think her nomination keeps Mick Mulvaney in charge of the CFPB indefinitely, because the Senate is so closely divided and could stall the confirmation process.
We believe Mulvaney will be allowed to continue to head the CFPB while the nomination is pending in the Senate. In our view, this benefits non-traditional lenders through the 2020 election.
Judge rules cfpb unconstitutional
In an unrelated, ongoing court case where the CFPB sued a firm, a federal judge for the Southern District of New York ruled the government agency unconstitutional on June 21, 2018 4. The judge found the CFPB “is unconstitutionally structured because it is an independent agency that exercises substantial executive power and is headed by a single Director.” She ruled the section of the 2010 Dodd-Frank Act creating the CFPB should be stricken and subsequently dismissed the government agency from pursuing the court case.
We think the ruling demonstrates how politicized the agency has become and increases the likelihood the Supreme Court will take up the issue of CFPB constitutionally in an upcoming term.
The CFPB is increasingly focused on the non-traditional lending market where underbanked customers interact with the financial industry. The customers in this banking segment maintain near-prime or sub-prime credit scores, earn an average of $50,000, have a bank account and credit card, and are employed in stable industries. They also have unique financial needs, such as debt consolidation and short-term financing gaps, and may have trouble obtaining loans from banks such as JP Morgan, Bank of America, SunTrust, etc.
According to BankRate’s January 2018 Security Index survey, a majority of American’s don’t have $1,000 of emergency savings 5. Increasingly, they’re turning to shorter-term financing solutions.
Below is a quick summary of these non-traditional lending companies:
- Specialty Finance: FirstCash Financial (FCFS) is a leading retail pawn operator with over 2,200 stores in the U.S. and Latin America. The company offers fully collateralized loans and is a source of short-term financing for underbanked customers. The average U.S. loan is $164, while the average Latin America loan is $67 6.
- Personal Loans: OneMain Holdings (OMF), Curo Financial (CURO), and Enova International (ENVA) each operate primarily in the personal loan space. OMF maintains an ~1,600 branch network and serves customers in the near-prime credit segment (FICO scores 550-700) 7. CRUO offers installment loans, open-end loans, and ancillary services, such as check cashing and prepaid debit cards. ENVA, a technology and analytics company, operates in the online lending space and serves the non-prime segment.
- Electronic Payment Processing: Green Dot Corporation (GDOT) is a leading provider of prepaid cards and banking services to the underbanked market segment. GDOT offers checking accounts and debit cards through its online ‘Banking as a Service’ platform and does not maintain any branches.
In our view, these companies benefit from (1) the Trump administration’s deregulatory agenda and (2) reduced competition from prior regulations. Each of the above companies serves an important, underbanked customer segment where competitors have previously exited due to prior regulations.
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