The View from Both Sides

Former CFPB deputy director and now Fenway Summer managing partner Raj Date takes an informed look at the regulatory environment, non-QM loans, and what drives financial tech successes (and failures)

Raj Date’s history — tenures as both executive and policymaker, with work over the years in financial technology, investment banking, and law — positions him particularly well to offer an informed look at what the future may hold in both the public and private spheres of financial services.

Date, who was the first-ever deputy director of the Consumer Financial Protection Bureau, now is managing partner of Fenway Summer, an advisory and investment firm focused on financial services and financial technology. He’s on the board of a number of financial services firms: Prosper, Green Dot, Circle, College Age, Megalith. Prior to his time at the CFPB, he was a senior vice president at Capital One, a managing director at Deutsche Bank, a McKinsey consultant, and founder of the Cambridge Winter Center think tank.

Date recently spoke with Mortgage Media’s SA Ibrahim about what challenges he sees facing the CFPB. Ibrahim, who recently retired as CEO of Radian Group and had previously been GreenPoint Mortgage CEO, has been concerned about the over-aggressiveness of the CFPB. The two industry vets also discussed the prognosis for Non-QM loans; what makes FinTech and other firms attractive for private equity; and what separates the FinTech winners and losers.

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Having left the bureau six years ago, “I am mostly involved with CFPB and the other financial regulators now as one of the regulated, having a principal stake in lots of different financial services companies, some or all of which have some supervisory relationship with the CFPB or the bank regulators, the SEC,” Date said. He notes that he and his colleagues at Fenway’s advisory affiliate, FS Vector, also help clients shape business strategy in a way that not only won’t get them into trouble with the regulatory agencies but can “harness a little bit of a tailwind” in terms of where the policy landscape may be heading.

“I think this is going to be a challenging time for the bureau, and I’m just very thankful now that there’s a permanent director in place.” Date said, referring to Kathy Kraninger, who took office in December. “I think the bureau, when we were building it, we had the advantage of being able to attract really committed people who were hyper-energetic about the mission of the place at a time where — I don’t care what your political leanings are like in 2010, 2011, nobody was saying, ‘Well, our financial services regulatory scheme in the U.S. – that feels about right. There is no room for improvement.’ Nobody thought that coming out of the crisis. And as a result, it was quite easy to be able to recruit people who were really talented, really energetic, and willing to make … building this new agency a real centerpiece of their professional careers.”

Good thing, too, because it was an “almost otherworldly difficult” task, consolidating authorities from six or seven different agencies, Date noted. It had a post-merger feel in a way, he said — except in most post-merger environments, it’s usually clear who’s acquiring whom. And it was a substantial strategic overhaul — there’d be no point to the time, expense and energy if there wasn’t a commitment to crafting a “different and better” regulatory approach. When he got to Treasury, he said, there were maybe a dozen people, working in the “sub-basement,” trying to put together the CFPB. When he left in 2013, there were about 1,200.

The bureau has seen significant shifts in approach — from an aggressive enforcement environment under former director Richard Cordray to a decidedly less aggressive one under former acting director Mick Mulvaney. Date hopes having a permanent director in place will help solidify the bureau’s mission to keep the organization moving in one direction.

“I think the main challenges are not so much policy challenges for the CFPB over the coming years, but more cultural ones,” he said, noting it’s hard to retain superstar talent and keep an organization’s momentum going if people are unsure of the fundamental mission. Having Kraninger in place should help, he noted — “but like many others across the industry, the most I can do is just cross my fingers and hope.”

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Noting that many on the industry side were worried about what was perceived as barriers put in place of serving some segments of the market, Ibrahim asked Date to evaluate the state of the non-QM market. After all, Ibrahim noted, both then and now Date was known for encouraging: “There is a way of doing this. Don’t give up.”

Date said he thinks non-QM loans are easier now than immediately in the wake of the ability-to-repay rule coming into place, though the growth of that particular market is slower than it could be, for assorted reasons. “Probably the single most important one is that the footprint of the agencies is not substantially smaller now than it was at the time of the crisis,” he said. And in this rate environment, there’s a feeling that if you can qualify for an agency, conforming or jumbo loan, you should probably go for it.

Coupled with the substantial state of agency execution is an understandable conservatism, a “natural reticence” on fixed-income investors’ parts — the mid-‘00s still loom pretty close in the rear-view mirror, after all. So with those two factors in play, “it’s hard to fight that headwind in a particularly effective way,” Date said.

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Software company Ellie Mae’s recent acquisition by private equity investment firm Thoma Bravo, LLC raises the question of whether more such deals can be expected regarding such major players — Ellie Mae is, after all, the industry’s leading cloud-based platform provider.

Date thinks more such deals are certainly possible and likely, as FinTech firms in particular offer opportunities that are very attractive to private equity.

“I think that there’s fundamentally a terrific amount of opportunity within financial services broadly to be able to earn excess returns by virtue of the dislocation of existing business models — most of that dislocation being enabled by technology that is very real,” he said. “This is not science fiction stuff. It’s here-and-now advancements that are both possible and are being executed on by actual teams in the actual market.” And this goes beyond just having a slick, fancy website to originate loans you would have originated anyway. Date, who is an investor in Better Mortgage, said it means “being able to use digital distribution to engage with customers in ways in which they really want to engage and thereby create a thicker relationship … that creates and leverages more data and is fundamentally stickier with customers over time.”

There’s also a superior use of data and analytics abetted by technology. Back in 2007 or so, the state of the art in terms of credit underwriting was the log regression modeling based on credit bureau data, Date noted, adding that some 30 percent of people’s credit risk can’t be easily modeled through traditional scoring. That model is no longer state-of-the-art, at any rate: Machine learning approaches can offer “manifestly superior outcomes” in terms of sloping credit risk compared to what the capabilities used to be.

“And that’s not because in the old days we were just stupid or something,” Date said. “It’s just that the computational power was not there. And as a result, we’ve been able to unlock some real analytic approaches by virtue of computational speed being better, which in turn enables new algorithmic approaches to making decisions.”

Add in improvements to the FinTech infrastructure being pursued — by, among others, Circle, one of the companies in Fenway’s orbit — and Date sees FinTech businesses as being very attractive to investors.

“So lots of very interesting things to do. And then when it comes to private equity, the math doesn’t lie. We’ve had so much venture investment and so much energy in FinTech, but precious few public market exits, which means that it is probably the case that there are a number of surprisingly big, still growing, profitable, cash-flowing, leverageable companies in FinTech that are quite ripe, I think, opportunities for private equity investment. So I think we’ll continue to see that activity moving forward.”

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Speaking of FinTech, there have been some impressive successes among companies that have launched — and some spectacular failures. What separates the winners and losers here — what differentiates the success stories from the cautionary tales?

While cautioning that “not all of the ink is dry yet” in terms of evaluating success in the long term, Date named two factors that he sees as common among the success stories.

“One is that they began by working backwards from an actual, tangible, concrete customer need that exists in real life,” he said. “So for example, because we were early investors in some blockchain-related companies, we have seen a great many blockchain entrepreneurs whose strategy can be summed up as, ‘Well, gosh. This is a very interesting advance in computer science. Surely I must be able to do something.’ … That’s usually not the way in which great companies are born. They are engineered the other way. What’s a real concrete customer need and how do I work backwards from it in order to solve it?”

The second factor is something he calls “paradoxical conservatism”: a fresh and novel attitude combined with execution that minimizes risk.

“In other words, it’s hard to build new businesses. There are easier ways to make a living, and if you really want to build something new and solve a problem through a way that is novel takes energy and enthusiasm and zeal and a borderline crazy commitment to a vision of the future,” Date said. “And we want people with that amazing zeal and energy, but we want them to be able to execute in the most conservative way possible because at the end of the day, it’s financial services. It’s people’s money, and it is highly regulated for a reason and the little things matter. And finding management teams who have that paradoxical combination of zeal and conservatism, I think, is a real marker between things that have real legs going forward and things that don’t.”