Commercial banks have cheap capital and a large loyal customer base, but their inability to execute loan requests in a hassle-free and time-sensitive manner has led to a customer exodus toward online lenders. Due to marktplace lenders disrupting the lending space, banks are finding it difficult to stop the downward spiral into obsolescence. One software […]
Commercial banks have cheap capital and a large loyal customer base, but their inability to execute loan requests in a hassle-free and time-sensitive manner has led to a customer exodus toward online lenders.
Due to marktplace lenders disrupting the lending space, banks are finding it difficult to stop the downward spiral into obsolescence. One software company selling online origination platforms to banks, however, may change that.
Alliance Partners, headquartered in Maryland, launched in 2010 to solve this pain point for traditional banks. In 2012, they secured $150 million from BlackRock, John Delaney, Jason Fish, and Blue Mountain Capital Management LLC. Co-founder Fish is also a director of Congressional Bank and co-founder of Capital Source. Co-founder and Non-Executive Chairman of the Board Lee Sachs has served as counselor to the secretary of the treasury and head of the Crisis Response Team.
The idea behind Alliance Partners is to provide banks with the technology, technical personnel, credit risk management system, regulatory expertise, and other strategic resources for the purpose of better managing bank portfolio strategies.
There are approximately 2,000 mid-size banks with asset holdings between $200 million to $10 Billion. They all share a common challenge, have access to low-cost capital, have established customer relationships based on trust, and maintain robust real estate portfolios. However, their weakness is in dealing with process-intensive funding requirements like C&I and SME lending. Twenty-five years ago, for instance, banks with fewer than $10 billion in assets had approximately 80 percent consumer loan share. Today, it’s more like 7 percent. The huge drop is due to lack of expertise and the personnel required to run a loan department with a comprehensive bouquet of services.
Alliance Partners have a pay-as-you-go business model with no upfront fees. This helps attract community banks that would like to try their services.
BancAlliance Network is a shared lending platform for community banks with more than 200 members in 39 states. Alliance Partners is its asset manager. From loan origination and client handling, Alliance Partners does it all. They’ve also partnered with Personal Capital, Fundation, and Lending Club for some services.
Through Personal Capital, BancAlliance network members are able to offer customers access to a suite of personal finance tools and digital wealth management services. This partnership helps broaden the scope of products and services currently offered by banks and provides sophisticated tools to help customers understand, grow, and manage their net worth.
Lending Club offers members co-branded personal loans. They also purchase certain types of loans. This partnership helps community banks and their customers obtain low capital and operational costs, which lowers the cost of credit for consumers.
Fundation is a leading online business lender. Its partnership with Alliance Partners helps community banks enhance small business lending capabilities with more options and simplicity. They’ve launched an online portal to help small businesses find products that best meet their banking needs.
Alliance Partners have been compared with platforms like LendKey, Cloud Lending Solutions, and Mirador.
Lendkey provides cloud-based technology that enables community financial institutions to deliver loans directly to customers at cheaper rates. There are plenty of companies like CloudLending and Mirador in the market that provide software and SaaS solutions, but today’s banks need more than just software; they need product expertise and a way to market their products to customers. Alliance Partners fills this void.
The community banking market is becoming more customer-oriented as banks struggle to find a digital-first strategy that meets the needs of their customers. It will take more than software, however, to make this pivot. There needs to be a shift in corporate culture. Only technology and a re-alignment with the new lending reality can make this happen for community banks.
News Comments Dear readers, I am in Shenzhen and Tokyo this week. Due to the time difference, we will likely send Lending Times around 9am , Chinese time. We will revert to the normal 1pm New York time next week. Today’s news in focus : summary judgment on CFPB vs Cash Call and its consequences; […]
I am in Shenzhen and Tokyo this week. Due to the time difference, we will likely send Lending Times around 9am , Chinese time. We will revert to the normal 1pm New York time next week.
The court first ruled that CashCall was the true lender on the loans that were issued by Western Sky Financial because “the entire monetary burden and risk of the loan program was placed on CashCall, such that CashCall, and not Western Sky, had the predominant economic interest.”
Having reached this conclusion, the court then determined that because CashCall was the “true lender,” the choice of law provision in the loan agreements at issue—which provided that the laws of the Cheyenne River Sioux Tribe (CRST) would apply—should be disregarded in favor of the laws of the borrowers’ home states.
Finally, the court held that CashCall’s founder, sole owner, and president was also liable for CashCall’s corporate violations because he participated in and had the authority to control the conduct at issue, and because he knew of or was recklessly indifferent to the misrepresentations.
A federal district court in California handed the Consumer Financial Protection Bureau (CFPB) a big win on Wednesday, August 31, 2016, granting the agency summary judgment on liability in its lawsuit against CashCall, Inc., its affiliated entities, and its owner.
In a 16-page decision and order, the US District Court for the Central District of California ruled that CashCall engaged in deceptive practices by servicing and collecting on loans in certain states where the interest rate on the loans exceeded the state usury limit and/or where CashCall was not a licensed lender.
The decision represents an additional judicial touchpoint on the important question of who is a “true lender” in a transaction and validates, at least for now, the CFPB’s theory that collecting on loans that state law renders void and/or uncollectable constitutes a violation of federal law.
The court’s decision is important both to CFPB enforcement efforts and to the validity of bank partner programs. The CFPB has at least one other pending lawsuit in which it has asserted a similar theory of liability that collecting on loans rendered void by state law constitutes unfair, deceptive and abusive conduct (UDAAP). Moreover, the CFPB may be emboldened by this decision to identify additional ways to “federalize” state law violations under its expansive UDAAP authority.
With respect to the “true lender” question, the decision is inconsistent with standards adopted by other courts. Some courts have determined the “true lender” based solely on the creditor named in the loan agreement. Other courts have determined the true lender through a narrow evaluation of facts regarding which party engages in the three non-ministerial acts that banking regulators have identified: (i) the determination to extend credit; (ii) the extension of credit itself; and (iii) the disbursement of funds resulting from the extension of credit.
Former CFPB lawyers said the CashCall decision is more likely to spur further CFPB actions against tribal lenders that use such exemptions to make loans online that don’t mesh with certain state laws. The agency has been careful not to take a public stance seen as too aggressive with marketplace lenders as it is a fairly new industry and regulators are wary of killing innovation through new rules.
The agency has been careful not to take a public stance seen as too aggressive with marketplace lenders as it is a fairly new industry and regulators are wary of killing innovation through new rules.
“I don’t think this means the CFPB will target marketplace lenders,” said James Kim, a former senior enforcement attorney at the CFPB who is now at Ballard Spahr LLP. “Having said that, it’s still dangerous for marketplace lending because state authorities and plaintiffs’ lawyers will use this case against them.”
Chicago-based RiverNorth Marketplace Lending Corporation is poised to launch a fund that will be investing in marketplace lending assets under the 40s Act as a non-listed closed end fund. A substantial portion of the fund is expected to be investing in whole loans. The filing indicates that a substantial portion of the marketplace loans will originate on LendingClub and Prosper – at least initially.
The investment objective of the fund is to seek a high level of current income with at least 80% of its managed assets being in marketplace lending investments. The new investment vehicle expects to invest up to $1 billion in loans from these online lenders. The minimum initial investment in shares will be $1,000,000, with a minimum subsequent investment of $5,000. The fund will use leverage to help boost returns and overall leverage is predicted to be approximately 10% of the fund’s net assets at launch. RiverNorth will extend quarterly repurchase offers from 5% to 25%.
Moody’s published a report on the potential benefits and pitfalls of partnerships between banks and marketplace lenders on Wednesday. The report states that customer acquisition costs amount to around 25 per cent of revenues for some platforms, but that bank partnerships can lower these costs by “rebalancing the channel mix”.
Of course, the elephant in the room is the fact that some banks are now beginning to build their own indigenous funding solutions. The Moody’s report makes mention of Wells Fargo’s FastFlexFM.
Moody’s Jim Ahern regularly reminds inquisitors that the estimated size of the collective pool of marketplace loans in the US is a mere $70-80bn. A drop in the ocean when compared to the scale of the subprime mortgage bubble.
The benefits of securitisation in fintech include lowering funding costs and channeling finance through to the real economy.
Ahern also stressed that securitisation brings an extra layer of scrutiny to bear upon marketplace loan portfolios. Whenever Moody’s rates a bond, the underlying loans are subjected to a rigorous third party analysis.
SMEs will often try banks first to get better rates, which can be around 4%. This is in comparison with interest rates at Funding Circle, which typically start from 6%, and increase depending on the assessment of the individual customer.
One bank that has already taken the move is Santander. It has been working with Funding Circle for two years. The bank’s focus is on providing better-quality customer service by referring customers to the platform if the bank itself cannot provide financing. Following its success, Funding Circle signed a similar agreement with RBS at the beginning of the year.
In the US, Lending Club already has agreements with Union Bank and Alliance Partners, which manages the BancAlliance consortium of small local banks.
Santander does not take any fees from the borrowing clients it refers, but not all banks will operate in this way. Misys’ Jollant says this potential to take a cut will make collaboration even more appealing, adding: “The bank is earning through two points – taking an origination fee that can be around 3% to 6% and a second 1% fee for payments processing and servicing the account. There is certainly money to be made through P2P for the banks.”
Banks will no doubt be delighted if they can make this money while dumping the actual credit risk on investors coming through the P2P platforms, so avoiding capital charges.
The next stage might be the potential opening up of a mandatory referral process. The UK government has assessed the possibility of SMEs being referred on to alternative lenders if their banks are unable to provide funds. These borrowers’ information will be passed on to a referral pool at the British Business Bank, which P2P platforms can access.
Philip Milton, of Devon-based Philip J Milton & Co, said he invested up to £1m from one of his company’s strategies into P2P Global, buying when the shares were worth £10.30 and selling when they were worth £11.93.
He has since been facing questions from his clients about whether they should put their money into a P2P platform.
The Australian Securities and Investments Commission’s (ASIC) new corporate plan renews its focus on fintech by outlining how it will mitigate the risks of digital disruption. The plan comes after ASIC’s budget was extended by $127.2 million in April.
The plan identified five key challenges to ASIC’s long-term vision, two of which related to fintech, as well as the key risks it will focus on in 2016-17 – 2018/19.
Following in the same line as its guidance for marketplace lending, ASIC plans to progress FSI initiative on non-cash payments as well as working with the Treasury on the ePayments code.
Comment: a strange article which at 1st recommends no regulation and then points out a reasonable regulation. I believe the title should be instead: ” A proposal on how online lending should be regulated”. It is Lending Times’ view that anytime somebody touches somebody else’s money the temptation is too big and regulation is required.
In markets in early stages of their development, regulation is a burden for both the emerging sector and the regulator alike.
Whether the lending marketplace system in India would want to emulate the Chinese diffusion model or carve out its own unique model of growth and viability is anyone’s guess. But regulation will play a big part on how this pans out in India.
Markets, if left alone, are self-correcting in nature.
As P2P does not carry liabilities on its books and no conventional balance sheet risks as such (P2P platforms source their income predominantly from arrangement fees from both sides), these platforms, asset-light in essence, become “non-banking, non-financial companies”. Therefore,
1. The proper regulatory authority for “non-banking, non-financial companies’ is the ministry of corporate affairs. However, these companies should register with the Reserve Bank of India (RBI) so that at any point the central bank can track the growth of this sector and make mid-course corrections for systemic risks.
2. Whilst they register with the relevant regulator, they must remain a self-regulating mechanism, which is a self-regulating organization (SRO), as in microfinance and pre-paid wallet sectors. This mechanism supports and supplements regulatory bodies and reduces their burden of supervision.
3. Business rules should be not attempted to be granularly defined or cast in stone in early stages.
Here are a few ways in which to go about it:
a) Among proposed guidelines, P2P lenders are required to put investors’ money in nodal/escrow accounts in banks. Under such an arrangement, banks would have to disclose an array of data including the platform’s number of borrowers and lenders and its volume of bad loans. These can be done equally by an SRO and backstopped by credit rating agencies.
b) Subsequently, the SRO from day one (working closely with the relevant regulating body, and across) can also work out detailed guidelines on various industry safeguards like leverage, interest rate caps, lending/borrowing caps, borrowing processes, KYC, underwriting norms and soft and hard credit check.
c) Since the tech platform has no financial liabilities, exposures or provisioning requirements (it just connects lenders with borrowers), the equity of Rs 2 crore is high. Most companies are happily capitalized at tens of lakhs (pre-funding) with modest debt:equity ratio. Therefore, a proportional capital base dependent on the size of the portfolio may be better.