Tuesday September 20th 2016, Daily News Digest

Tuesday September 20th 2016, Daily News Digest

News Comments Main News: RateSetter’s results and their change in business model by amortizing origination fee over the duration of the loan; Prosper’s Monthly Report ; Eisman’s claim online lenders are clueless. Main Analysis: Prosper’s Monthly Report analysis; RateSetter’s balance sheet actions. Main though generating pieces : Use of blockchain in lending. United States Eisman, […]

Tuesday September 20th 2016, Daily News Digest

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United States

United Kingdom




United States

Eisman Assails ‘Clueless’ Silicon Valley Over Online Lending, (Bloomberg), Rated: AAA

While the loans these companies make are small on average and don’t portend to be the next “Big Short” — the title of the book and film that detailed Eisman’s bet against the debt central to the 2008 financial crisis — there is reason for investors to be cautious, he said.

The central problem is that these lending startups, their founders and backers in particular, don’t have a lot of experience making loans to consumers, and some of them approach loan-making as they would retail sales, Eisman said in opening remarks at a conference of investment bankers and investors in Miami Beach, Florida, on Sunday.

“When you go to Amazon and buy a book, you buy it and the transaction is over,” he said. “But when you take out a loan, that is just the beginning of the transaction — it’s like a relationship.”

The remarks were given inside a large conference hall of the beachfront Fontainebleau Hotel, where several thousand Wall Street securitization professionals are convening this week for their 22nd annual ABS East Conference. It’s the same gathering where, in one scene of the film “The Big Short,” the character based on Eisman bursts into outrage at a mortgage executive giving a talk.

“We have seen loans underperform from their expected loss estimate at the time of underwriting,” Stephanie Yeh, a director at Credit Suisse Group AG, said on a Monday morning panel discussion. “There still isn’t a lot of data.”

“Traditional Wall Street occasionally forgets that online lending has a long track record and that these platforms have been built by people with deep financial markets experience,” Nat Hoopes, executive director of the Marketplace Lending Association, a trade group, wrote in an e-mail. “Borrowers and investors are turning to these online products because they are delivering enormous value compared to the traditional alternatives.”

This month, a top U.S. banking regulator, Thomas Curry, warned the startup lenders about the potential for unintended biases in their underwriting that could lead to violations of federal law. Bond graders have also noted that these startups have varying degrees of underwriting sophistication and that regulatory and legal risks abound.

Prosper monthly report, (Prosper), Rated: AAA

Prosper: Loan Portfolio on Track for Highest Returns Since 2013, (Crowdfund Insider), Rated: AAA

Prosper states that the 2016 portfolio is on track to have the highest estimated return since 2013. This is alongside the highest average FICO to date. Estimated returns on August 2016 production continues to be just over 7% on average.

Although delinquency rates for 2015 loans remain elevated in comparison to 2013 and 2014 vintages, Prosper is of the opinion that internal adjustments will “positively impact delinquency in the new 2016 vintages.”

Monthly loan averages stood at $13,541 per borrower with the weighted average borrower rate at 14.79%. Weighted average estimated return adjusted for expected losses came in at 7.19%.

Business Loan Provider Earns Highest 5-Star Rating from TopConsumerReviews.com, (Press Release Rocket), Rated: A

TopConsumerReviews.com recently awarded its best-in-class 5 star rating to OnDeck

Small business ownership is on the rise. For some, the desire to own a business is fueled by numerous success stories of entrepreneurs and inventors, while others are looking for opportunities beyond their traditional 9-to-5 workplace.

United Kingdom

P2P lending rediscovers balance sheet magic, (FT Alphaville), Rated: AAA

One of the key features of peer-to-peer (P2P) lending is an absence of centralised balance sheet risk. In the traditional, boring model of banking, a bank holds deposits and loans on its balance sheet and earns a spread by paying depositors less than it charges borrowers.

That was the dream, this is the reality: 

That snippet is from the latest annual accounts of Ratesetter, one of the UK’s top three “peer-to-peer” lenders, and shows the startup taking £2m of risk on to its own balance sheet in order to fund a borrower in “financial difficulty”.

In the broader world of business, £2m is not a huge sum of money. But this particular sum of money is important for one specific and one general reason.

First, it’s a meaningful amount of cash for Ratesetter and, according to a spokesperson, it’s the first time it’s done something like this. At the end of March this year, the accounts say, the lender had £15.4m of funds available, meaning the £2m working capital commitment accounts for about 13 per cent of its cash.

Second, it’s yet another sign that P2P lenders will take on balance sheet risk if it suits them.

On a smaller scale, another UK P2P lender, Funding Circle, also takes some balance sheet risk when writing property loans. Borrowers in that market can’t wait around to see if their request for money will be fulfilled by individual lenders on the platform, so the platform itself underwrites the loan.

But just as Laplanche had insisted “we don’t take credit risk”, so too Ratesetter’s chief executive Rhydian Lewis has argued publicly against the need for P2P lenders (more accurately called ‘online lenders’) to use their balance sheets.

An interview can be found here. 

A spokesperson for Ratesetter said Lewis’ thinking had not changed on the matter and that the money it lent in this situation was “an exceptional case”, which wouldn’t be repeated.

Revenue Up 46% at RateSetter. Pre-Tax Loss Stands at £4.9 Million, (Crowdfund Insider), Rated: AAA

RateSetter has released its accounts for 2015 – 2016.

According to their financial results, top line revenue increased 46% to £18.5 million from £12.6 million versus prior period. The increase in revenue was paired with a pre-tax loss of £4.9 million compared to a pre-tax profit of £476,000 for the year prior.

RateSetter explained that results were driven by an accounting decision to charge fees over the lifetime of the loans instead of charging upfront.

RateSetter stated that if fees had been charged upfront the peer to peer lender would have recorded a pre-tax profit.

Having turned a small profit in 2013-14 and 2014-15, proving our model, we’ve deliberately planned and delivered an increased level of investment into our business.

RateSetter shared additional information regarding their operations including;

  • Major investment in financial year 2015-16; will continue in 2016-17.
  • Loans under management increased by 70%, from £341 million on 31 March 2015, to £581 million a year later.
  • The number of active investors grew from 18,608 to 31,036 over the same period.
  • Today these figures stand at £640 million and 36,310 respectively – with a 70% increase in new active investors in the period since the EU referendum compared to the same three months last year.

Marketplace lender RateSetter ‘deliberately’ made a loss despite boosting revenues to £18.5 million, (Business Insider), Rated: AAA

63% of all RateSetter loans now have the platform’s fee repaid as part of the monthly borrower repayments, a spokesperson confirmed over email, compared to almost none three years ago.

The company says in an emailed statement that the change was encouraged by City of London investors Woodford Investment Management and Artemis, which took part in a £20 million funding round for the platform last year.

“The switch from up front to recurring fees was not a decision we took lightly. However, it greatly enhances the sustainability of our business — we strongly feel that it will prove to be a very positive development and anticipate that others in our industry will follow our lead.”

Bad debt rates have risen since RateSetter first opened its doors in 2011 but the company says the change to the fee model should stop this trend as it “aligns RateSetter’s interests with those of its investors as it provides a financial incentive to only approve loans which perform.”

RateSetter says it currently has £640 million of loans under management and 36,310 investors on its platform.

Funding Circle partners with ActionCOACH, the World’s #1 Business Coaching firm, (Funding Circle), Rated: A

ounded in 1997, ActionCOACH advise thousands of small businesses every week, on how to get more time to finding the best employees, and more money on their bottom-line.


Crowdlending startup Kameo backed by Norwegian bankers, (Swedish Startup Space), Rated: A

Kameo is one of a number of Swedish startups in the crowdfunding business. The company has chosen a slightly different direction than Swedish peers Fundedbyme and Pepins.

Kameo is a platform where individuals partner to finance loans to specific companies, also known as crowdlending.

Harung says they are primarily focused on small construction companies that use Kameo to supplement bank loans for building projects

“Initially, we wanted to use a Saas-platform, but the one we chose wasn’t approved by the Danish FSA. So, we chose to develop our own.” said Mr. Harung.

Mr. Harung had Avanza Bank financier Bjørn Braaten onboard from the start. With nearly 40 percent of the share, Mr. Braaten is currently the largest shareholder in Kameo. The company also counts Svein S. Jacobsen as chairman, who has also served on the board of Nordea Bank.

The service has already been live in Sweden for a while, but now it’s time to bang the drum and start promoting the site.

Mr. Heldaldeclined to comment on exactly how much he has invested himself, but he says it is “in the region of a few million SEK.”


2017 opportunities in alternative lending in Asia, (Fintech Innovation), Rated: A

According to Roger Crook, CEO of Fintech startup Capital Springboard, the P2P market in Southeast Asia remains relatively more young compared to the US and Europe, albeit the industry is witnessing the same experience curve (uptake).

He estimates the overall bank lending in Singapore at S$350 billion a year with SMEs accounting for S$80 billion of the figure. “And if you look at P2P today, it’s probably around S$150 million market total. So, the penetration is very low. The local banks provide about 60% of loans to SMEs while foreign banks take up the rest,” estimated Crook.

Crook observed that the average Singaporean SME is under three years of age, with revenues of less than S$30 million. And with the Monetary Authority of Singapore defining SMEs as businesses with revenues of up to S$100 million, this puts a lot of smaller SMEs out of reach of bank loans.


Sydney Fintech startup, Othera, is one of few Australian startups doing more than just talking about Ethereum blockchain, (PR Wire), Rated: A

Othera, a Sydney startup based in the BlueChilli tech incubator, provides credit analytics and investment solutions to loan originators, institutional and private investors, and small businesses.

Having launched their proprietary credit decisioning software to the market earlier this year, they have followed up with the delivery of an innovative two-part blockchain solution that will redefine how the global financial systems manage and trade debt and other asset back securities- and retail investors can get in on the action too.

Othera currently has two prototypes in testing phase, the Othera Blockchain Lending Platform and the Digital Asset Trading Exchange (both worldwide patent pending). They are linked platforms and when used together, they enable loan originators and investors the ability to directly connect and transact debt or asset backed securities with more investment transparency, lower risk and for known fixed returns. This is a radical investment proposition for an industry that has not seen this been done before.


George Popescu

Monday September 5th 2016, Daily News Digest

Monday September 5th 2016, Daily News Digest

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; […]

Monday September 5th 2016, Daily News Digest

News Comments

United States

United Kingdom




United States

CFPB Scores Big Win in CashCall Lawsuit That Turns on “True Lender” Analysis, (Lexology), Rated: AAA

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.

Online Lenders Face Higher Litigation Risk After U.S. Court Ruling, (Nasdaq), Rated: AAA

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.”

RiverNorth Marketplace Lending Fund Nears Launch, (Crowdfund Insider), Rated: AAA

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%.

You can read the entire filing here.

How does Moody’s respond to questions about whether online lending is a bubble?, (Alt Fi), Rated: AAA

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.

Bank collaboration with P2P platforms rising, (Euromoney), Rated: AAA

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.

United Kingdom

Adviser shuns P2P to back sector’s selling platforms, (FT Adviser), Rated: A

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.

P2P giant Zopa to cut rates, (FT Adviser), Rated: A

Comments: We covered these news for our readers on Friday. We found some additional important info to share regarding these news.

In a blog posted on the company’s website, it said all of its lender rates will decrease by 0.2 per cent from the 8 September.

Andrew Lawson, chief product officer at Zopa, said headline rates from other loan providers have fallen between 0.1 and 0.3 per cent since the interest rate cut.

He also pointed out that banks have already reduced their rates dramatically, in many cases by more than 0.25 per cent.

“This lack of competitiveness for investors from the banks has led to a surge in new lenders at Zopa, meaning slower lending speeds and queues of, on average, 10 days for our Classic account.

“The reality is no bank, deposit-taker or lender, is completely disconnected from the bank rate.


Innovation and fintech are the focus of ASIC’s Corporate Plan, (Finder), Rated: A

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.

Why online lending should not be regulated,(DailyO), Rated: A

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.


George Popescu