Re:  OCC Guidance on Deposit-Related Consumer Credit Products (Docket ID OCC-2011-0012)

Dear OCC Representative:

Core Innovation Capital is submitting this letter in response to the request for comments by the Office of the Comptroller of the Currency (OCC) on June 8, 2011.  We appreciate the opportunity to respond to the OCC’s proposed guidance on safe and sound banking practices for overdraft and deposit advance programs.  We commend the OCC for addressing the matter of deposit-related consumer credit.

We are a venture capital fund that invests in the most innovative companies serving underbanked consumers in America.  Our definition of the underbanked comprises of people that have little or no access to mainstream financial services, such as banks, and so rely upon alternative financial services, such as check cashers, payday lenders and pawnbroker solutions.  According to a nationwide study, it was uncovered that there are over 60 million individuals that fall into this category and a large portion of these consumers are both homeowners, family oriented, but with limited access to credit.

Core Innovation Capital diligently researches and invests in early growth-stage for-profit companies in the financial services industry.  Our team has made “double bottom line” investments serving the underbanked since 2005. Our vision is to fund scalable, technology-driven solutions in customer-facing products and services, as well as business-to-business solutions, that meaningfully improve the lives of low- to moderate income people and strengthen the American middle class.

Our vision, and we hope you share it, is to see a strong, robust, and competitive financial services marketplace, where the diversity of consumer transaction, savings, and credit needs are met with a range of providers offering clear and transparent products and services at reasonable prices.

The recommendations and insights in this comment letter are based on deep industry knowledge and our consumer observations of market practices. We offer the following suggestions for the OCC to study and encourage through your guidance.

We believe APR capping regulatory practices stifle innovation, are irrelevant to the consumer, and are a poor proxy for whether a loan is “good” for the borrower.

End arbitrary APR ceilings for short-term loans.

We believe that Annual Percentage Rate (APR) is an effective metric for calculating and comparing interest costs across mortgages, credit cards and other long-term forms of credit. However, APR is counterproductive when it comes to small-dollar and short-term credit products, particularly in relationship to lower income consumers. This directly matters to your constituents: working Americans took out $40 billion in payday loans last year, which does not account for other short-term credit solutions such as overdraft, title lending, and pawn shops to name a few. When regulators cap APR for short-term loans at an arbitrary number like 36%, lower income working class people get badly hurt because access disappears and less regulated, inferior products appear in their place, which leaves more people without emergency liquidity paying even more for off-shore, under the table or “non-loan” loans.

As an example of why APR is not useful to most consumers when it comes to small-dollar loans, in a focus group we attended every participant believed that a $10 fee for $100 borrowed for two weeks was a better than 20% APR.  An annual metric for a short-term product is confusing: Would you check into a hotel that charged $70,000 (annual rate)? Or a cab that charged $200,000 (cross country rate)?  Do you include the initiation fees (many credit unions with “low APRs” don’t)? We believe that cash-on-cash ($7 for every $100 borrowed) schedules are much clearer and actionable, but not enough.

Encourage innovative business solutions

We see a tremendous amount of socially oriented entrepreneurs who wish to provide better alternatives to payday and other expensive forms of credit.  Rate caps and regulatory ambiguity actively discourage the very energy and creativity needed to create more responsible and consumer-oriented credit instruments for working Americans.  We hope the OCC will act within its ability to encourage innovation in small-dollar lending with a quality standard that is based on the structure of the products instead of the APR.

Implement a loan structure such as “TRUST”

As our central suggestion, formed from extensive research and meetings with consumer advocates and industry representatives; in lieu of APR, we propose a model such as “TRUST” as a new quality standard for short-term credit.  By addressing the core structure of a short-term loan consumers are empowered and much needed innovation can be unlocked.  Our suggested model consist of five tenets:

• Term flexibility – suit the loan to fit various users’ needs
• Repaid fully – design the loan to be payable without rollover
• Understandable – make the terms and fees clear and transparent
• Selective – good loans should be priced according to risk
• Transitional – offer a graduation path for good performance

An example of how this would translate to in practice could include the following:

1.)   A consumer goes online and finds a TRUST certified small-dollar lender.

2.)   She is asked how much money she needs and how long she needs to pay it back (Term Flexibility). She can adjust these variables.

3.)   Once she settles on an amount borrowed and length of time, she is able to plainly see the price and payment ramifications (Understandable) (e.g. 6 payments of $100).

4.)   She clicks on “Apply for loan” and the system considers what kind risk class she belongs to (Selective) and whether she is likely able to repay the loan based on her income and other resources (Repaid Fully).

5.)   To aid the consumer, once payments are met, the system either reports to the “Big Three” credit bureaus or begins to build an internal credit score for the individual, which could provide better terms on her next loan.  Alternately, the system could require a small amount of savings collateral to both securitize the loan as well as establish a savings behavior (Transitional).

By design, there are many ways to manifest the TRUST structure for short-term, small-dollar loans.  We hope the TRUST concept can provide a framework to end the partisan conflicts between consumer lenders, consumer advocates, regulators and innovators who will never move forward while APR stands between them, to the ultimate disadvantage of the lower-income people they are trying to serve and protect.  We strongly urge the OCC to avoid an APR-based regulatory approach and adopt, by any name, the principals described in TRUST.

We appreciate the OCC’s request for comment and hope our suggestions are useful in illustrating best practices for ensuring that these products are accessible, responsibly designed, and safely used by all consumers.

Sincerely,

Arjan Schütte

Managing Partner, Core Innovation Capital