Pub. 10 2020 Issue 3

22 The Underwriting process had always been a challenge for Fintech lenders. Non-performing loans and the definition of NPL is not 100% aligned with best practices in the banking industry. Sometimes Fintech is viewed as more Tech (technology) than Fin (finance). One reason for this is attracting consumers with proper marketing and technology to apply for loans. Build the book if you will, and initially focusing on the process before risk. The concept of quick, reasonably priced processes with employees motivated by technology, relaxed culture and measurable criteria allowed the companies to attract a lot of interest from investors. Lenders considered this relatively low cost to obtain a loan as costs incurred with creating innovative technology to approve loans and retaining a performing part of the portfolio within the Fintech lender. CHAPTER IV. NUMBERS One of the factors by FinTech lenders that influenced their perfor - mance has been rollover from DPD 5 (5 days overdue) to DPD 30, then DPD 30 to DPD 60, DPD 60 to DPD 90, DPD 90 to 180 and charge-off. The charge-off ratio did not, initially, impact the lender’s valuation. In the growth stage, they calculated the number of loans getting to charge-off in comparison to the entire loan book. As lend - ers reached the stratosphere of maximum market penetration, the actual charge-off % did start to show. As many of the loans are not collateralized, the value of collateral did not allow to decrease the value of LGD. EAD (exposure at default) has dramatically increased as well, due to collection processes being impacted both internally and externally. A lack of resources, appetite and experience handling of collection accounts led to increases in delinquent accounts. Bad data entry, setup of legal agreements and lack of desire to pursue a judgment limited success on recovering principal on defaulted loans. Many judgments, if obtained, had been on a default judgment basis in the state of the legal department of the Fintech lender to both decrease costs and presumably to initiate payment discussions. Filing all judgments in the state of the lender would result in limited enforcement options of the judgments. FinTechs also encounter different modes of fraud. If the fraud is occurring due to an invalid or third party SSN, the fraud is likely happening by repeat professional borrowers, or a borrower with no intention to repay the loan. Loans have been provided to borrowers to finance bankruptcy; loans without requiring an SSN or loans to small business, such as restaurants, have added additional risk to the business. On the side of the revenue, FinTech is less regulated than a bank or credit union. One extreme example is a Title Loan company. They have the ability to receive revenue from the purchase, underwriting costs, servicing fees and ability to refer new services to clients to supplement the non-performing loan book. Additionally, the constant change of Chief Risk Officers (usually every two years), different interests of boards in disagreements with investors over performance, and vision and pre-IPO valuation linked to the loan book had been a challenge. Different FinTech lenders by the end of June 2020