Friday June 2 2017, Daily News Digest

alternative lending mergers & acquisitions

News Comments Today’s main news: OCC policy on exam treatment of violations goes into effect July 1. Comparisons of Zopa’s IFISA to others. RateSetter hits highest valuation. Seedrs, NatWest partner to offer alternative funding options. Zhong An seeks Hong Kong IPO. Today’s main analysis: Alternative Lending Market Analysis. International P2P lending volumes. Today’s thought-provoking articles: Under the hood of asset-level […]

alternative lending mergers & acquisitions

News Comments

United States

United Kingdom

China

European Union

International

Australia

India

Asia

News Summary

United States

Nutter Bank Report, May 2017 (JD Supra), Rated: AAA

Supreme Court Rules That Cities Can Sue Lenders Under the Fair Housing Act

The U.S. Supreme Court has issued a decision that reaffirms the standing of municipalities to sue lenders, including banks, for certain discriminatory mortgage lending practices that violate the federal Fair Housing Act (“FHA”). The Court’s decision stated that this provision of the FHA “reflects a congressional intent to confer standing broadly,” and held that the city’s claimed injuries are within the FHA’s zone of interests. Click here for a copy of the Court’s decision.

Nutter Notes: Despite the Court’s ruling in favor of the city on the issue of standing, the Court’s ruling on the issue of proximate cause may make it more difficult in the future for cities to sue lenders for FHA violations.

OCC Issues Updated Guidance on Exam Treatment of Violations of Laws and Regulations

The updated policies and procedures direct OCC examiners to communicate violations to supervised institutions using a consistent format consisting of legal citation and description, a summary of relevant statutory or regulatory requirements, facts supporting the violation and root causes, corrective actions required, and board and management’s commitments to corrective action. The updated policies and procedures also emphasize the importance of timely and thorough follow-up and tracking of management’s corrective actions and related milestones. This policy will become effective on July 1, 2017. Click here for a copy of the OCC Bulletin.

Nutter Notes: Specifically, the OCC’s updated policy requires that examiners communicate all substantive violations to the bank in a report of examination (“ROE”) or supervisory letter, including substantive self-identified violations in certain circumstances. Examiners will be required to communicate less substantive OCC-identified violations in a separate written document if the examiners decide not to include them in an ROE or supervisory letter. The updated policy gives examiners discretion to determine whether less substantive, self-identified violations may be communicated separately. The OCC stated that it expects the bank’s board and management to take timely and effective correction of all violations regardless of how they are communicated. According to the updated policy, if management fails to correct a violation previously communicated in a separate written document by the OCC, the examiner should include the violation in the next ROE or supervisory letter. The updated policy also requires examiners to identify violations as “New,” “Self-identified,” or “Repeat,” as applicable.

FT Partners’ CEO Monthly Alternative Lending Market Analysis (FT Partners), Rated: AAA

FT Partners is pleased to present you with the latest installment of our “CEO Monthly Alternative Lending Market Analysis.”

FT Partners served as the sole strategic and financial advisor to:

  • here.

    Source: FT Partners’ CEO Monthly Alternative Lending Market Analysis June 2017

    Looking under the hood of Asset-Level Disclosures: Income Verification is just the beginning (LinkedIn), Rated: AAA

    Bloomberg published an article last week focusing on a recent auto loan securitization by Santander Consumer USA Holdings, where only 8% of loans in the ~$1Bn collateral pool had income verification on the borrower.

    At Aspire Financial Technologies, we’re already believers in the power of loan level data to give Investors better visibility, understanding, and decisioning around huge volumes of consumer loans, having created the Aspire Gateway platform for Alternative and Marketplace Lending participants. In this sector, loan-level data is paramount to understanding and decisioning for Investors, and Banks providing credit facilities. So, when we learned of the new securitization ALD data files being made available this year, and a requirement from Investors to be able to consume this data, we saw an opportunity for our data engineers to clean, vet and normalize the XML (text-based) data files and load them into our infrastructure API, which is well-suited to accommodating loan level data. The result of this, was our release of the ALD Explorer in April. (Free access to the ALD Explorer is available here.)

    Although our numbers differ from Moody’s as to the % of loans where income was verified (13% vs. 8%), we note a similar conclusion: the vast majority of ~90k loans had no income verification, and were given to low credit score borrowers (WAVG score = 559).

    This is borne out through looking at another ALD Explorer report on a prime auto securitization: Ford Credit Auto Owner Trust 2017-A. This deal has less than 2% of the loans with income verification, but had a WAVG credit score of 740 (note that we have excluded in this table Credit Score Types that were either Commercial (9,437 occurrences) and Unknown/None (2,276 occurrences)).

    To Deliver on its Promise, Crowdfunding Needs Better Language (Crowdfund Insider), Rated: A

    In Part 1 of this series on How To Fix Crowdfunding Education, I made the case for beginning all crowdfunding education by teaching the core fundamental that cuts across all forms of crowdfunding: participation.

    To begin, we need to be more careful in our use of the word “crowdfunding.”

    Since the passing of the Title III equity crowdfunding rules in the U.S., many who write and speak about equity crowdfunding have stopped using the “equity” part of the phrase. Among other impacts, I’ve watched conversations on LinkedIn forums about rewards crowdfunding strike terror into the hearts of project creators as someone offhandedly introduces the terms “investor” and the “SEC” into the discussion of their campaigns. “Investor” is a particularly problematic word when it is used interchangeably to describe both the people who back rewards campaigns (often described as “investing in a creator’s ideas”) and investment in equity or debt offerings. Even the word “equity” itself is confusing since many securities are not actually equity, but debt. And “rewards” doesn’t come close to expressing the power of this kind of crowdfunding to galvanize communities around ideas.

    Then there is the issue of jargon.

    So if “online” is what distinguishes equity crowdfunding from an IPO (Initial Public Offering), does that mean online lending and online donation are crowdfunding, too? To add to our alphabet soup, there’s the DPO (Direct Public Offering) U.S. investment crowdfunding that predates the JOBS Act, and the CPO (Community Public Offering) the acronym used to describe intrastate crowdfunding offerings in Oregon. And then, there’s the “crowdfunding IPO” the term being floated about in publications the likes of The Wall Street Journal and Fortune to describe Spotify’s potential Direct Public Offering (DPO).

    We need consistency in our language to build trust. Looking around the industry, there is language already in use that we could adopt and use consistently. For example, a recent Forbes article by Devin Thorpe was titled “Investment Crowdfunding: What Works And What Needs Fixing” rather than “equity crowdfunding.” By using the word “investment” or “crowdinvesting” instead of “equity” we can make a clear distinction that participants in this type of crowdfunding are investors, but that not all of these investments result in an equity stake in a business.

    Goldman Sachs’ new online lending business is changing the bank’s culture (Business Insider), Rated: A

    Omer Ismail, the chief operating officer of Marcus by Goldman Sachs, described the online lending business as “more casual” in an interview on the Lend Academy Podcast.

    Ismail believes that some of that more relaxed, creative culture is beginning to find its way into other parts of Goldman Sachs.

    “I was with the chief technology officer of Goldman and I went down to his office a couple of days ago and I noticed that now he has white walls so it’s actually really cool to see how folks at Marcus are actually influencing other parts of Goldman.”

    Top 9 most active VC investors in fintech (Pitch Book), Rated: A

    Since the beginning of last year, 605 US venture investors have participated in at least one fintech transaction, spreading a total of

    NEW FINTECH LEADERS JOIN THE CONSUMER FINANCIAL DATA RIGHTS GROUP (Yodlee), Rated: B

    The Consumer Financial Data Rights (CFDR), an industry group formed by leading companies in the financial sector to support the consumer’s right to access their financial data, has expanded its membership to now include 27 companies. Recent additions include ActiveHours, Clarity, DataCoup, Draft, LifeLock, Morningstar, NextCapital, Onist, Oportun, Petal, Quovo, SnapCheck, Vested, and WorldRemit.

    Kushner-backed Cadre wants to raise $ 65M at $ 800M valuation (The Real Deal), Rated: B

    The Jared Kushner-backed real estate investment platform Cadre is looking to raise $65 million in venture funding.

    The funds, if raised, would give Cadre a valuation of more than $800 million, the Information reported.

    The Token Fund – Enter the Digital Mutual Fund (The Merkle), Rated: B

    The Token Fund is akin to a traditional market mutual, index, or hedge fund.

    So this is a digital fund management group that is aiming to bring non-crypto savvy traders and investors into the digital market, while also providing a service to the veterans users and traders of crypto.

    Disclaimer: This is a sponsored post and does not necessarily reflect the views of any employees of The Merkle.

    United Kingdom

    Zopa Innovative Finance ISA: how it works, rates and how it compares (Love Money), Rated: AAA

    Zopa, one of the major peer-to-peer lenders in the UK, has announced it will roll out its Innovative Finance ISA (IFISA) from 15 June offering returns of up to 6.1%.

    The new Zopa Core deal will join Zopa Plus, while the Zopa Access (offering returns of up to 2.9%) and Zopa Classic (3.7%) deals will close by 1 December 2017.

    Product Risk Markets Target return Minimum Investment Amount*
    Zopa Core IFISA A*, A, B, C 3.9% £1,000
    Zopa Plus IFISA A*, A, B, C, D, E 6.1% £1,000

    The new Zopa Core product will lend in the same risk markets (A*-C) as Access and Classic did, but, crucially – like Zopa Plus which launched in March 2017 – it will not be covered by the Safeguard fund.

    Zopa says it’s scrapping Safeguard as tax laws have changed, allowing investors to claim tax relief from bad debts, so it’s no longer needed, plus it emphasises retiring Safeguard will provide greater expected returns and make products easier to understand.

    Lending Works is Zopa’s closest rival with an IFISA option. It also allows investors to lend to individuals, but it expects lower returns of 3.3% over three years and 4.4% over five years, after fees and bad debts.

    The Crowd for Angels IFISA for example offers returns of up to 9%. This crowdfunding platform raises cash for companies wanting to expand, diversify or develop their business through crowd bonds and shares.

    Rivals in this space include the Crowd2fund IFISA , which can earn you 8.7%, the Crowdstacker IFISA offering rates between 5-7% and LendingCrowd IFISA offering 6% returns.

    Peer-to-peer platforms in this market include Landlord Invest (offering rates of up to 12%), Relendex (10%) and Landbay (3.75%).

    If you’re happy to take on more risk you could try Abundance, an ethical peer-to-peer platform raises money from investors for green energy projects.

    RateSetter hits highest valuation at £200m after recent funding round (Growth Business), Rated: AAA

    RateSetter raised £13 million from existing shareholders, including Woodford Investment Management and Artemis on Tuesday. Since this round of funding, the London-based peer-to-peer lender announced that its valuation now exceeds £200 million. The investment formed its eighth fundraising round, and took RateSetter’s total amount raised in equity to £41.5 million.

    Seedrs teams up with NatWest to offer alternative funding options (London School of Business & Finance), Rated: AAA

    Through the programme, the crowdfunding platform will be joining a panel of funders to provide alternative finance solutions to business and commercial customers of NatWest and RBS in the UK who are unable to access the financial support they need through traditional funding routes.

    Seedrs is currently the only equity-based finance provider on the panel, which features other finance providers such as iwoca, Assetz Capital, Funding Circle, Royal Bank of Scotland Social & Community Capital and Together.

    LendInvest Capital Announces Montello Real Estate Opportunity Fund Milestone (Crowdfund Insider), Rated: A

    LendInvest Capital, a UK-based specialist real estate lender and fund manager, has announced that its flagship private debt fund, the Montello Real Estate Opportunity Fund, is now managing over £100 million ($128m) on behalf of private and institutional clients.

    The Fund hit its three-year track record in January 2017 and surpassed the £100 million milestone at the end this past April, reported LendInvest, “the culmination of a very active year” during which the Fund more than doubled in size (up 113% from  £47m AUM at 30 April 2016 to c. £100M AUM at 30 April 2017). The Fund also had a record quarter for fundraising between January and March of this year, receiving £30 million of new investment.

    Basset & Gold unveils four-year marketplace lending bond (P2P Finance News), Rated: A

    BASSET & GOLD is launching a new four-year bond backed by marketplace lending deals, with regular reinvestment of the interest stream set to deliver higher yields.

    The new debt offering from the direct lending and alternative finance specialist will return a compounding fixed yield of 30.9 per cent at the end of the term, equivalent to an annual return of 7.72 per cent.

    Honeycomb raises £105m from oversubscribed share placing (P2P Finance News), Rated: A

    HONEYCOMB Investment Trust has raised £105m from an oversubscribed share placing, which it will use to capitalise on new business opportunities.

    The alternative finance-focused investment fund said on Wednesday that it had successfully completed its placing of 10 million shares, issued at £10.50 per share.

    Finimize allows you to create a free financial plan from your mobile (This is Money), Rated: A

    Quick, simple, jargon-free – the Finimize My Life plan seeks to sort your finances out, giving you sensible savings goals, investment options and easy plans to pay off debt.

    As many as two-thirds of those aged 18 to 34 wish they had received more money advice at a younger age, according to research from Santander.

    Do you think financial literacy remains a problem then?

    Max: I do. We’ve done some research with YouGov and the results speak for themselves: 59 per cent of millennials could not confidently explain what an Isa is, 84 per cent couldn’t tell you what the term ‘equity’ means and 90 per cent couldn’t confidently explain what ‘asset management’ is.

    Of the 1,000 people surveyed, 50 per cent were not confident explaining ANY of the financial terms listed in the survey.

    Why do you think managing our personal finances has been hard for millennials? 

    Max: It is unsurprising that financial literacy levels are so low amongst my generation. We were never taught these terms in school and it can be daunting to try and plan your financial life when you feel in the dark about how the industry works.

    Do millennials have money to save and invest? 

    Max: Yes. It comes down to confidence: of the millennials we surveyed, 52 per cent of those with between £10,000 and £24,999 of savings do not feel confident explaining what an Isa is.

    How does it work?

    Max: Once you’ve registered with Finimize you enter a few simple personal details.

    These include your country of residence, age, salary, savings, passive income, spare income, whether you own a house (this is a yes or no question), if you have income protection and whether you have any bad debt such as credit cards or personal loans.

    Once a user has provided the basic inputs, the platform generates a financial plan for someone like you.

    Would you take financial advice from a robot at your bank? (The Telegraph), Rated: A

    HSBC has become the latest of the major banks to announce a low-cost online investment service that will use algorithms to match customers to an investment portfolio.

    The service is aimed at those with less than £15,000 to invest, and the bank promised costs would be “far lower than industry standards”.

    The services typically take customers through a questionnaire online to get a picture of their finances and determine how much risk they are willing to take, before advising which investments to put their money in.

    NatWest launched its Invest service in February to its existing customers. The service offers five funds run by Coutts & Co, each with a different portion in stocks, bonds and cash. It charges investors 0.95pc on the first £500,000 they invest and then 0.7pc on any investments above that amount.

    Barclays users pay 0.2pc on money held in funds and 0.1pc on all other investments, with a minimum fee of £4 a month and maximum of £125 per month. Fund and other investment trading costs £3 and £6 respectively if completed online.

    P2P Lender Wellesley Retrenches After Departure of CFO Alasdair Lenman (Crowdfund Insider), Rated: B

    Wellesley has entered a period of retrenchment as CFO Alasdair Lenman has departed the company after less than a year on the job. The Wellesley Group consists of Wellesley & Co Ltd, Wellesley Finance Plc and Wellesley Group Investors Ltd.

    Stephen Bell, Wellesley’s Chief Risk Officer, updated on the performance of their loans including non-performing assets;

    “The Wellesley loan book continues to evolve and now stands at 65 loans with combined committed facilities of £271 million. During 2016 the drawn balanced increased by 10% to £163.6 million which was made up of new loans and additional drawdowns on existing loans of £118.6 million.”

    China

    China’s Zhong An aims to raise at least $ 1 billion in Hong Kong IPO – sources (Reuters), Rated: AAA

    Zhong An Online Property and Casualty Insurance, China’s first online-only insurer, has resumed a plan to raise $1 billion or more in a Hong Kong initial public offering (IPO) in the second half of this year, said two people with knowledge of the matter.

    Zhong An, whose major shareholders include Tencent Holdings Ltd (0700.HK) and Alibaba Group Holding Ltd (BABA.N) affiliate Ant Financial, plans to apply for listing in the coming weeks, said one of the people, who declined to be identified as the matter is confidential.

    The Shanghai-based insurer chose Credit Suisse, JPMorgan and UBS in October to lead the IPO, but later suspended the plan to explore a mainland listing.

    Research on Financial Inclusion and Poverty Reduction in China (Lend Academy), Rated: AAA

    Case study 1: CFPA MicroFinance

    • As of Dec 2016, CFPA Microfinance currently has branches in 229 counties and 18 provinces throughout China, and 85% of the branches are located in areas designated by the Central or Local Governments as poverty stricken counties.
    • As of Nov 2016, CFPA Microfinance has disbursed loans valued at RMB CNY 18.4 billion ($2.7 billion) to 1.61 million clients, with average loan size of CNY 11,000 ($1,620). 62% of all loans have been deployed for the purpose of raising livestock, breeding fish and farming and etc.
    • Approximately 3 million low-income villagers have received microloans from CFPA Microfinance for improving their livelihood and raising local production.

    Social development:

    • 91% of all CFPA Microfinance clients are women
    • At least 80% of CFPA Microfinance clients would not have been able to borrow from anywhere else, according to a survey by the China Agriculture University and China Academy of Social Sciences
    • 49 out of the 53 CFPA Microfinance operating outlets are in China’s Nationally Designated Poverty Countries, the poorest areas in the country.

    Case study 2: Ant Financial

    When it comes to poverty alleviation, Ant Financial chose CFPA Microfinance to partner with.

    With the two parties cooperation in technology and channels, it is possible that when a farmer needs to borrow money, the lending decision would be made based on big data, rather than the information collected by loan officers.

    Research shows that, by the measure of “digital financial inclusion index” created by Prof. Huang Yiping, the condition of underdeveloped areas in China in 2015 are relatively better off compared with five years ago.

    Case study 3: CreditEase

    CreditEase’s efforts in financial inclusion to reduce poverty can be best illustrated by the example of Yinongdai.

    What Yinongdai does is that it helps to match “charitable lenders” with impoverished credible rural borrowers. To be more specific, “charitable lenders” can choose a farmer’s project and “donate” at least RMB 100 ($14.70), and lenders can get roughly 2% return annually.

    For over the seven years, Yinongdai has collected over 200 million RMB ($29 million) from 150,000 lenders, and helped about 20,000 needy farmers, Tang Ning said in an interview in Apr 2017.

    The shortage of financial services in China’s rural areas amounts to $ 447 billion. (Xing Ping She Email), Rated: A

    According to data from Chinese Academy of Social Sciences, the market space of rural finance in China reached to $447 billion since 2014. With policy supports on rural finance and the maturing and saturation of the urban financial market, there comes up an attractive blue ocean market in rural finance.

    In recent years, many participants have flooded into rural market, including traditional financial institutions, agriculture service providers, as well as e-commerce platform and internet finance companies, but few of them succeed.

    Up to now, the traditional institutions such as rural credit cooperatives are still the main force to serve rural areas, however, it could not meet the capital needs of farmers’ production and livelihood.

    Source

    Blockchain Startup Wyre Acquires Remitsy for China Market Push (CoinDesk), Rated: B

    Blockchain payments startup Wyre has acquired industry startup Remitsy in a cash and equity deal of an undisclosed amount.

    According to CEO Michael Dunworth, it was Remitsy’s close proximity to China’s market that was the chief factor prompting the move. (Remitsy uses a combination of blockchain technology and banking relationships to convert user currencies for China-based users).

    European Union

    Robo-Advisor Ginmon receives asset management license (EXtra Magazin), Rated: A

    The Frankfurt-based Robo-Advisor Ginmon has now received the license from the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) for financial portfolio management pursuant to section 32 of the German Banking Act (KWG). Up to now, the digital asset management had only one permission for financial intermediaries according to §34f of the trade regulations.

    International

    International P2P Lending Volumes May 2017 (P2P-Banking), Rated: AAA

    Milestones reached this month are:

    • Assetz Capital crosses 250 million GBP lent sinch launch
    • Lendinvest reaches 1 billion GBP in origination since launch

    Australia

    Robo-advice for SMSFs: what accountants need to know (In the Black), Rated: A

    Accountants referring clients to robo-advice tools need to be wary of licensing constraints.

    We understand that a number of accountants who have chosen to operate without an AFS licence authorisation have entered into arrangements with digital financial advice providers (or “robo-advisers”) to allow their clients to access digital advice about SMSFs.

    Under these arrangements, accountants refer their clients who need financial product advice (for example, about whether or not to establish an SMSF), to a digital advice tool which can provide that advice.

    While digital advice providers might indicate that their tools can be used in such a way that unlicensed accountants who refer clients to the tools would not be providing financial services, this may not always be the case.

    India

    Flipkart will soon offer customers financial products and services (VC Circle), Rated: A

    Homegrown e-commerce major Flipkart is mulling over providing financial products and services online, a segment that has seen tremendous growth in India in the last few years.

    A dedicated team for financial services and products is already in place and lead product manager for fintech and consumer credit products at Flipkart, Monomita Roy Avasarala, has already initiated talks with online lending startups, the report said.

    Flipkart would offer mutual funds and insurance products besides credit and loans, the publication reported citing undisclosed sources.

    Google Launchpad picks 6 startups from India, shows love for AI (Tech in Asia), Rated: B

    This is the only fintech startup from India to make it to the latest Launchpad batch. IndiaLends – like the name suggests – is a lending product.

    It offers personal loans, free credit reports, home loans, and credit cards to consumers. You can check your loan eligibility using the IndiaLends app, which can also alert you when an EMI is due and help you manage and track all your credit accounts as well as monthly spending. IndiaLends uses artificial intelligence tech for credit rating, loan eligibility, and so on.

    Asia

    e-payments make advances in Malaysia, Singapore, Hong Kong (The Asset), Rated: A

    Bank Negara Malaysia, the central bank, on May 22 announced the merger of Malaysian Electronic Clearing Corporation (MyClear) and Malaysian Electronic Payment System (MEPS) to form Payments Network Malaysia or PayNet.

    On May 5 DBS introduced its Smart Nation Ambassador Programme (SNAP). The programme will see DBS recruiting up to 1,000 ambassadors that will encourage small, cash-based merchants to adopt DBS PayLah! QR codes as a payment method in Singapore.

    Bank of China Hong Kong and WeChat Pay Hong Kong announced a collaboration to promote mobile payments in Hong Kong, on May 19.

    Swift introduced a new cross-border payments tracker that enables international payments to be traced in real-time on May 23.

    Japan looks to double cashless payments in 10 years (Nikkei Asian Review), Rated: A

    Cash-heavy Japan aims to double digital payments to 40% in the next decade by helping metropolitan-area businesses afford cashless services to better attract foreign visitors and open their wallets.

    The goal, set by the Financial Services Agency and the industry ministry, will be part of a plan to promote fintech, the intersection of finance and information technology, in a growth strategy to be compiled in June. The move is also a step toward better accommodating foreign tourists, with an eye toward the 2020 Tokyo Olympics.

    Japan’s current 19% rate of cashless payments is less than half the over-50% level seen in nations including South Korea and China, but the targeted 40% rate would put it roughly on par with the U.S.

    Broken down by industry, around 90% of Japan’s lodging facilities accept card payments, compared with roughly 70% of supermarkets and just half of taxis.

    Authors:

    George Popescu
    Allen Taylor

Extracting Insights from Asset Level Disclosure Data

ALD growing data

Introduction Over the past four months, we’ve had extensive conversations with ABS market participants to discuss the new Asset Level Disclosure (ALD) requirements for public US securitizations. We discovered that many market participants have been overwhelmed with the volume of loan-level data and are at a loss on how they can readily derive value from […]

ALD growing data

Introduction

Over the past four months, we’ve had extensive conversations with ABS market participants to discuss the new Asset Level Disclosure (ALD) requirements for public US securitizations. We discovered that many market participants have been overwhelmed with the volume of loan-level data and are at a loss on how they can readily derive value from it. In the following research piece, we answer commonly asked questions and provide guidance for incorporating ALD data into the investment process.

Specifically, we highlight the need for participants to (1) access standardized ALD data on-demand in an easily digestible and consistent manner, (2) unlock complex relationships and insights within and across securitization trusts, and (3) develop benchmarks for performance.

What is the scale of the data and how does one access it? By December 2017, we project there will be ~100 securitization trusts with over 34GB of data for just the auto-loan, auto-lease, and CMBS verticals. Given the data size and update frequency, we believe the market needs a centralized hub so users can access it easily in a consistent, clean format that has cash flow-specific fields.

What uses are there for this data? Once the data is cleaned and enhanced the opportunities for insights expand dramatically. Performing stratifications across trusts to compare asset pools and calculating performance curves are required at a minimum, but thereafter there are many opportunities to gain greater insight beyond what is possible using pool or rep-line data, including heat maps, dispersion analysis, and sector wide benchmarks.

Where Does Aspire fit in? Aspire has built an end-to-end data and analytics solution for auto-loan trust data, that is expanding to cover all the asset verticals with ALD requirements. The ALD Explorer is available on an open access basis with limited content and functionality, however once registered, users can access all content and functionality on a free-trial basis. Interested participants can access the ALD Explorer here.

Every institution should to be as informed as their most sophisticated contemporaries, which means they need a solution that encompasses everything from hosting and maintaining the ALD data to providing tools to gain insights from it. Going forward, fulfilling these business requirements will be critical because it will be part of the baseline needed for firms to participate in ABS markets intelligently.

Background

Why are issuers publishing this data?
As a result of Regulation A/B II from the Dodd-Frank Wall Street Reform and Consumer Protection Act, securitization issuers, starting in 2017, must post Asset Level Disclosure (loan-level characteristic and performance data) for loans in public securitization trusts on an ongoing monthly basis. These postings are made on the SEC EDGAR website. Asset classes covered by this requirement currently include auto-loans, auto-leases, and CMBS, but eventually will include other asset classes, including RMBS and potentially student loans.

What is the scale of this data? How quickly is it growing?
Going forward, we expect the volume of loan level data to grow quickly. As of April 2017, there have been 58 issuers and depositors posting up to 4 months of loan-level performance and characteristic data, containing information on over 1.4 million loans in aggregate. On average, each individual auto-loan posting is 220MB and typically contains over 70 mixed type fields for over 50,000 payment records on average. By December 2017 (Exhibit 1), we project there will be ~100 securitization trusts (over the verticals of auto-loans, leases and CMBS) with over 34GB of data of which the majority will be from auto-loan securitizations. These estimates do not account for new asset verticals.

Making Data Useful

Why is this ALD data important?
The size and difficulty in managing the loan-level data has caught many market participants by surprise. We urge them to embrace the new opportunities it enables. There is significant value in examining loan characteristics and performance both within and across trusts. For investors in the publicly issued securitization bonds, the value is obvious. They can analyze asset pool characteristics and performance and improve their asset (and liability note) valuation methodology. Beyond this, there are many tangible benefits for issuers and investors in similar markets and assets since they now have access to a broad sample of loans across trusts. To enable and realize the potential of this new data, participants require a partner with a specific skill-set that combines classical fixed income credit expertise with modern machine learning techniques and technology.

How does one access the data?
Given the data size and update frequency, Aspire believes the market needs a centralized hub so users can access it easily in a consistent format. The data is currently being posted on the SEC EDGAR site as ABS-EE files in XML format with only certain fields specified. Aspire provides a free service to all interested participants by converting these files to a CSV format and posting them on the ALD Explorer site. However, most participants need more than this because opening multiple files as spreadsheets or in a programming environment becomes untenable quickly because of their size. Also, the raw data does not include cash flow-specific fields like the month’s due amount, prepayment amount, or loan-to-value ratio, which need to be calculated the same way across trusts. Furthermore, there are discrepancies in the way certain field values are reported that need to be made consistent so that market participants can make apples-to-apples comparisons. For these reasons, a central database repository containing cleaned, enhanced, and standardized data becomes an ideal solution.

How does one ensure the data is consistent across trusts?
We emphasize that the market will need solutions to aggregate this ever-expanding dataset. The aggregator will need to demonstrate a mastery of the data by offering a raw data summary, the rules used to clean and enhance it, and additional field value verifications done in partnership with issuers to ensure consistency. On the last point, we think there may be a role for industry trade organizations to play in getting issuers to report values using a consistent methodology and additional useful fields to investors. We know that SFIG has already been active in this discussion.

Analytics for the Future

What tools are available to help one make use of ALD?
Once the data is cleaned and enhanced, the opportunities for insights expand dramatically.
Performing stratifications across trusts to compare asset pools and calculating performance curves are required at a minimum and thereafter there are many opportunities to gain greater insight beyond what is possible using pool or rep-line data. For example, one could employ modeling techniques not to predict outcomes, but rather to identify the characteristics that most highly correlate with probability of default, prepayment, or delinquency. Using this method, investors could determine if defaults were over-represented in any cross section of characteristics (such as a geographic location, auto type, or credit score band). This can be done for any intra or inter-trust stratification and any loan status. For example, some cursory modeling on one auto-loan trust suggests that a loan’s age and loan-to-value ratio are highly coincident with statuses of delinquency (30-90 days). One could then display the delinquency percentage (represented by color intensity) against buckets of age and LTV on a heat map (Exhibit 2).

Are there any sector wide applications?
Eventually the industry may require data indices that display metrics (e.g. defaults, prepayments, roll-rates) for inter-trust segments overtime (e.g. an auto-loan subprime default index). These indices may be segmented into custom benchmarks and used to gauge asset pool performance, cohort performance (such as that trust’s underwriting standards across trusts (percentage of subprime borrowers for similar issuers). Currently, the time series of data for each trust is too shallow for the aggregation to be meaningful, but that will change as more deals’ data are added and current deals’ data expand. Below we show roll rates for prime borrowers across trusts versus the loan’s age as an example.

What other uses are there?

There are a multitude of potential uses once a longer data time series is published. For example, potential purchasers of a comparable private auto-loan pool can develop valuation scenarios (e.g. default, prepayment, and severity curves) from sampling similar loans derived from the ALD data set. Sophisticated players can create valuation models using cross-trust data that could be used broadly. Consider the advantages of a near-prime credit valuation process that could be applied irrespective of issuer. The data could also be used by equity investors to evaluate issuer underwriting quality in their due diligence process.

Where does Aspire fit in?
Aspire’s ALD Explorer product is uniquely positioned to fulfill the market need to leverage this data. We have built out the capability to clean and enhance raw data, provide data access readily, display stratifications and performance curves for multiple asset pools, and heat maps like the one described above.

We leverage our experience from the marketplace lending sector, which has many similar data issues, including the requirement to access loan level data. In that market, institutional buyers needed a centralized hub to aggregate and transform fragmented originator data and then create a robust reporting and analytics layer on top. Here, the datasets will become much larger over time.

Where can I learn more?
Aspire has built an end-to-end data and analytics solution for auto-loan trust data, that will be expanding to cover all the asset verticals with ALD requirements. The ALD Explorer is available on an open access basis with limited content and functionality. Once registered, users can access all content and functionality on a free-trial basis. Interested participants can access the ALD Explorer here.

Disclaimer

This material is provided for informational educational purposes solely in connection with a discussion of marketplace lending and a number of potential investment entities, structures and strategies relating to marketplace lending activities, and it should not be construed as investment advice or a recommendation to buy, hold or sell any security or purchase any other investment product or service. Aspire is not registered or licensed, nor are we relying on an exemption from registration in any jurisdiction. This presentation is only being provided to recipients who are “accredited investors” as defined under the Securities Act of 1933 or under applicable Canadian securities legislation.

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Authors:

Written by Peter Mallik, head of quantitative strategies, and David Fry, CFA, co-Founder & CEO of Aspire Financial Technologies.