August 12, 2020
RE: NCRC Comment Letter on SoFi Charter Application
To Whom it May Concern:
The National Community Reinvestment Coalition (NCRC) and 41 community organizations co-signing this letter maintain that Social Finance, Inc.’s (SoFi’s) application for a bank charter has not demonstrated a significant commitment to meeting the convenience and needs of the community to be served as required per the OCC’s licensing manual.[1] While the financial technology company has made positive changes to its Community Reinvestment Act (CRA) plan since its last application for an industrial loan charter (ILC) in 2017, the OCC cannot approve the application unless SoFi addresses vital CRA and fair lending matters.
It is still unclear whether SoFi’s institutional culture is compatible with the obligations of the CRA. The on-line lender has established itself as a niche lender, focusing on affluent millennials. It has established a social, exclusive and virtual community featuring happy hours, discounts and other perks designed to attract and retain affluent millennial clientele. Originally, SoFi’s products were available only to Stanford graduates, the elite university of its founders. SoFi is fixated on finding the “best” and the “brightest.” A New York Times article described SoFi as focusing on young and wealthy clientale, called Henry’s or High Earners, Not Rich Yet. The average income of SoFi customers was $144,000 and their average credit score was 733.[2]
As well as favoring the affluent, SoFi appears to turn away applicants from communities of color. SoFi is currently the subject of a class action lawsuit alleging that it is not providing fair opportunities for DACA recipients to access its lending products, including refinance loans.[3] SoFi needs to affirm in its application that it seeks out low- and moderate-income (LMI) and people of color as customers by committing to performance measures that can be verified with publicly available data. At this point, these public accountability mechanisms are absent from SoFi’s application.
SoFi’s website advertises several discounts for its one million “members.[4]” These discounts save members hundreds if not thousands of dollars.[5] The members also benefit from career counseling offered by SoFi.[6] It is unclear who the members are. Are they only affluent customers that apply over the internet? Do they have to pay substantial annual membership fees out of reach for those with modest incomes? Could LMI consumers benefit from member services such as counseling and discounts? SoFi’s application does not describe who the members are and does not describe whether designation of members is consistent with the Equal Credit Opportunity Act (ECOA).
Unanswered is whether the lender has committed itself to marketing its products in a manner that is fair, honest and transparent. In February of 2019, SoFi settled with the Federal Trade Commission (FTC) regarding unfair and deceptive marketing practices for its student loans. The FTC alleged that SoFi misrepresented savings from refinancing student debt – sometimes doubling the amount of savings – by excluding large numbers of it previous refinances from its calculations of estimated savings for new customers.[7]
Newspaper articles describe a SoFi algorithm in deciding who qualifies for loans.[8] These algorithms have raised significant concerns about disparate impact and fair lending violations because the public does not know what factors the algorithms consider in their underwriting decisions. Articles discuss how education at certain elite universities is weighted heavily, further tilting SoFi and other online lenders away from a diverse customer base and towards serving white and wealthy millennials.[9] In SoFi’s case, a trade publication reported that “SoFi’s underwriting process requires that a borrower has graduated from a selection of Title IV colleges….and has a job with significant income….” If an applicant graduated from a post-secondary institution outside of a subset of Title IV colleges, it is unclear if such an applicant would qualify for a SoFi loan or be rejected.[10] SoFi does not address whether it still uses algorithms and whether its underwriting process complies with fair lending laws. This is a glaring deficiency in the application that must be rectified before the OCC approves the application.
In addition, the application does not describe whether the products are consistent with safety and soundness, which is the statutory mandate of CRA. In order to be safe and sound, the student loans, consumer loans and home loans must be affordable in order to be sustainable for borrowers. The loan products must not be marketed in a deceptive and abusive manner designed to trick borrowers into accepting initially low rates that then rapidly adjust upwards. SoFi’s application is silent about these core issues of honesty, transparency and sustainability of its products.
Receiving a bank charter is a privilege, not a right. On-line lenders have proliferated, exploiting unproven marketing and underwriting approaches that raise significant questions regarding disparate impact, abusive lending practices and safety and soundness. SoFi is one of these on-line lenders that still must prove that it is responsible and inclusive. Its application falls short of requisite assurances of a public benefit. Moreover, its CRA plan is cursory and does not have specific and measurable goals necessary for the public to weigh its adequacy.
SoFi is a major lending institution with more than 1,700 employees and more than $50 billion in lending activity.[11] As such, it owes the public a comprehensive application and CRA plan that provides detail about robust compliance with CRA and fair lending laws. It must describe how it will marshal its resources for the benefits of modest income neighborhoods and communities of color recovering from the COVID pandemic. The application in its present form does not offer a CRA and fair lending commitment commensurate with SoFi’s size and market presence.
NCRC believes the SoFi must consider the following as minimal requirements for an online lender applicant creating a rigorous CRA and fair lending plan. Such a plan must be comprehensive, qualities missing in SoFi’s proposed plan:
Affiliates and Subsidiaries Must be Included
The application states that the new bank would take over the lending operations of SoFi’s non-bank affiliates as well as offering deposit products and banking services. However, the non-bank affiliate will still operate SoFi’s investment management business.[12] Presumably, this part of the operation involves offering investment services for consumers.
NCRC has advocated that affiliates must be automatically included in CRA exams. Affiliate activity is connected to bank activity. An overall company grows from selling consumers products from all parts of a company. Since the company as a whole prospers from its interconnected parts, the CRA obligation to use company resources to reinvest into communities must apply to all parts of the company. SoFiwould be in a position to engage in innovative approaches to satisfying needs of LMI communities if it applied the resources and expertise of its investment operations to LMI communities. It could design safe and sound investment products for LMI consumers to help them build wealth and thus make a contribution towards reducing class and racial wealth disparities in our country. In addition, it could use the assets of its non-bank affiliate to support community development loans and investments.
Assessment Area Cannot be Narrow but Must Include Areas Where a Substantial Amount of Business is Conducted
SoFi’s application establishes the Salt Lake City area and adjacent counties in Utah as the assessment area for SoFi Bank because the bank’s headquarters is located in the Salt Lake City area. This narrow assessment area is not truly responding to credit and deposit needs where SoFi is conducting business. SoFi will engage in lending and other business nationally. Its assessment area will thus fall short of meeting the convenience and needs requirement for a charter application.[13] SoFi is adopting the part of the regulatory definition of assessment area that relies on a banking model in which branches gather deposits. This definition does not apply to SoFi so the lender must utilize another part of the regulatory definition of assessment areas that allows assessment areas to be designated in areas beyond branches where substantial lending and business activity occurs.[14]
SoFi acknowledges the limitations of traditional assessment area designations by indicating that it seeks approval of a broader state and regional area (BSRA) that includes the states of Nevada, Arizona, California, New Mexico and Texas. However, a BSRA usually entails CRA examiners just considering community development activities and not retail lending, which SoFi will offer across the country. In addition to the BSRA, SoFi must identify other geographical areas with substantial amounts of its business activity in the South, Midwest and East Coasts. The assessment areas must reflect a diversity of areas and include smaller metropolitan areas and rural areas that are underserved as NCRC recommends for fintechs seeking bank charters.[15] NCRC used Lending Club data in our white paper submitted as Congressional testimony that described how to designate assessment areas based on lending data.
SoFi’s application states that it has 12 offices across the country but does not specify the geographical locations of these offices. The application must therefore be amended and re-submitted to indicate whether these areas are also suitable for assessment areas in which exams would rate retail lending as well as community development activities.
The greater Salt Lake City area is commonly referred to as a CRA hot spot because of the plethora of ILCs and special purpose banks located there. The competition among these banks to find CRA-related deals for community development is intense. The region has a surfeit of community development financing. If SoFi’s CRA program is mainly devoted to the Salt Lake City area, SoFi will exacerbate disparities in CRA resources among hot spots and deserts that are underserved areas. SoFi implicitly recognizes this dynamic as reflected in these quotes from its application and its decision to adopt a BSRA in which it will also conduct CRA activities.
With respect to community development activities, many of the Bank’s competing financial institutions have long track records of support of affordable housing, economic development, qualified investment and community development services. In pursuing its CRA program, the Bank will enter an active, mature and competitive community development marketplace.[16]
Use of the BSRA will provide the Bank with additional opportunities to identify underserved community needs and will reflect, at least in part, the Bank’s broader national market, as well as its California and Texas employee footprints.[17]
Recognition of the hot spot conundrum is not sufficient. SoFi must indicate in its application that it will not primarily serve the greater Salt Lake City area. Instead, SoFi must thoughtfully designate assessment areas throughout the country that serve a diversity of urban and rural communities, including several that are underserved as measured by access to loans and banking services.
Towards a Substantial CRA Plan that Includes Major Lines of Business
SoFi delineates CRA priorities in the following areas:
- Affordable housing;
- Small business formation, financing, employment, and growth;
- Financial literacy and financial planning;
- Expanding digital access.[18]
NCRC agrees that this list captures important community development needs but the list skirts SoFi’s major product lines in retail lending. A proposed strategic plan must indicate how a bank will utilize its major lines of retail lending in order to respond to LMI borrowers’ and communities’ need for credit and deposit services. If a bank omits or downplays using its major lines of business to meet its CRA obligations, it is not using its capacities, skills or resources to meet needs. SoFi’s comparative advantage (as pioneering economist Adam Smith would say) is its major lines of business. LMI communities would be deprived of the products SoFi excels in if SoFi’s strategic plan does not include comprehensive measurable goals for these products. The CRA plan in SoFi’s application refers to the development of measurable goals but then does not indicate what the specific performance measures would be. Would they include commonly used measures on CRA exams such as the percent of loans to LMI borrowers and communities? Would SoFi chose peer companies to compare itself to in its performance measures?[19]
SoFi’s application lists home loans, personal loans and student loans as major lines of business. In addition, it states that SoFi will be developing a credit card product. The CRA plan must describe measureable goals for each of these products. In addition, SoFi must describe product and underwriting approaches specifically for LMI borrowers and communities. CRA exams contain component tests that include evaluation criteria of innovation, flexibility and responsiveness to needs. If a CRA plan does not address how products will respond to specific needs in the LMI population, the CRA plan falls short of a bank’s obligation to respond to credit and deposit needs. SoFi describes its clientele as well-educated with strong credit profiles but facing financial challenges.[20] While NCRC does not challenge SoFi’schosen niche, NCRC insists that CRA imposes an obligation to serve LMI borrowers and communities as well, meaning that SoFi’s CRA plan must thoughtfully describe how its products will serve LMI populations.
Student Loan and Student Loan Refinancing
In addition to its established student loan markets, SoFi should consider for its CRA plan that a segment of LMI students attended for-profit colleges and vocational schools that have been widely reported as plunging their students into high levels of debt.[21] SoFi should devote a significant amount of its CRA plan to devising an outreach and loan program for LMI students. SoFi could find a large number of post-secondary institutions in its assessment areas that have sizable numbers of LMI students. It should market a student loan refinancing product and financial counseling to these students.
SoFi’s student lending must have clear and equivalent protections as federal loans. SoFi must also commit to not refinancing the loans of students with repayment plans that are income-based. These protections would be especially critical for any LMI customers of SoFi. Like student lending and refinancing, SoFi must develop measurable goals, products and marketing approaches for the LMI market for each of its other major product lines.
Responsible Lending
A charter application submitted by an on-line lender must have rigorous assurances of responsible lending. SoFi’s charter application does not provide sufficient detail on how the lender will not only comply with fair lending laws but also offer safe, sustainable, transparent and affordable products. A responsible lending commitment would include ironclad promises to adhere to federal and state protections for consumers, homebuyers, and small businesses. SoFi’s application does not include descriptions of how its products and underwriting approaches do not create disparate impacts or otherwise violate fair lending and consumer protection laws.
The description of SoFi’s fair lending compliance is described in this brief paragraph:
In addition to its CRA program, SoFi Bank is committed to fair lending practices. Specifically, SoFi Bank, consistent with the practices of SoFi, Inc. to date, will focus on safe and sound lending practices that are fully supported by a comprehensive compliance program that monitors and tests for adherence to applicable law and regulations, including those addressing fair lending, disparate impact, and the avoidance of abusive lending practices.[22]
SoFi’s algorithmic underwriting raises the possibility that people of color and LMI populations not graduating from elite universities are disproportionately not served or rejected for loans. The public does not know the impact of SoFi’s underwriting and marketing because SoFi is not subject to HMDA reporting requirements and also has not voluntarily disclosed data enabling an investigation of its lending practices.
SoFi’s student lending must have comprehensive protections that are currently lacking. As stated above, these protections are critical for LMI borrowers. SoFi offers home refinance loans as a means to consolidate student debt and lower interest rates.[23] The downside, however, is that a mortgage loan places the home at risk in the event of default, whereas the student loan does not. Also, borrowers lose protections associated with federal loans such as income-based repayment and loan payment deferrals in the event of job loss. Home refinance loans are not appropriate for borrowers with federal loans and could be problematic for those with private sector loans. SoFi must reveal the performance record of their refinance loans and the consumer protection safeguards it has applied to this loan product.[24]
On-line lenders have a controversial and inconsistent record of small business lending, employing deceptive tactics while offering high-cost loans.[25] The FAQs on SoFi’s small business lending program and its Lantern system for selecting loans for applicants does not provide assurances of responsible lending nor commits to serving minority-owned, women-owned or businesses in LMI communities.[26]
SoFi offers a large array of products, including several lending products, investment vehicles, insurance and deposit products. The application does not discuss how it would avoid inappropriate and illegal cross-selling activities. The public needs assurances that SoFi’s sales approach will not be overly aggressive and abusive.
Community Development Financing
A noticeable omission in the CRA plan is no mention of the bank’s likely asset size or dollar amount of deposits. Thus, the CRA plan does not project a ratio of community development financing (lending and investing) as a percentage of assets or deposits unlike other CRA plans that have been submitted to the agencies as part of charter applications. This makes it impossible for the public to judge SoFi’scommitment relative to its peers.
Using the recently released Federal Reserve database of CRA data, NCRC calculated median ratios of community development (CD) financing to deposits.[27] Large banks (with assets above $50 billion) had a median ratio of 7.4% while regional banks (assets between $10 billion and $50 billion) and community banks (assets under $10 billion) had median ratios of about 3%. It is impossible to suggest a target for SoFi Bank since the public does not know its probable deposit size. However, if it proposed a ratio substantially less than 3%, NCRC would consider this too low.
The descriptions of SoFi’s commitment to affordable housing is sparse. While the CRA plan provides several pages of demographic and economic trends in the Salt Lake City area, the most specific SoFi gets is this:
Based on the available housing data and these community priorities, there appears to be an opportunity for SoFi to play a role in helping create greater access to affordable housing for low- and moderate-income individuals. SoFi will consider targeted ways to put capital to work to improve greater access to affordable housing.[28]
The application describes housing prices and rents increasing considerably faster than incomes due to rapid growth and in-migration in the Utah assessment area. Yet, the response is so vague as not to be helpful in terms of judging its adequacy. How about committing to a low down payment homeownership loan or offering discounts to LMI homebuyers like SoFi offers to its members? How about more specifics regrading financing rental housing for LMI households?
SoFi’s description of responding to small business credit and capital needs is more specific. It discusses supplementing Salt Lake County’s start-up funding for small businesses and serving areas that the County’s program cannot serve because of federal funding restrictions.[29] However, it does not discuss whether equity investments or community development lending would make more sense and it does not offer an estimated dollar amount for financing and rationale for the financing level. Again, this makes it hard for the public to judge the adequacy of the CRA plan and SoFi’s intentions.
Perhaps the most developed and promising aspect of SoFi’s community development activities is its financial education plans.[30] The CRA plan indicates that SoFi will target schools with 50% of their students being LMI for financial education sessions regarding post-secondary financing options. NCRC has recommended repeatedly in comments on charter applications that fintechs must apply their expertise to their CRA programs; SoFi’s financial education approach utilizes SoFi’s expertise as a student lender. Likewise, SoFi indicates that it will develop webinars and tutorials to help adults plan for paying for their children’s college, their retirement and other life events. This effort should be supplemented with in person training and counseling to increase its effectiveness. Lastly, SoFi states that it contemplates mentoring for small business start-ups and supporting small business incubators.
While the financial education plans are more developed than the affordable housing or small business initiatives described above, they do not describe how many of the 1,700 SoFi employees will be involved nor how many hours will be committed. The CRA plan should also compare SoFi community service initiatives to its peers so the public can better judge its adequacy. Further, these activities should extend beyond Utah and into the proposed BSRA. In person training could also be conducted by SoFi employees located in the 12 offices across the country, some of which are likely to be located in other parts of the country besides the Western region.
Conclusion
SoFi’s application is an improvement upon the ILC application it submitted to the FDIC in 2017. Yet, significant questions concerning SoFi’s practices remain such as whether it still uses algorithms for underwriting that may exclude protected classes without business justification.
Despite its improvements, NCRC believes that the application must be re-submitted and cannot be approved in its current form. The current application has little information about fair lending compliance despite the significant concerns about SoFi’s lending practices. The CRA plan provides a skeleton of proposed activities and merely professes that performance measures will be produced in a subsequent CRA strategic plan.
The CRA plan provides no performance measures or specific numerical targets for significant products lines nor does the CRA plan describe what the performance measures will be (such as percentages of retail loans to LMI borrowers or ratios of CD financing to deposits). In addition, the CRA plan offers only a few examples of how community development initiatives will be responsive to needs. Overall, the public has no way of judging the adequacy of the CRA plan due to its vagueness.
Thank you for the opportunity to comment on this important matter. This letter represents the perspective of NCRC and the undersigned organizations. If you have any questions, you can reach me or Josh Silver, Senior Advisor, on 202-628-8866.
Sincerely,
Jesse Van Tol
CEO
Undersigned Organizations
National
National NeighborWorks Association
Alabama
NAACP
California
California Reinvestment Coalition
Fair Housing Council of Orange County
VSEDC
Delaware
Delaware Community Reinvestment Action Council, Inc.
District of Columbia
Coalition for Non Profit Housing and Economic Development
Florida
Community Reinvestment Alliance of South Florida
Goldenrule Housing
Metro North Community Development Corp.
Solitas House
Hawaii
Hawai’i Alliance for Community-Based Economic Development
Illinois
Woodstock Institute
Indiana
Northwest Indiana Reinvestment Alliance
Kentucky
Metropolitan Housing Coalition
REBOUND, Inc.
Maryland
Maryland Consumer Rights Coalition
Massachusetts
Community Service Network
Missouri
Justine PETERSEN
Metropolitan St. Louis Equal Housing and Opportunity Council
Old North St. Louis Restoration Group
RAA – Ready, Aim, Advocate
Mississippi
Housing Education & Economic Development (HEED)
Montgomery Citizens United for Prosperity (MCUP)
North Carolina
Henderson and Company
Reinvestment Partners
New Mexico
Southwest Neighborhood Housing Services
New Jersey
New Jersey Citizen Action
New York
Fair Finance Watch
PathStone Enterprise Center
Ohio
Another Chance of Ohio
Columbus Compact dba Columbus Empowerment Corp.
Home Repair Resource Center
Working In Neighborhoods
Oregon
CASA of Oregon
NeighborWorks Umpqua
Proud Ground
Pennsylvania
Ceiba
Pittsburgh Community Reinvestment Group
Texas
Southern Dallas Progress CDC
Wisconsin
Metropolitan Milwaukee Fair Housing Council
[1] Comptroller’s Licensing Manual, Charters, September 2016, p. 96, https://www.occ.gov/publications/publications-by-type/licensing-manuals/charters.pdf,
[2] Nathaniel Popper, SoFi, an Online Lender, Is Looking for a Relationship, New York Times, October 19, 2016, http://www.nytimes.com/2016/10/20/business/dealbook/sofi-an-online-lender-is-looking-for-a-relationship.html
[3] Press Release, Lawyers for Civil Rights, DACA Discrimination Class Action Against Online Lender (May 19, 2020), http://lawyersforcivilrights.org/our-impact/economic-justice/daca-recipient-files-discrimination-class-action-against-major-online-lender/.
[4] SoFI application, p. 6
[5] See https://www.sofi.com/member-benefits/#member-benefits-section-one
[6] See https://www.sofi.com/career-coaching/
[7] FTC Approves Final Order with SoFi, February 25, 2019,
https://www.ftc.gov/news-events/press-releases/2019/02/ftc-approves-final-order-sofi
[8] The Economist. (2016, January 14). So Far, So Good. Retrieved July 03, 2017, from https://www.economist.com/news/finance-and-economics/21688439-fintech-darling-offers-new-modelone-not-without-risks-so-far-so-good
[9] Penny Crosman, Is it OK for Lending Algorithms to Favor Ivy League Schools?, American Banker, March 9, 2017, https://www.americanbanker.com/news/is-it-ok-for-lending-algorithms-to-favor-ivy-league-schools
[10] SoFi vs. Earnest Comparison appearing in Lendedu, April 21, 2017, https://lendedu.com/blog/sofi-earnest-comparison
[11] SoFi Application, pp. 2-3.
[12] SoFi Application, p. 9.
[13] SoFi Application, p. 3.
[14] §25.41(c)(2) Assessment area delineation, https://www.ffiec.gov/cra/regulation.htm
[15] NCRC’s Congressional Testimony On Fintech Oversight, February 2018, https://ncrc.org/ncrcs-congressional-testimony-fintech-oversight/
[16] SoFi Application, p. 15 of CRA Plan
[17] SoFi Application, p. 5 of CRA Plan
[18] SoFi Application, p. 18 of CRA Plan
[19] SoFi Application, CRA plan, p. 18.
[20] SoFi Application, p. 3.
[21] Woodstock Institute, Starting out Behind: Trends in Student Loan Burdens at For-Profit Colleges (May 2015), http://www.woodstockinst.org/research/starting-out-behind-trends-student-loan-burdens-profit-colleges
[22] SoFi Application, p. 3 of CRA plan.
[23] See https://www.sofi.com/home-loans/mortgage-refinance/
[24] Ann Carrns, How Refinancing Your Mortgage Can Pay Off Your Student Loan, November 9, 2016, New York Times, https://www.nytimes.com/2016/11/10/your-money/how-refinancing-your-mortgage-can-pay-off-your-student-loan.html
[25] Woodstock Institute, Analysis of Business Loan Terms, Fact Sheet, http://www.woodstockinst.org/research/analysis-business-loan-terms
[26] See https://www.sofi.com/lantern-smb-marketplace/
[27] NCRC Supplemental CRA Comment Using Federal Reserve CRA Data, see Table 7, https://www.ncrc.org/ncrc-supplemental-cra-comment-using-federal-reserve-cra-data/
[28] SoFi application, p. 16 of CRA plan.
[29] SoFi application, p. 17 of CRA plan.
[30] SoFi Application, p. 20 of CRA plan.
