It’s not usually a good thing when your biggest export market, biggest source of foreign direct investment, and the country that owns your entire banking oligopoly experiences a major economic slowdown. Yet New Zealand, at least in the past decade or so, watched its fortunes wane as Australia’s mining sector boomed, while the bust in Oz has gone hand-in-hand with stronger growth in Middle Earth.
It's not usually a good thing when your biggest export market, biggest source of foreign direct investment, and the country that owns your entire banking oligopoly experiences a major economic slowdown. Yet New Zealand, at least in the past decade or so, watched its fortunes wane as Australia's mining sector boomed, while the bust in Oz has gone hand-in-hand with stronger growth in Middle Earth.
The mortgage industry of the US has matured over the past few years, many distinct phases of evolution has helped it to reach its current status as the largest and most advanced home-financing market in the world. In 2014, around 4.94 million of existing homes were sold within the U.S. Ever since 2008 financial collapse; […]
The mortgage industry of the US has matured over the past few years, many distinct phases of evolution has helped it to reach its current status as the largest and most advanced home-financing market in the world.
In 2014, around 4.94 million of existing homes were sold within the U.S. Ever since 2008 financial collapse; each and every mortgage is closely scrutinized in an effort to avoid the mistakes that led to the collapse. CFPB (Consumer Financial Protection Bureau) has amended the HMDA (Home Mortgage Disclosure Act) and changes will be rolled out in 2017.
The final rule reflects the CFPB’s belief that the HMDA data should be updated to handle the informational shortcomings exposed by the 2008 financial collapse and to fulfill the wants of householders, potential owners, and neighborhoods throughout the country. Notable amendments are listed below:
Any banks, institution or non-profit organization which has not originated at least 25 covered close-end mortgage loan or at least 100 open end lines of credit in each of two preceding years and does not meet other criteria, will not come under Regulation C. This change will eliminate reporting requirement for low-volume depository institutions.
Financial institutions must report information about applications for and originations of closed-end home improvement, home purchase, and refinancing loans.
Lending institutes will be required to collect, record, and report information for preapproval requests for home purchase loans that were approved but not accepted. Under the current regulation, such collection is optional.
Information about applicants and borrowers, including age, credit score and debt-to-income and combined debt-to-income ratios.
Information about the loan process, including whether the application was submitted directly to the institution, whether the loan was, or would have been, initially payable to the institution, and the name of, and results from, the automated underwriting system that was used.
Information about the property securing the loan, including value and type (e.g., manufactured home).
Information about the features of the loan, such as total loan costs or total points and fees, origination charges, discount points, lender credits, interest rate, prepayment penalty term, loan term, introductory rate period, and non-amortizing features.
Certain unique identifiers, such as property address, legal entity identifier for financial institutions, and mortgage originator NMLSR identifier.
In its endeavor to coordinate reportage necessities with well-established data standards and thereby reducing the reportage burden on lenders, the HMDA Rule modification includes legal entity identifier, universal loan identifier, purpose of loan, preapproved amount, construction technique, type of occupancy, loan quantity, ethnicity, race, sex, type of buyer, rate spread, status of lien, and reason for denial. Presently under Regulation C, the reportage of the explanations for denial is non-mandatory, though some establishments are needed to report the explanations under separate rules.
For data collected in or after 2018, the rules would require an establishment to report whether or not it collected information concerning the applicant’s or borrower’s ethnicity, race, and sex based on visual observation or by surname. Additionally, an establishment has to allow the customer to self-identify their own ethnicity and race by filling out disaggregated ethnic and racial subcategories. These amendments will help to bring transparency and ensure fair lending. Government and other public agencies also use this information to decide how to allocate to community and housing investment.
Earlier, the major flaw in the HMDA act was if the loan was denied, nobody knew for sure the reason for the loan request being rejected. Was the issue large debt to income ratio or bad credit score or was it because of someone’s race or ethnicity. To overcome this problem, CFPB has mandated to file a detailed report of the applicant which will include income ratio, credit score, charges, and fees. The issue is the enhanced reporting requirements might lead to overwhelming of the current system resulting in erroneous filings. Reporting inaccurate data can have severe implication in the shape of penalties; public agencies rely on this data to decide how well the public is served, and reporting wrong data can have an adverse effect. Another concern lending industry has with regards to reporting the information is CFPB has not yet determined how much information will be made public and what will be kept confidential by CFPB. Ensuring consumer privacy and rendering useful information will be a tough balancing act for the agency.
The new and changed information requirements will generate extra scrutiny for lenders and a proactive approach to these changes is important. The new data sets can embody far more details regarding lender, borrowers, credit, collateral, loan type, pricing, fees, and charges. This information will allow the regulators and personal parties to investigate a lender’s practices in a much more detailed manner than is presently doable. For instance, the age of the person or receiver may probably be analyzed in conjunction with rating, ethnicity, or geographic information so as to spot potential instances of discrimination. Lenders will be compelled to take into account the impression HMDA information has made and make applicable changes to policies, procedures, and pricing concerns. The additional information needed for loan rating (e.g., origination charges, discount points, loaner credits, and interest rate) is possibly of great interest to regulators and the potential complainant. State regulators could utilize this information so as to spot violations of limitations on fees and charges.
Even though changes do not take effect until 2018, but never the less it is not early to look at the compliance management system in order to determine how new information will be collected and added to current HMDA system. Since HMDA system will be required to manage a large amount of additional data, the current system needs to be assessed if it can handle the additional data or not. Lending institutes should also identify the deficiencies in their systems and take corrective measures before the system takes on the additional load. Will the current staff suffice to manage the new requirements? What training resources need to be introduced to impart knowledge to the staff about the new changes? Internal audit, compliance should begin planning for new changes. Lending institutes should be prepared to conduct a self-analysis of their data well before the effective date of the new rule.
One such company that has built its business on facilitating financial and mortgage companies in transition is Altisource. Its client includes one of the nation’s largest sub-prime servicers, government agencies and multiple lenders, servicers, investors, mortgage bankers, credit unions, money services corporations, and hedge funds across the country. It boasts of 9,000 employees across the globe. Its wide range of services includes:
Real Estate Investor Solutions
Consumer Real Estate Solutions
The company is a leader in proprietary business processes, vendor and electronic payment management software and behavioral science-based analytics. It is redefining the industry standards and helping lending organizations have a renewed focus on compliance. The company is led by William Shepro, an industry veteran and previously COO of Ocwen Solutions.
With over 20 major regulations supervising the industry in the US, the compliance is burdensome for largest of companies leave alone nimble fintechs looking to disrupt the market. The 2008 financial crash and the consequent emergence of CFPB has been a good thing but has added a layer of compliance for the lenders. It is essential that Fintech start-ups with relatively little experience ensure that they are on the right side of the law. With no major financial backing, it can be a death knell for a startup to be caught on the wrong side of regulators. Partnering with an established compliance solutions provider like Altisource would not only help in ensuring compliance but will also signal prospective investors that they are not going to find any nasty legal surprises after investing in the company.
News Comments Today’s main news: 2017 Forecast of MPL ABS volumes. Today’s main analysis : Discussion, ahead of Q3 Lending Club results, of present data and expectations. Lending Club’s PPT presentation where they announced and discuss auto lending. Today’s thought-provoking articles: A Marketplace critic supported by PwC’s denovo quarterly report. United States A weekly summary of the MPL space […]
US GDP growth clocked in at an annual growth rate of 2.9% and the probability of a December rate hike is increased to over 70%. A
2017 Forecast by PeerIQ, (Email), Rated: AAA
We expect the U.S. MPL market to grow in 2017. Specifically, we expect 47% YoY growth ($26.7 billion in life-to-date new issuance volumes since 2013) in the new issuance market under our base case.
Our forecast methodology is as follows:
We start with consumer demand. We observe re-leveraging of consumer credit post-2011 and conclude that consumer demand for loans will continue to expand in 2017.
We predict continued demand for short duration MPL ABS bonds given i) elevated interest rate risk and potential steeper yield curve for fixed-income investors, and ii) the favorable relative value of MPL ABS to other credit spread products.
We build a bottoms-up framework that examines the pace and size of deal activity across repeat issuers to forecast 2017 ABS volumes under a base, bear, and bull case.
Finally, we observe that ~55% of loans were funded via the ABS market in 1H 2016. We use an assumption of 50% funding via ABS to back out total MPL originations.
In our base case, we do not foresee a severe negative shock to the U.S. economy, and consumer debt growth stays on the same trajectory as next year. As the U.S. household market moves out of the balance sheet deleveraging phase, we expect an expansion in the total addressable consumer credit market.
Fixed-income Investors Continue to Favor MPL ABS in 2017
Asset managers are seeking short duration assets that have lower interest rate sensitivity in a rising rate environment. Within the ABS sector, we observe that marketplace ABS papers present strong relative-value. For instance, MPL student refi ABS papers retains ~50 bps of spread pick-up as compared to traditional private student loans ABS.
Fixed-income investors, especially traditional securitized product investors, will continue to actively bid the MPL ABS bonds in 2017 amidst rising inflation expectations and a global reach for yield. A healthy yield appetite from bond investors will support stable demand for new issuance.
Repeat Issuers Continue to Power the New Issuance Market in 2017
We believe that the emergence of repeat issuers and broader rating agency coverage allow the MPL ABS category to be incorporated into mainstream ABS sector.Indeed, as warehouse financing roll risk increases non-bank lenders are increasingly funding via securitization to raise permanent, low-cost, non-recourse capital.
MPL ABS Issuance to Grow Approximately 47% YoY for 2017
Looking ahead to 2017, we believe that the MPL ABS new issuance market will continue to be dominated by repeat issuers, such as SoFi, Marlette, Avant, Earnest, CommonBond, and others.
Given the repeat issuers make up about 80% of the MPL ABS issuance, we put our base case new issuance outlook at $11.2 billion, or a $26.7 billion total ABS issuance, backed by $30 billion of loans, by YE 2017. We ignore growth in the real estate MPL market for this analysis (although we do observe ABS activity with LendingHome and expect others to follow).
In a recent article on Lending Times, Suber highlighted 5 lessons learned during 2015:
We can’t do it alone
You better have awesome partners
Focus on what’s critical on your path to success
A reputation takes years to build, but minutes to tarnish
Victory goes to the ones that change and adjust
But the fact of the matter is that online lending is based on a simple premise of providing a better service, at a lower cost, while delivering higher returns for investors. While some observers are of the belief the industry is not sustainable because they aren’t banks (and don’t have deposits), the industry continues to evolve, adjust and improve – addressing challenges head on.
Loan originations are growing again. Online lending is not a static industry but fairly agile and, if Orchard is correct, “things appear to be getting back on track”.
“While it’s now clear that all press is not good press, 2016 was a year of complete industry education, awareness, and understanding (EAU). 2017 will become the year of platform profitability, ubiquity and secured permanent capital for the leading online providers of credit to consumers, small business, mortgage, student and real estate loans.”
In 2016, the trend reversed. For Lending Club, total originations for Q2 2016 came in at $1.96 billion, down from a peak of $2.75 billion in Q1. In 2Q15, Prosper reported a steep decline of over 50% in originations compared to same period a year before.
The hype can be clearly seen in PwC’s DeNovo quarterly report, which tracks fintech trends. Marketplace lending was the top trend for the first three-quarters in 2015 but dropped to the second-largest trend in 4Q15. In 1Q16, the industry did not even make the top 10.
The repercussions of such action are now visible with a rise in delinquencies and a damning report from Moody’s questioning the viability of the asset class. “Investor overreacted to that news,” said Wu, adding that the 2015 vintages are hurting current performance, overshadowing newer and better vintages that will generate long-term growth and returns for investors.
Marketplace lenders are at a crossroads. The resulting shakeout, however, might prove to be beneficial to the market.
“Investors are getting more realistic about returns, and platforms are getting more realistic about what they can get away with. They need to come back and offer products that are compelling for investors,” Wu concluded.
Lending Club guided investors to a 3Q loss of -$15M to -$30M.
This may be optimistic, as originations likely shrunk from $1.9B to $1.5-$1.75B.
The company is likely to announce an adjusted loss of $20-$40M.
In a previous article, we noted that Lending Club had several chores ahead of it in order to win back investor confidence.
Demonstrate to regulatory authorities that fraud had not spread throughout the company
Immediately adapt company expenses to match the lower revenue growth expectations
Shore up note investor confidence in the company’s efficacy and underwriting
On Auto Loan Refinancing
Lending Club began as a way for consumers to obtain non-secured loans. The auto loan refinancing business represents a move into secured assets and puts further distance between Lending Club and the retail investors it once relied upon. The company noted that most auto dealers place a 1-3% surcharge on top of the loan that is backed by the bank, and the competitive advantage of the auto loan refinancing is that the company will be able to offer lower rates by cutting out the middleman.
In their statement, we noted that loan servicing is outsourced. With no ordination fee charged to borrowers and no servicing fee charged to lenders, it is unlikely we will see these loans on either the whole loan market or the fractional market. Either Lending Club will remain a balance sheet lender, or it will securitize the loans and sell them in batches to institutional investors.
Although Lord Turner said that peer-to-peer lenders are “a useful part of the system” he cautioned that regulators should be concerned by any move towards complex securitisation – when debts are packaged together as financial instruments to be sold on. The “real flashing red light” would be the emergence of instruments such as structured investment vehicles (SIVs), he warned.
Korea is at the initial stage of embracing fintech, compared with other industry-leading marketplaces such as the United States or the United Kingdom,” the 31-year-old CEO said in an interview.
“But the fintech market here is getting more activated and popularized, as Korea is on a path to deregulate for emerging fintech business,” he said. “In the U.S. and China, the fintech market is growing fast, due to their open environment toward regulations.”
“Korea has tight and centralized financial information management infrastructure, which is why I believe the nation will become one of the world’s most influential fintech powerhouses,” he said.
“We collected some 800,000 big datasets in Korea to analyze investment patterns of each investor,” he said. “The big data allowed us to create a ‘recommended algorithm’ for investors. This is then used to create a more specific and personalized investment portfolio for them to reinvest on our platform.”
LENDIT is currently the nation’s top-tier P2P lending operator. The company has grown rapidly to have lent a total of more than 21 billion won in just 18 months after its foundation in March last year.
Toronto-based Lending Loop, a platform connecting small businesses in need of financing with Canadian investors, is open for business after completing its registration with the Ontario Securities Commission and additional regulators. It is available in every Canadian province except Quebec.
Founders Cato Pastoll and Brandon Vlaar launched Lending Loop in late 2015. The registration process to become an exempt market dealer began this March.
Chinese news website The Paperreports that hundreds of groups of freelance debt collectors have emerged on Chinese social media, dubbing the phenomenon a”gray chain of debt collection.” Users in these groups would share “best practices” from bombarding borrowers with frequent phone calls to posting public notices around their homes or even swarming them with “beggars,” practices that a Chinese lawyer told The Paper could veer into illegal territory.