Wednesday August 30st 2016, Daily News Digest

Wednesday August 30st 2016, Daily News Digest

Correspondance From our readers regarding yesterday’s comment of why verified-income borrowers perform less well than verified one. Rich said “Hi George – on the question about why non-verified incomes perform better: could be because the rules they apply to determine whether to verify are more powerful than the lift from verification. Example: only verify if Fico […]

Wednesday August 30st 2016, Daily News Digest

Correspondance

  • From our readers regarding yesterday’s comment of why verified-income borrowers perform less well than verified one.
  • Rich said “Hi George – on the question about why non-verified incomes perform better: could be because the rules they apply to determine whether to verify are more powerful than the lift from verification. Example: only verify if Fico < 650.  This could cause the effect. I have no info on how LC underwrites – all speculation”
  • I assumed that a random sample was picked to verify income for. If the sample was not random, the source of our mystery is certainly most likely there, indeed.

News Comments

United States

United Kingdom

European Union

Indonesia

Australia

New Zealand

 

United States

Behalf Raises $ 27 Million, (Finovate), Rated: AAA

In a round led by new investor Viola Growth, small business financing innovator Behalf has raised $27 million in Series C funding.

Behalf pays vendors directly on their small client’s behalf – hence the name.

Behalf was founded in 2011 and is headquartered in New York City. he company has doubled revenues every six months since inception, and recently added Jorgen Bocklage, founder of 118 118 Money and former VP of Finance at fellow Finovate alum Dashlane as its new CFO.

Consumer Unsecured Q2 2016, (Orchard Platform), Rated: AAA

2014 vintage charge-offs have increased more steeply than in recent years, aligning closely with rates we saw in 2011 and 2012. While some of this trend can be attributed to deteriorating loan performance, most of it is due to the continued growth of subprime loan origination platforms. These platforms charge off at higher rates but offer investors increased interest rates as compensation for this additional risk. There’s not enough 2015 vintage performance data to draw any conclusions yet but we will be closely monitoring how that vintage performs in the coming quarters.

Across the industry, Q2 origination volume was down approximately 34% from Q1 origination volume, and down approximately 16% from Q2 2015 origination volume. Following years of consistent quarter-over-quarter increases in originations, we continue to see declines so far in 2016. Recent news and volatility at several of the largest originators have led to softening origination volumes, but we’re not ruling out an uptick in growth later this year as confidence and capital returns to these platforms.

Borrower rates rose 96bps in Q2 as a result of increases made by several originators to borrower interest rates in an effort to reignite investor demand in loan purchases.

Source : Orchard Platform

Source : Orchard Platform

Source : Orchard Platform

Three Takeaways From Square’s Latest Earnings, (Fortune), Rated: AAA

Online lending is still massive and growing: Square’s lending arm, Square Capital continues to be one of the bright stars in the company’s suite of services outside of payments. In the second quarter, Square extended nearly 34,000 business loans totaling $189 million, an increase of 123% year over year and 23% from the previous quarter in 2016.

Square originally launched the lending arm in 2014 to provide cash advances to merchants using Square’s point of sale service. Square recently announced that it would be expanding into traditional online loans, with fees between 10% to 16% of the amount borrowed.

Last quarter, Square said it was experiencing “challenging credit market conditions” and also reported delays in signing new investors to back its fledgling lending business.

Square sells the majority of its loans to third parties for an upfront fee and a small ongoing servicing fee. This quarter, Square said that it added five new investors to invest lending capital.

Is The Future Of Alt-Lending Playing Well With Others?, ( Pymnts), Rated: A

The biggest and most surprising change of direction on the “beating” vs “joining” question doubtlessly comes from the rapidly evolving world of online lending.

The banks, for a variety of reasons, aren’t going anywhere, which means a lot of lenders like Fundation are looking more into joining — and to connecting their lending platform to those banks customers.

Online lending, particularly its marketplace variant, solved a lot of problems at once and quickly attracted interest from all corners. By 2015 it seemed certain to many sober judges that lending was a business that technologists were going to slowly devour out from under the banks.

But a year can make a big difference, and the summer of 2016 is a very different place than the summer of 2015.

Today, investors have more options — less risky ones (more on that in a second) — and that has resulted in fewer marketplace loans getting bought.

Borrowers also have more options as credit has thawed for even sub-prime buyers.

“It’s saturated. Hundreds of platforms are going after the same pool of customers.”

Graziano describes Fundation as a “credit solutions provider” more than a lender — noting that the power of its offering is in the tools it offers around online applications and data-intensive credit algorithms to partners.

The Composite Model: A Viable Future for Online Lending, (Crowdfund Insider), Rated: A

Composite lending combines two models – balance sheet lending and marketplace lending – to deliver best of both worlds: all the benefits of marketplace lending, combined with the reliability and resiliency of balance sheet lenders.

Marketplace lenders shot into the spotlight just a few years ago, promising faster, easier access to credit than ever before, for those wanting or needing it.

If a recession or downturn causes loan requests to dry up or investors to pull back, marketplace lenders have no other reliable source of capital generation – making going out of business a probable fate.

As the saying goes, “you need to have money to make money” – and a comparison of marketplace lenders to balance sheet lenders proves this.

In many instances, marketplace lenders’ biggest problem is their borrowers, many of which are subprime. In addition, analyses have shown that these borrowers often borrow money to pay off debt, but then just end up accruing more debt.

In an effort to grow capital, marketplace lenders may assume even more perilous risk positions, which just leads to more delinquencies and defaults and can quickly accelerate the downward spiral.

As we have noted, the advantages of the marketplace lending model are very real.

CredibleFriends launches P2P bitcoin credit line mobile app, plans credit card, (SMN Weekly), Rated: A

Only recently CredibleFriends raised $100 006 of its $250 000 fundraising goal on the cryptocurrency crowdfunding site BnkToTheFuture from 87 backers, surpassing the $100 000 needed by July 15  to ensure the funds pledged will be deposited.

“The mission at Credible Friends is to get digital currency into everyone’s pocket by making it insanely easy to extend credit to the people you know and trust already,” Zach Doty, CEO Credible Friends told Bravenewcoin.com.

The platform locks in a 15% return, depending on defaults. A loan of $575, or 1 Bitcoin today, will be worth $661.2 in a year, regardless of the price of Bitcoin at that time. While this may work for or against the lender, it removes volatility.

Borrowers are charged 25% APR interest using the average daily balance method and the interest is charged monthly.

United Kingdom

Have online lenders changed their spots, (Alt Fi), Rated: A

Is it all just buttressing lending capital and trimming down costs? Has nothing else changed?

Transparency has long been pitched as the panacea to the industry’s so-called incentivisation problem.

However, as we at AltFi have repeatedly pointed out, standards of disclosure vary immensely across the industry. There are limits to the alignment that static loanbook disclosure can effect. There are also limits to what sense can be made of static loanbook disclosure, and to what extent investment decisions can be based upon this granularity of information.

In the UK market, AltFi Data Analytics provides investors with a real-time view of the performance of four of the “big five” marketplace lenders – Zopa, Funding Circle, RateSetter and MarketInvoice.

It’s “real-time” because the product is powered by loan-by-loan, cash-flow level data. But more important, perhaps, is the fact that the data has been packaged up into a series of tools which allow for seamless segmentation and intuitive analysis.

Finally, in questioning whether or not the online lending sector is changing shape, it would be remiss of me not to mention the imminent arrival of a brand new cadre of formidable-looking sector entrants.

Goldman Sachs is set to launch Marcus, an online lending outfit that will target both consumers and business, in October. Rumour has itthat Marcus loans will be funded by Goldman’s New York State-chartered banking subsidiary.

American Express, the $55.13bn market cap credit card giant, has also launched a platform – a short-term lender for small business owners in the US named Working Capital Terms.

And, of course, there’s the JPMorgan Chase initiative, made possible through a collaboration with OnDeck.

European Union

Two Years of Investing in Property Development Loans at Estateguru, (P2P-Banking), Rated: B

Estateguru is a p2p lending marketplace in Estonia focussed on bridge loans to property developers in Estonia. Since the launch in 2014 Estateguru has facilitated a loan volume of more than 10 million Euro in a total of 65 loans.  Typical interest rates range from about 9% to about 12%.

Many investors keep some cash in the Estateguru account in order not to miss out, when new loans appear. Tiny loans (< 40,000 EUR) are sometimes 100% funded by the time the email arrives.

Indonesia

Check out the new fintech industry partnerships announced during the IFFC 2016, (e27), Rated: A

Several companies even had the opportunity to sign their MOU on stage during the opening ceremony, with President Joko Widodo witnessing the process.

Investree – Bank Danamon

P2P lending platform Investree announced their partnership with Bank Danamon on the first day of IFFC 2016. Bank Danamon will be handling cash management for lending activities facilitated by the Investree platform, which connects lenders to SMEs. The startup has been working with Bank Danamon since its launch in October 2015.

Dimo – Sinarmas Bank

Mobile payment startup Dimo and Sinarmas Bank were one of the businesses who had the opportunity to sign their MOU in the presence of President Joko Widodo.

AMVESINDO – SVCA

On the venture capital firms side, Venture Capital Association for Indonesian Startups (AMVESINDO) and the Singapore Venture Capital and Private Equity Association (SVCA) announced the formation of the ASEAN Venture Council.

Australia

XBRL to flatten information asymmetries in the small business lending market, (DailyFintech), Rated: AAA

Like English is to business, so too in many ways is XBRL to data.

It is the common language many governments and startups now hope will become the standard by which organizations share and translate information between each other. Today, without broad take-up of XBRL, many governments, investors and businesses are currently in the dark when it comes to analyzing the mountains of unstructured data thrown at them by financial entities.

For small business finance and banking, XBRL has the potential to not only reduce the need for multiple data entry, but to also allow for greater comparability and portability of financial information. This opens the door to significant productivity savings and reduced financing costs to boot.

In 2010 Australia made inroads into encouraging adoption of XBRL through the launch of its Standard Business Reporting (SBR) initiative. Using SBR enabled software, businesses across Australia can now lodge key government forms (tax returns etc) straight from their accounting software to relevant government agencies. According to a report from the Australian Business Register, at the end of June 2014, over 568,000 reports had been lodged using SBR since its implementation in mid-2010.

Unsurprisingly, there is evidence that suggests XBRL can play a role in lowering the cost of lending. After being spearheaded by the National Bank of Belgium back in 2005, today more than 95% of Belgian private firms’ annual accounts are voluntarily filed in XBRL.

Research published in the Journal of Accounting and Public Policy in April 2016 has also indicated a correlation between XBRL adopters and lower interest rate spreads.

There is nothing more satisfying than being understood. Yet for many small business owners seeking credit, this is still far more difficult than it should be. XBRL has the potential to help both sides of the lending equation communicate with each other better, faster and more fluently.

ASIC Talks Regulating Fintech Insurgents, (Which 50), Rated: AAA

The corporate watchdog has its eye on new business models in financial services such as marketplace lending.  ASIC established its Innovation Hub in April 2015 in order to proactively engage with the fintech sector and help start-ups navigate ASIC’s regulatory system.

“We are making senior ASIC staff available at places like Stone and Chalk from time to time to answer questions,” said Tanzer.

In the first twelve months of operation, ASIC’s Innovation Hub worked with 93 entities, with 66 receiving informal assistance. As a result, 15 previously unlicensed innovative businesses have received a new financial services or credit licence since March 2015. The Innovation Hub has established relationships with international regulators in Europe, North America and Asia to discuss innovation developments and policy proposals.

An Innovation Hub Taskforce has also been formed, which includes senior executive leaders from many teams in ASIC and commissioner John Price.

The regulator has also have established the Digital Finance Advisory Committee, or DFAC for short, which is made up of industry, consumer and academic representatives.

New Zealand

LendMe sympathizes with Harmoney but says not in the same boat, (Stuff), Rated: B

Peer-to-peer lending service LendMe says it sympathises with Harmoney over a lawsuit filed by the Commerce Commission though it doesn’t believe the whole industry is under threat.

Harmoney, which is part-owned by Trade Me and Heartland Bank, has syndicated $300m of unsecured loans through its website which acts as matchmaker between borrowers and lenders.

Harmoney chief executive Neil Roberts said on Monday that an unfavourable ruling could “spell the end of the industry in its current form”.

A commission spokesman noted Harmoney would continue to be able to earn a margin from lenders who advanced money through its website, which those lenders could recuperate through interest payments.

LendMe chief executive Marcus Morrison said it was in a different position to Harmoney as all but one of the $3m of loans it had facilitated were to trusts and small businesses, to which the CCCFA did not apply.

Morrison said he sympathised with Harmoney, however. “They are providing a service and they feel they should be able to earn something for that. Harmoney has obviously fulfilled a strong need otherwise they wouldn’t have been able to do this level of lending.

Another disagreement between Harmoney and competition watchdog opened up after the commission denied a claim by Harmoney that the company had circulated copies of its proposed fee structure to the commission prior to it being granted a P2P lending licence by the Financial Markets Authority (FMA) in 2014.

Though Harmoney would have disclosed that information to the FMA, that authority “didn’t have any involvement with the CCCFA”, he said.

Some people who have lent money through Harmoney complained on Stuff that it had had virtually no loans awaiting fulfillment in recent days, meaning they had funds sitting idle on call that they were unable to invest. Harmoney responded through a spokesman that investors’ appetite to lend money through Harmoney had grown at a faster pace than borrowers’ willingness to take out loans, even though the latter had doubled.

Author:

George Popescu

A bonfire of the Swiss watches

Ever since the Chinese government cracked down on “gift giving” as part of its anti-corruption campaign, Swiss watch exports have taking a beating.

Here’s the trend, courtesy of a UBS European luxury note out Wednesday:

Continue reading: A bonfire of the Swiss watches

Ever since the Chinese government cracked down on “gift giving” as part of its anti-corruption campaign, Swiss watch exports have taking a beating.

Here’s the trend, courtesy of a UBS European luxury note out Wednesday:

Continue reading: A bonfire of the Swiss watches

UK banks and their own decaying NIMs

This is a prophecy brought to you by Citi:
Over the past five years the incumbent UK domestic banks have managed to maintain and improve net interest margins. As asset yields have declined the banks have been able to respond via careful liability manag…

This is a prophecy brought to you by Citi:

Over the past five years the incumbent UK domestic banks have managed to maintain and improve net interest margins. As asset yields have declined the banks have been able to respond via careful liability management, lowering savings rates and retiring expensive legacy wholesale funding issued during the financial crisis.

We believe this positive trend is now set to stall and reverse. While banks will probably be able to mitigate the impact of lower rates over the next 6 months, we fear that beyond this net interest margins [NIMs] could fall sharply.

Continue reading: UK banks and their own decaying NIMs

Further reading

Elsewhere on Wednesday,
– Reverse Voxsplaining the EpiPen issue: Drugs vs chairs.
– Buzzfeed on ISDS, part two: The billion-dollar ultimatum.
– The economics and politics of manufacturing fetishism.Continue reading: Further reading

Elsewhere on Wednesday,

- Reverse Voxsplaining the EpiPen issue: Drugs vs chairs.

- Buzzfeed on ISDS, part two: The billion-dollar ultimatum.

- The economics and politics of manufacturing fetishism.

Continue reading: Further reading

FirstFT – EU opens door on Apple, Trump’s economic plan and the CIA’s venture capital firm

Tech group to pay billions in back taxes, opening door for other European and US tax authorities

Continue reading: FirstFT – EU opens door on Apple, Trump’s economic plan and the CIA’s venture capital firm

Tech group to pay billions in back taxes, opening door for other European and US tax authorities

Continue reading: FirstFT – EU opens door on Apple, Trump’s economic plan and the CIA’s venture capital firm

Mixing investment banking and P2P lending

Mixing investment banking and P2P lending

Crowdstacker stands out for bringing the traditional investment bank manual in-depth underwriting approach to p2p investors. They provide 30 to 40-page information brochures that cover everything about the company including the risk percentage of investing in the company, helping the lender in making an informed decision. As as result, the company was the 2nd FCA regulated […]

Mixing investment banking and P2P lending

Crowdstacker stands out for bringing the traditional investment bank manual in-depth underwriting approach to p2p investors. They provide 30 to 40-page information brochures that cover everything about the company including the risk percentage of investing in the company, helping the lender in making an informed decision.

As as result, the company was the 2nd FCA regulated P2P lender and among the 1st Independent Finance ISA (IFISA) authorized P2P lenders.

The process

They have a simple investment process. They present businesses who want to borrow the money to investors. They call it “the stack.” The stack is built on four criteria’s.

  • Financial Health- It is critical that business is financially sound and can make the payments.
  • Security- In some cases, they take security for a loan over the company’s asset, such as property.
  • Restrictions- It imposes prudent restrictions on the company as to what they can or cannot do.
  • People- It keeps an eye on the reputation and track record of the people who run the business, to make sure they have the experience and qualification.

As an investor, one manually select the business they want to lend to from the Crowdstacker stack. In return, they earn interest every quarter and the principal is return at the end of the term.

In the last 12 months, the start-up has raised $6 Million for two companies. This investment was made by private investors rather than institutional investors.

Crowdstacker is only the 2nd fully authorized P2P lending platform by FCA. Crowdstacker acts a facilitator between lenders/investors and businesses who want to borrow money. The loan size required by borrowers on the Crowdstacker platform is bigger than that of other P2P platforms focussed on small and medium business lending. The main reason for focussing on growing and established businesses is they minimize the risk of defaults.

Company history

Crowdstacker is based out of London and was established in May 2014 and a subsidiary of Nineyards Captial. Two experts in the field of alternate lending came together to start this venture. Karteek Patel has 14 years experience in finance and also a founder of futures and options business, managed independent UCTIS platform and was a fund manager as well. His field of expertise includes launching multiple hedge funds, developing new financial products among other things. Mark Bristow is a chartered accountant and has over 14 years of experience in the financial sector and that includes 5 years in developing financial solutions in renewable industry and has assisted clients in making portfolios of renewable assets using various forms of financing. They have won Best New Peer to Peer Provider Award in January 2016, they were the finalist for “Best P2P Lender 2016” and also nominated for “Best Peer to Peer Platform 2016”by online wealth awards.

Business model

They have a simple business model; they do not charge anything from the lender. They charge a setup fee between 20,000 to 40, 000 GBP from borrowers to put together the documentation with a made to order animation video and 3.5% of the funds raised plus 0.5% admin fee for monitoring the loan and servicing.

The underwriting

Ex-auditors, accountants, attorneys, and sometimes industry specialists make up the credit committee team who decides about the commercial terms of the loan by looking at the company financials and assets. The biggest limitation they are facing is the quality of borrowers.

Since Crowdstacker is the 1st company to become and IFISA manager, their lending volumes have increased quite a lot. They turn down the borrowers who do not match their criteria. Their goal is not to do a bulk of loans at a time, instead, the founders want to concentrate on the quality of loans which is beneficial for the company and the lender. Hence finding the right borrower is fundamental for attracting the lenders.

A criterion for choosing a borrower is decided on few factors:

  • Companies have to have more than 3 years of track record.
  • They need to be profitable.
  • Whether the companies can afford to borrow goven their cash flows.

The regulatory structure

Each lender enters into a loan contract, known as 36H agreement. Each lender loans through that contract to the borrower. The Same type of agreement is required if anyone wants to have such loan in IFISA and the platform also needs to be qualified as well. Crowdstacker acts as a security trustee on behalf of the lenders. It also provides loan monitoring for the clients. It uses a 3rd party custodian to hold the client money and regularly monitor the interest payments and the borrower.

Secured Lending

In the case of defaults, it depends whether the loan is secured or not. So far, they have only done secured loans and they act as security trustee. In the event of a default, they contact the company or they use an enforcer who will take steps to recover the money or the last resort is selling the collateral properties to recover the funds. Default and recovery are the two metrics of the business. In the case of defaults, they make sure they have recourse against the company and its cash flows.

Due to the company’s automation and pre-screening process, they quickly select which companies qualify and merit potential underwriting attention.

Crowdstacker’s goal is to become part of the borrower’s long-term funding strategies with repeat business. They diligently work hard to bring clients on board who can stay with them for a long period of time and who are capable of doing successive raises.

Author: Heena Dhir

 

Secured Lending

Secured Lending

While a sturdy job market is giving a sense of security and optimism to American employees, it is not the sole reason for the increase in borrowing. The stagnation in wages; fall in gas prices and the considerable increase in home equity loans, all are contributing factors to  the rise in demand for loans. Secured […]

Secured Lending

While a sturdy job market is giving a sense of security and optimism to American employees, it is not the sole reason for the increase in borrowing.

The stagnation in wages; fall in gas prices and the considerable increase in home equity loans, all are contributing factors to  the rise in demand for loans. Secured personal loans, auto loans, home loans, loans for luxury items like furniture or boats, all are expected to relish bigger demand this year.

Secured loan numbers

Trans Union expects average secured personal loan balances to increase to $17,904 up from $17,411 at the end of 2015, with the volume of secured loans increasing by 3%. In addition to forecasting a rise in demand for private loans, Trans Union expects no change in default rate in 2016. Of the 13.6 million customers who had a secured loan balance as of the third quarter of 2015, 7.13 million were within the prime and higher risk tiers and 3.34 million were within the subprime risk tier.

According to Real Trac statistics in 2015, 1.08 million U.S. properties had foreclosure filings on them. These filings cover default notices, regular auctions, and bank repossession, and are down 3% from 2014. In 2015, a total of 449,900 properties were repossessed by the lender, up 38 percent from 2014. Average price for the bank owned homes in 2015 was down by 41% below the average price of all homes, which is the biggest discount on bank-owned houses since 2006. The foreclosure process in 4th quarter took 629 days on average as compared to 630 days in 3rd quarter, but this number was still 4 % more than what it was in the 4th quarter of 2014.

US auto loans have touched the $1 Trillion mark in total size recently and there are concerns of a sub-prime auto lending bubble in the market. The size of an average auto loan is more than $30,000. An industry report released by Transunion (image below) documents the slide in lending standards with 11 basis points increase in average delinquency from 1% in q2 2015 to 1.11% in Q2 2016. The average auto loan balance has also grown by 2.7% during the period.

Along with the delinquency rates, it is important to understand how the collateral is monetized by the lender and what kind of recovery rates are achieved on repossession.  If a client defaults on a home equity loan or a home equity line of credit, the lender can foreclose the house. While the process varies from state to state, but generally default begins after no payment is made for 150 days. Although foreclosure normally takes 2 to 18 months, some foreclosures can take two years or more.

Secured loans are not always secured

Similarly, if someone defaults on their automobile loan, banks take the ownership of their vehicle. Most banks will first issue a notice to a client in default; usually, the allotted time period is seven days, in which they can make good on their payment. If they cannot meet the deadline or renegotiate their loan terms, the lender can petition a court for a permit to repossess the vehicle.

After the bank repossesses the property, it usually takes 3 to 6 months, before the lender can put an REO property on the market. This blocks their capital acts as a huge drag on growth. Lenders are not experienced in maintenance and repair; so they hire professionals to maintain the properties, which again cost money.

This has led to a scenario of “Bank walk-aways”; a situation where banks do not foreclose because the collateral is so underwater that the proceeds from a sale would not be enough to cover the transaction costs of implementing the foreclosure itself. In Oakland County, 27% of foreclosures in the last 5 years were categorized as walk-aways by a news report. Secured loans don’t seem secure anymore!

Secured loans in p2p

On the other side, in the p2p lending industry, the decline in the rate of returns, increase in default rates and saturation in unsecured loan markets have pushed fintech lenders into entering the secured loan segment.

Companies like Realtymogul, Patchofland, Driveup, Zopa.com, etc have started lending against property, cars, gold and other physical collateral. This may entice the investors who might have burnt their hands at unsecured lending; believing that secured lending will ensure protection from capital loss. But it is vital that start-ups understand the existing scenario of secured lending in America and have processes in place to ensure that collaterals can be repossessed and monetized on a feasible basis.

The start-ups will need to rely on many external vendors for enforcing repossession, auctions etc. It is here that the lender needs to be sure that the company itself and its vendors are fully compliant with all the relevant federal and state laws.

Complytrac is one of the leaders in the space and its partnership with alternative credit data giant-Microbilt has given it a powerful platform to attract fintech clients. Microbilt also has multiple products which are being used by lenders to ensure that secured loans are actually secure. Its ID verification and background screening tools are considered by experts to be amongst the top solutions in the industry.  It’s SmartTrac, Property Search report, SPOT verified place of employment, Trace details, and other services have become the standard in the marketplace. Though there have been many launches in this space, Microbilt continues to hold its leadership position due to the staggering data at its disposal. Its alternative credit data points are 3 times more than the combined alternate data of the three largest consumer credit agencies.

Transition from unsecured to secured

Secured lending is a welcome extension for the p2p lending industry which had earlier exclusively focused on unsecured consumer and business lending. Secured lending will allow risk-averse lenders to join the marketplace lending platform for investing and generating superior returns. But secured lending brings its own set of headaches for young start-ups. Compliance needs to be top notch especially during repossession, auction etc. Credit analysis and fraud detection will still play an extremely important role in ensuring that the lenders are not taken for a ride. Investing in the top of the line solutions for combating defaults and ensuring compliance is not a question of choice anymore for young fintech start-ups, but necessary for survival.

Author: Heena Dhir and George Popescu

George Popescu

 

Art and devolution

The following piece is a review of a new Off-Broadway adaptation of The Iron Heel, a book by Jack London. This review is also itself an adaptation of Leon Trotsky’s 1937 review of the The Iron Heel. Do follow along with the Trotsy original — and excuse the excessive adverbs, for which Trotsky had an unfortunate weakness.

The play produced upon me—I speak without exaggeration—ambivalence. Not because of its artistic qualities: the form of the play here represents only an armour for propaganda analysis, and a reminder that the West hasn’t developed any new forms of political organisation since index funds socialism. The director is intentionally nostalgic in his use of audience sing-along. He is himself interested not so much in the fate of socialism as in the fate of political discourse. By this, however, I don’t want at all to belittle the post-structuralist value of the work, especially in the fourth-wall-breaking commentary of one actor in its late scenes. The questions of narrator trustworthiness develop subtly. Nevertheless, this is not the main feature. The play surprised me with the sentimentality and rosiness of its historical framing.

Continue reading: Art and devolution

The following piece is a review of a new Off-Broadway adaptation of The Iron Heel, a book by Jack London. This review is also itself an adaptation of Leon Trotsky’s 1937 review of the The Iron Heel. Do follow along with the Trotsy original — and excuse the excessive adverbs, for which Trotsky had an unfortunate weakness.

The play produced upon me—I speak without exaggeration—ambivalence. Not because of its artistic qualities: the form of the play here represents only an armour for propaganda analysis, and a reminder that the West hasn’t developed any new forms of political organisation since index funds socialism. The director is intentionally nostalgic in his use of audience sing-along. He is himself interested not so much in the fate of socialism as in the fate of political discourse. By this, however, I don’t want at all to belittle the post-structuralist value of the work, especially in the fourth-wall-breaking commentary of one actor in its late scenes. The questions of narrator trustworthiness develop subtly. Nevertheless, this is not the main feature. The play surprised me with the sentimentality and rosiness of its historical framing.

Continue reading: Art and devolution

Tuesday August 30st 2016, Daily News Digest

Tuesday August 30st 2016, Daily News Digest

News Comments Today we have few articles but really good ones. Read an in-depth analysis of Lending Club’s business, triggered by the poor article in Bloomberg. A great article showing clearly how the 2016-student-loans-market compares unfavorably to the mortgage-market pre-2008. Did you know that Kabbage is using FICO’s rules engine ? Neither did I. And […]

Tuesday August 30st 2016, Daily News Digest

News Comments

United States

European Union

New Zealand

  • A great article showing how the regulator looked at Harmoney’s business model. Approved it. And now the regulator is suing Harmoney because of their business model. It’s fun to do business in New Zealand. Do we need regulators to regulate regulators ? Not that my opinion matters much, but charging a fee that is a % of the loan principal paid at disbursement , in my eyes, does not make Harmoney a creditor as the fee is paid regardless if the loan is paid back or not.

 

United States

Camino Financial Raises Million in Equity Financing, (PR Newswire), Rated: AAA

Camino Financial, an online credit marketplace focused on extending small business loans to Hispanic-owned businesses, the largest and fastest growing underbanked business segment in the U.S. The Company recently raised an additional $2 million in equity financing.

Last November, Camino Financial raised $750,000 in seed capital backed by institutional and angel investors.

The company raised an additional $2 million series seed financing led by Collaborative Fund and Hunt Holdings LP, in collaboration with Comcast Ventures Catalyst Fund and Impact America Fund, among other influential angel investors..

Twin brothers, Sean and Kenny Salas, incubated Camino Financial while completing their MBAs at Harvard Business School. As sons of an entrepreneur who lost her Mexican restaurant chain after 25 years in business, the Salas twins founded Camino Financial to empower small business owners with knowledge and capital.

How Bloomberg’s ‘Expose’ On LendingClub Is Wrong, (Seeking Alpha), Rated: AAA

 

A recent post on LendingRobot analyzed the performance of LendingClub’s repeat borrowers (Disclosure: I work as an IAR at the company that posted this analysis) and concluded that:

  1. LendingClub did not hide that it was issuing loans to repeat borrowers.
  2. Repeat borrowers had delinquency rates 4% lower than the platform average and had a higher ROI.

The Bloomberg article states:

“That Sims was able to use an algorithm and a home-built computer to pinpoint problematic loans…”

Saying that the loans are problematic supposes that these loans perform worse than average. As seen in the previously mentioned study, repeat borrowers perform better than the average loan.

The Bloomberg article states:

“In Portland, over coffee, Sims said he’d found thousands of instances from 2009 through 2011 in which LendingClub seemed to allow borrowers to split their loans in two if their first attempt to get a loan didn’t find any takers.”

It shouldn’t be a surprise that a borrower can have more than one loan since the following is stated on LendingClub’s website:

The Bloomberg article states:

“It also chose not to verify the incomes of most of its borrowers, arguing that unverified loans performed as well as verified ones. The practice is defensible-credit card issuers rarely verify incomes-but banks generally do so for the sort of fixed-rate loans LendingClub offers. In any case, the practice cut against Laplanche’s story about his standards being more rigorous than those of conventional banks.”

The article neglects to show the data on LendingClub’s income verification. In fact, LC has verified the income of over 50 percent of borrowers since 2010.

What is more interesting is looking at the charge-off rate of these loans. Write-offs for non-verified borrowers are consistently several percentage points lower than verified borrowers.

The article states:

“Even so, in loan applications, borrowers have made reference to bankruptcies, divorces, and medical procedures-information that could be linked to them publicly if someone were determined to do so. ‘What’s scary is that everybody who has taken out a loan is in there,’ Sims said. ‘You don’t expect that if you apply for a loan, everybody is going to be able to find your income and everything else. It’s this black hole of bad stuff.'”

This is partially true. Data for issued loans is publicly available, though the company redacts personally identifiable information. Data for applicants who did not receive a loan is heavily truncated. Here is a sample of these entries:

The article states:

“British asset management firm Baillie Gifford, at one point LendingClub’s second-largest shareholder, sold its entire stake.”

This statement leads the reader to believe that all investors are jumping ship. Most surveyed analysts don’t recommend selling the stock.

In addition, the article leaves out that, as one major investor was selling, another was buying. After all, there are two sides to every stock transaction. For instance, Shanda Group bought an 11.7% stake in LendingClub in May, and purchased an additional 3.4% of the company in June to become LC’s largest shareholder.

Regarding the stock price, the article notes that after Renaud left the company:

“LendingClub’s shares fell again, losing half their value by the end of the week.”

The article neglects to share that the stock has rebounded 60% from its lows in mid-May.

The article states:

“The company arranged about $2 billion in loans last quarter-and has more than $500 million in cash, according to regulatory filings.”

Actual cash and cash equivalents listed in the SEC filing is $572.9 million. The article neglects to mention that LendingClub also has an additional $259.5 million in sellable securities, which brings the company’s total available reserves to $832.4 million. The company could lose $80 million per quarter for more than two-and-a-half years before this reserve is exhausted, something other peer lending companies probably envy.

The article states:

“… Sims tuned in to an earnings call, learning that LendingClub had lost more than $80 million. Its CFO was also resigning.”

These two sentences put together imply that the CFO was forced out due to the company losing $80 million. The article leaves out that the CFO decided to leave earlier in the year, and was asked to stay until the company was able to “navigate current events.”

Moving Forward

Reading articles like the recent Bloomberg piece makes it sound like there are still “shady things” to be uncovered, but this is unlikely. With the stock currently trading at 2x book value, the bad news of lower revenue and originations for the next two quarters has already priced into the stock. I expect that if the company’s recent key hires succeed in quelling regulators and attracting institutional money, the stock will rebound quickly.

The student loan conundrum, (Washington Times), Rated: AAA

At every political event I’ve been to this election cycle — Democrat or Republican, down-ballot or top of the ticket — a millennial always asks the same question to whomever is running.

“What are you going to do to make college more affordable and lower student loans?” they ask sincerely. And there’s no question as to why — average annual tuition at private universities have skyrocketed to $26,740 in the 2014-2015 school year from $9,882 in the early 1980s.

What these millennials really need to understand, is that high-college tuition is partially the result of well-intended but ill-conceived liberal policies that were kicked into high gear under President Barack Obama.

For Mr. Obama took the student loan industry public when he passed the Affordable Care Act in 2010, making the Department of Education the originator of about 90 percent of U.S. student loans. Today, student loan financing roughly equals nearly a quarter of the government’s annual federal borrowing.

As more students were able to borrow more money, colleges, in turn, increased their tuition costs, according to an analysis of the Federal Reserve Bank of New York.

Remember the government-induced housing bubble? Same thing. The more loans you can get — regardless of credit qualifications — the higher the prices become. Everyone is happy — until repayment time comes.
The employment market, although better than it was in 2009, is still in recovery and, as millennials will tell you, jobs aren’t plentiful and competition is more intense — they’re now competing against more college-educated youth.

More than 40 percent of Americans who borrowed from the government’s main student-loan program aren’t making payments or are behind, according to recent data.

“If student debt continues to skyrocket, the federal government may have to deal with as much as a $500 billion write-down when future defaults and loan-forgiveness programs are factored in,” Mr. Pianko wrote.

What’s the answer?

S.P. Kothari, a professor at the MIT Sloan School of Management, had an interesting idea: restructure the Federal Direct Loan Program to base loan amounts on field of study and earning potential.

“When the government is in the business of offering credit, as it is now with student loans, it should think hard about credit risk,” he wrote in The Wall Street Journal with Korok Ray, a professor at the Texas A&M University. “One of the chief lessons of the 2008 financial crisis was that mispricing credit risk can have catastrophic consequences. Yet the government’s Direct Loan Program mostly ignores the credit risk of students, treating them largely as identical in their long-term employment outcomes.

“If the housing market crash taught us anything, it’s that all bubbles will burst. It’s time for the government to start backing off,” she wrote.

How Kabbage knows if it can lend you 0,000 in just seven minutes, (IT Business), Rated: A

A partnership with Scotiabank will give access to the loans platform founded in 2009 to the bank’s customers in Canada and Mexico. The loans in Canada are for a six-month term and work as a line of credit, and can be for as little as $1,000. Even though Scotiabank describes Kabbage as a financial technology startup that’s disruptive to the loans business, it’s supported the firm since last year, when it invested in Kabbage through the ScotiaBank Digital Factory.

How Kabbage has been able to evaluate a mass number of loan applications and determine fair rates for those approved has changed since it first started operating to serve the eBay sellers market in 2009. At first, it was licencing a rules model to process the data from another third-party provider. But when it began struggling to make instant decisions and lacked a variety of financial models, Petralia knew she had to fix the problem.

irst, she tried to build an in-house rules engine.

“I made the mistake of assuming we could do it,” she says. “We couldn’t execute on that and we needed more support.”

Looking back on the experience, Petralia compares trying to build a new rules and decision-making software to trying to build a custom CRM for her company. She uses Salesforce.com for her CRM rather than trying to focus time and energy on something that’s not a core competency, and for the rules engine, she turned to FICO.

After hiring external consultants to evaluate options and going through an RFP process, Kabbage settled on the San Jose, Calif.-based firm that’s best known for creating the industry-standard score for evaluating consumer credit risk in the U.S. Namely, it adopted FICO’s Origination Manager Decision Module for the task.

That’s no surprise to Tim VanTassel, vice-president and general manager of FICO’s credit risk lifecycle line of business. He says that supporting alternative lending services like Kabbage is now part of of FICO’s business strategy.

FICO’s module crunches the data that Kabbage pulls in and applies the rules to it so loans can be automated, he explains. Since in the loans business, you expect that some segment of the loans will go bad, you charge enough interest to cover that loss. But the real trick is in determining the appropriate amount to both cover that loss while keeping your products priced to sell.

A typical Kabbage loan transaction could call on 30 different data sources and up to 50 different models to score that data at any different time. So at least one aspect of FICO’s software that helps ensure the best model is being used is a Champion-Challenger process.

This predictive analytics algorithm will compare different models against a historical data set to determine which model is most effective. By doing this, VanTassel says that Kabbage can hone its understanding of specific markets over time.

Petralia says the software also allows her team to test the deployment of models. That makes it easy for an analyst to try a model on a smaller portion of loan applications, and if it proves a good change, bump it up to cover a wider swath.

If she had to function without FICO, she could turn to competitors such as IBM for a rules engine, she says. But she’s content with her vendor.

European Union

EstateGuru.co ­- a p2p lending platform is launching its first investment opportunity in Latvia, ( Company Press Release), Rated: B

EstateGuru is the leading Baltic peer­to­peer lending platform for secured short and mid term property loans.

Within two years the platform has provided funding for over 65 projects by investors from 27 European countries. In August 2016, the platform reached a remarkable milestone when loans provided through the platform surpassed €10 million. Now, EstateGuru is launching its next phase of success by entering the Latvian market.

EstateGuru’s 4500 investors are always ready to fund promising business plans provided security is in place.” Summarises EstateGuru Co­Founder and CEO Marek Pärtel.

EstateGuru’s first Latvian project is a bridge loan secured by residential project at Zentenes 19a in Riga with the loan amount of up to €430,000 allowing investors to earn 12.5% p.a interest rate from their investment.

EstateGuru platform has provided successful funding for several high­end development projects, the biggest being Mardi street residential development project in Tallinn city centre (€2,2 million). Even though the minimum investment is €50, biggest portfolios in the platform exceed €500,000.

The funding speed on the EstateGuru platform is increasing by the project with the current record being €31,000 in 31 minutes.

Average loan sizes through the platform are €162,227, with the LTV (Loan to value) ratio being 58.62% and historical average returns of 11.77%. The average loan term is 14 months. To date, €3.4 million of loans provided has already been repaid and investors have received a total of €409,771 in interest. None of the loans have defaulted and all present repayments are on schedule.

New Zealand

Commerce Commission attempts to establish how the Consumer Finance Act 2003 applies to peer-to-peer lender’s ‘platform fee’; Harmoney ‘disappointed’ with action, (Interest), Rated: AAA

Since its incorporation in May 2014, Harmoney has charged borrowers a ‘platform fee’ that is added to all loans funded through its platform.

Before December 2015 Harmoney set the fee at a percentage of the amount borrowed.

The Commission’s view is that the platform fee is a credit fee under the Act, and that Harmoney is a creditor. That was changed, but the commission says it understands that the lending transaction remains fundamentally the same

Harmoney says it is not a creditor, and that the fee is the revenue it earns for running its loans marketplace.

The commission says that while its case relates primarily to the original platform fee regime, the Court’s answers will apply to any fee structures that are similarly constituted.

There are now four P2P companies in operation, with different business models. Both Squirrel Money and Lending Crowd launched with flat fees, assuming they were party to the CCCFA. But LendMe has argued its fees are not credit fees under the CCCFA.

The Commission has made its application under section 100A of the Commerce Act which enables it to seek the opinion of the High Court on issues of law. This is the first time that the Commission has made an application under section 100A in a consumer credit case.

Harmoney’s joint chief executive and founder Neil Roberts said that prior to launching the Harmoney peer to peer marketplace the company documented the business model in detail following extensive legal advice and working with all stakeholders during the licensing process prior to being granted its peer to peer licence by the Financial Markets Authority.

The Commerce Commission disputes this comment, saying it was not given all the information about Harmoney’s set up and fees modelling prior to launch.

Through its PR company Harmoney has, later in the day, disputed the commission’s assertion and produced two documents, here and here that it says shows the commission was consulted on fees and other aspects of Harmoney’s business prior to launch.

For the year to 31 March 2016, Harmoney recorded a loss of $14.2 million before tax on revenues of $8.6 million. Roberts says, “We have invested heavily in the platform to open up a new asset class for retail investors and a frictionless experience for borrowers, a genuine alternative that creates competition in the financial markets. Like many tech start-ups we are not yet turning a profit, and continue to invest as an innovator in the P2P lending market.”

LendMe chief executive Marcus Morrison said his company was “having quite a bit of dialogue with Comm Comm (and their lawyer) late last year” but have not had any since.

“We made our stance and process very clear to them at that time. We believe that the our platform fees are not deemed credit fees under the CCCFA in that the borrowers’ ability to drawdown their loan is in no way contingent upon their payment of the platform fee (paid to LendMe) and that the fee is not in any way passed on to the lender. “In any case, virtually all of our borrowers have either been commercial entities or trusts and so are not subject to the requirements of the CCCFA,” Morrison said.
Author:

George Popescu