By Victoria Finkle
March 21 — Raj Date stepped into the revolving door after leaving the Consumer Financial Protection Bureau (CFPB), but, rather than returning to Wall Street, he took a different exit.
Date, who as the CFPB’s interim leader and deputy director had built the new agency from the ground up and helped craft some of its most significant rules to date, launched a D.C.-based venture investment firm targeted at the rapidly growing financial technology sector.
There’s a confluence of forces hitting the banking industry that could give smaller, nimbler startups an advantage over industry behemoths weighed down by bureaucracy and an aversion to risk — and Date wanted to strike while the time is right.
“This moment in time wasn't going to last forever, and we wanted to make sure we hit the window,” Date told Bloomberg BNA in a sit-down interview this month.
Date points to several factors that bode well for “fintech” startups, including changes to technology, customer behavior, regulatory expectations and capital markets.
“If any one of those factors were changing rapidly, that would yield a lot of new ideas and new approaches. The fact that all four of them are changing pretty dramatically multiplies that exponentially,” he said.
Cloud-based systems and the coder boom make it easy for startups to create new offerings for consumers who increasingly access financial services on their tablets and smartphones. Billions of dollars in funding are flooding a market Goldman Sachs estimates could ultimately steal as much as $4.7 trillion in big banks’ annual revenue.
Taken together, there's tremendous upside for new entrants willing to roll the dice on one — or many — new ideas.
“That's part of why there's a hole in the marketplace for scrappy little firms like ours that are willing to have a very deep set of content expertise applied to tiny, new ideas in the hopes that some of them will really get traction,” Date said.
Fenway Summer, which is home to a number of former CFPB employees, has a hand in almost every corner of consumer finance. Fenway Summer currently sponsors or co-sponsors three firms: Ethos Lending, a mortgage lender; FS Card Services, a credit card company for subprime borrowers; and College Ave Student Loans, a marketplace lender for private student loans.
Date said that Ethos, which launched in April 2014, originated more than $1 billion in mortgages last year, and that he expects it could do three times as much business in the coming year. Though Date indicated when the firm got off the ground that it would be focused on prime mortgages that fall outside of the CFPB’s “qualified mortgage” rule, the bulk of business has so far been in super-prime jumbo mortgages and agency loans sold to government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
“I think it will be an important product over time, but that's not where the market is today,” he said. “If you can get a government-subsidized GSE loan for a fixed rate at comically low pricing, you should go do that.”
He said that the early response to FS Card’s first product, the Build Card, which was introduced late last year, has confirmed the company’s theory that “there’s clearly a market need” among less creditworthy borrowers “that we think we can satisfy.”
College Ave, meanwhile, is “off to the races,” Date said, adding that “we’d expect to really start scaling the business ahead of this coming school year.” Fenway Summer made its seed investment in that business in August 2014.
At the same time, Date and his team prepared the launch of a venture capital firm, Fenway Summer Ventures, in October 2014. The fund is now invested in a diverse portfolio of 20 startups, including small business marketplace lender Street Shares, bitcoin services firm Circle Internet Financial and an online child support payments platform called SupportPay. Date declined to comment in detail about the fund’s performance, other than to say “so far, so good, although it's way too early to know for sure.”
The company sold its advisory arm to Promontory Financial Group, a consulting firm, in May 2015 — Date serves as a senior adviser at Promontory in addition to his duties as managing partner at Fenway Summer.
“The key for Date will be how he moves forward in terms of building a model that can be a market-buster, something that can wedge in between antiquated business processes,” said David Stevens, president and chief executive of the Mortgage Bankers Association. “The headwinds are such that experimentation requires some pioneering, and that means you’re going to have some successes and some failures.”
Date, a graduate of UC Berkeley and Harvard Law School, began his career consulting at McKinsey, and then served as an executive at both Capital One and Deutsche Bank. He also launched his own consultancy, Cambridge Winter, before joining Elizabeth Warren at the Treasury Department to help get the CFPB up and running.
He’s been criticized at times for his moves between industry and government by those concerned about the impact of the revolving door. In July 2013, House Republicans asked CFPB Director Richard Cordray for information about ongoing contacts between the agency and Date and several other agency officials who “left the CFPB in order to profit from rules they helped create.”
Critics of the financial services industry have been more forgiving about Date’s transition. “You want to get the benefit of folks from the private sector and realize not a lot of them will be there for their careers — you need a mix there,” said Mike Calhoun of the Center for Responsible Lending. “He has very few peers who have that combination of how to do the lending as well as the expertise regarding the regulatory issues.”
Date said his job experiences have taught him that “it’s awfully difficult to take clever lawyers and drop them into things and just hope for the best.”
He said it's crucial that regulators have banking experience to cut through intense lobbying from outside parties.
“I've seen institutions struggle to do the right substantive thing when they have to rely on lobbyists and industry-fueled think tanks in order to figure out what the right thing is to do,” he said. “You have to have people who are willing and able to do their own work.”
Date added more broadly that his transition into the venture capital business after time in banking and then at the CFPB has reinforced his concerns that the industry, and even the country, has become “rules-mad,” eschewing a more principles-based model that would allow for — and even embrace — regulatory discretion.
“Everybody wants rules — tell us the concrete rules — and then, of course, everybody wants exceptions to those rules and exceptions to those exceptions,” he told Bloomberg BNA. “You end up with this hyper-complicated, byzantine architecture of very concrete rules and these calamitous consequences if you don't comply with them.”
Date hasn’t had many second thoughts about the rules he helped write now that he’s on the receiving end, but said he has become more aware of the dangers of regulation that is overly prescriptive.
“More than anything else, I was struck by how more or less every industry commenter on every one of our rules seemed to be seeking the holy grail of ‘certainty,'” Date said about his tenure at the CFPB. “But we live in a nuanced and dynamic world, so actually creating “certainty” typically requires a lot of complexity and excruciating detail. And then, when I left the Bureau, I saw how banks and finance companies, despite having pounded the table for certainty, seemed sometimes paralyzed and unable to work well with the very complexity and detail that the quest for ‘certainty' had all but required.”
Despite explosive growth in recent years, the fintech industry is quietly bracing itself for both economic and regulatory trials as it continues to grow, something Date said he’ll be watching, as well.
Delinquency rates at some of the largest marketplace lenders have begun to tick up in recent months, and rising competition in the space is squeezing margins, spurring some concern among major investors.
The banking agencies are also beginning to increase scrutiny of the industry, with additional oversight likely. The prudential regulators are examining startup models and their ties to financial institutions more closely, and are beginning to offer some tacit guidance for how banks should proceed, which could increase legal troubles for some down the line.
The CFPB has taken several recent enforcement actions against financial startups. The agency fined PayPal $10 million and ordered $15 million in consumer redress last May over the advertising and handling of its credit product, Bill Me Later. This month, regulators settled with payment processor Dwolla, fining the firm $100,000 and requiring it to clean up its data security.
“Regulators are going softly, but deliberately — the CFPB in particular does not want to fall behind its peers,” said Brandon Barford, a partner at Beacon Policy Advisors.
While observers note that regulators are taking care to monitor the rise of financial technology without necessarily stifling innovation, there are also some clear cases where they’ve simply failed to keep pace.
“The entire development of distributed-ledger technologies, including but not limited to bitcoin, it's almost like it snuck up on the regulatory bodies,” said Date. “It's pretty striking that the New York Department of Financial Services under Ben Lawsky basically stepped into a void with their bit licensing framework — and good for them, somebody had to say something.”
The big question is where banking regulators will turn their focus next and what that will mean for the bottom line at fledgling technology companies.
“At a minimum, new rules add clarity, but they also add costs,” said Barford. “A CEO doesn't want to have a whole 30-person legal and compliance department if it isn't necessary. As a cost center, he or she has to think about how many more loans need to be made to earn that money back.”
The CFPB’s March 7 bulletin announcing that it will start collecting complaints about marketplace lenders could lead to more enforcement actions or new regulations down the line, depending on what kinds of concerns emerge.
Date, who’s earned a reputation as quick-witted and entrepreneurial, showed early interest in some of these emerging markets during his tenure at the CFPB. He was a leading proponent for the agency’s Project Catalyst, an ongoing effort to work with financial startups and learn more about new business models.
The initiative recently finalized its “no-action letter” policy, which could provide clarification for some innovative financial companies in cases where there’s an overhanging regulatory question. The program, however, will start small, with the agency expecting to act on just a handful of such letters per year.
“He was the driving force behind Project Catalyst. That's still evolving. It hasn’t changed the world yet, but it was the first step by any of the regulators to look at the importance of innovation,” said Jo Ann Barefoot, chief executive of the Jo Ann Barefoot Group and a former regulator. “It makes the CFPB less of a typical bureaucracy and gives it more of an entrepreneurial culture, at least in one component of it.”
For his part, Date acknowledges that regulators “quite logically tend to focus their resources and talent on big incumbent firms with big incumbent problems,” often getting “blindsided by new ideas and new technology.”
“Project Catalyst was all about trying to intentionally break from that mold,” he added. “It was meant to reach out and engage with people, companies and ideas that would never otherwise attract the attention of a big federal agency. And there’s no doubt that part of what I observed in driving Project Catalyst was a big hole in the venture capital market — and that is the market opportunity that Fenway Summer is trying to fill.”
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