July 21st 2016, Daily News Digest

News Comments A lot of news today, and today we have an especially good international section. Please do pay attention to the Australian, Singapore and China sections in particular. (And Lending Times technical team reports that yes, Mailchimp has not answered any of the multiple requests for support from a paying client in 17 hours. […]

News Comments

  • A lot of news today, and today we have an especially good international section. Please do pay attention to the Australian, Singapore and China sections in particular.
  • (And Lending Times technical team reports that yes, Mailchimp has not answered any of the multiple requests for support from a paying client in 17 hours. We will send today’s newsletter by hand again using the older design template.)

United States

United Kingdom

European Union

Switzerland

India

Singapore

Australia

China

News Summary

 

United States

The marketplace lending market has received an influx of positive news recently, (Peer IQ), Rated: AAA

The WSJ reports that Moody’s removed Class C mezzanine bonds issued by CHAI 2015-PM1, 2015-PM2, and 2015-PM3 from downgrade review and confirmed Ba3 rating.

At the time of downgrade review in February, Moody’s cited a faster build-up of delinquencies and charge-offs than expected. Moody’s also increased the expected cumulative lifetime net loss from 8% to 12% (bringing revised estimates in-line with platform and market expectations).
As of the June 15, 2016 distribution date, losses on the CHAI 2015-PM1, 2015-PM2 and 2015-PM3 pools have reached 3.6%, 1.5% and 0.5%, respectively.
Improvement in Credit Spread on MPL ABS bonds
The ratings action was presaged by the ABS market which showed spread tightening from 1000 to 400 bps. Readers may seek to review the May month-end newsletter to see the analysis cited in the WSJ report:
PeerIQ credit spread on MPL ABS bonds
Leading up to the CHAI 2016 PM-1 offering in April, the culmination of ratings actions, regulatory chatter, delinquency fears, and volatile credit markets created an inhospitable environment for new deals. The auction resulted in limited participation and wide initial pricing–10.26% coupon priced to 12.5% yield on the CHAI 2016 PMI-1 C tranche.
Investors that bought the CHAI C tranche at new issuance without any leverage would have seen about 15% price appreciation in 3 months. Investors that performed the up-front credit work and applied analytics to separate the signal from headlines were able to earn outsized returns.
Dislocation creates opportunity
Ironically, the dislocation in recent months has created substantial investor interest in MPL ABS and whole loans. The CHAI 2016-1 PM1 offering prompted investors that were historically dismissive of marketplace lending to do a double-take
Repeat ABS investors are now looking upstream to capture additional whole loan economics.
Large asset managers with double-digit return objectives in a negative to low rate world are looking to strike bargains with platforms. There is still much more to be done. Nevertheless, the climate for establishing relationships with platforms may be as good as ever.

Little Change in LendingClub Loans Since Madden Decision, (BNA), Rated: A

So far, LendingClub loans haven’t changed in average interest rate or risk, either in the 2nd Circuit or nationwide.

Both the total number and value of loans and the amounts arranged through the company have only grown, not diminished, while average FICO scores measuring a borrower’s credit rating remain consistent, and internal loan grades have remained the same. One exception is that the average value of borrowers’ previously requested FICO score did increase steadily since the decision, even though FICO scores at the time of loan issuance did not.

LendingClub has also continued to arrange loans to borrowers in the 2nd Circuit that surpass the interest rate caps in those states. The Madden decision does not prevent national banks from providing loans above a state’s interest rate cap. Instead, it applies to debt collection agencies that purchase those loans.

Lending club changes after Madden vs Midland

As a result of the court’s decision, LendingClub in February renegotiated terms with WebBank—the Utah bank that originates all of the loans through the online service (40 BBD, 3/1/16)

Under the new arrangement, WebBank maintains ongoing accounts for the borrowers and receives regular payments from LendingClub—called “loan-trailing fees”—rather than a single lump sum fee on every loan it originates. The loan trailing fee is based on the total amount serviced by the bank and a “loan fee factor.” A LendingClub representative told Bloomberg BNA that the company does not publicly disclose the amount of the loan fee agreement with WebBank.

Different picture for Prosper

Prosper loan volumes

Representative for Prosper attributed any changes in lending to general market fluctuations but would not comment further for this story.

A 2009 paper from the Federal Reserve Bank of Atlanta said that loans sold into the secondary market through originate-to-distribute underperformed other loans by 9 percent. A 2010 academic paper funded by the FDIC’s Center for Financial Research also implicated the originate-to-distribute model in the subprime crisis.

Author and University of Michigan Finance Professor Amiyatosh Purnanandam told Bloomberg BNA that part of the problem with the originate-to-distribute model is that once the debt is sold, the originating bank has nothing at risk and the debt buyers don’t always have the skill in evaluating good borrowers as national banks do.

Jefferies revives stalled Lending Club bond: sources, (Reuters), Rated: AAA

Comment: We covered these news last week as well. At that time it was more of rumor. It seems it’s real news now.

Jefferies has revived its stalled Lending Club loan securitization in a club-style deal it has begun to pre-market to only a few select investors, two buyside sources with knowledge of the trade told IFR.

The bank is now looking to sell a two-tranche trade that could offer yields in the 4.25%-7% range, one of the investors said.

The top class of notes of slightly less than one-year were about 60% subscribed, while a longer 2-year tranche was already fully covered, the investor said.

The near-prime loan securitization was shelved after Lending Club said it had repurchased a US$22m pool of loans sold to Jefferies under Laplanche’s watch that included falsified documentation.

Goldman Sachs also hit pause on its potential bond sale of prime Lending Club loans.

But bankers told IFR that Goldman could now look to revive its bond deal, if the Jefferies trade finds favor with investors.

Goldman Sachs Sets Its Eyes on Retail Banking (GS), (Investopedia), Rated: AAA

Fast Start
According to the Wall Street Journal, more than 20,000 new customers have opened internet bank accounts with the Goldman unit since it launched three months ago. Unlike other Internet-only retail banks that tend to offer a wide range of services, Goldman’s products are geared towards long-term savings, and it solely offers its customers the option to open traditional savings and certificate of deposit (CD) accounts. As of July 20, 2016, the bank’s interest rate on online savings accounts was 1.05% while its interest rate on a 5-year CD was 1.85%. In many cases, these rates are a lot higher than what traditional banks pay their customers. For example, Wells Fargo (WFC), Citibank (C), Bank of America (BAC) and Chase (JPM) all pay less than 0.03% APY on regular savings accounts. GS Bank can offer above-average interest rates to its depositors because they do not have the overhead expenses of a typical brick and mortar bank. (See also, The Pros And Cons Of Internet Banks.)

Retail Diversification
For Goldman Sachs, savings accounts may not be as exciting as the main investment banking business. Yet, the company still benefits from expanding into retail banking, enabling Goldman Sachs to diversify its customer base and tap into a segment of the market, retail investors, that they have been unable to serve in the past. GS Bank will also help boost Goldman’s overall liquidity, and keep the company compliant with new regulations calling for more liquidity from financial institutions. Around the same time GS Bank was launched, the Federal Deposit Insurance Corporation (FDIC) proposed new rules that would require banks to own sufficient ‘‘easy-to-sell’’ assets that would be able to cover any and all liabilities coming due within a one year period. (See also: The History Of The FDIC.)

The Realities Of Alt-Lending Regulation Begin To Set In, (Pymnts), Rated: A

Comment: we covered this yesterday as head news. However it is so important that we would like to remind our readers just in case.

“I suspect more regulation will come to the space, and I think that will suit us well,” said PayPal VP and General Manager of Small Business Lending Darrell Esch in an interview with Forbes last year.

When asked by PYMNTS whether he was concerned about incoming regulation on the space, OnDeck Vice President of External Affairs and Associate General Counsel Daniel Gorfine simply stated, “No, not concerned.”

Reports from Bloomberg BNA this week, however, could signal a shift in how alternative lending players are reacting to the incoming threat of regulation.

“Strong evidence indicates that small business loans under $100,000 share common characteristics with consumer loans yet do not enjoy the same consumer protections,” the Treasury stated in its May report. “Treasury is willing to work with members of Congress to consider legislation that addresses both oversight and borrower protections.”

“I would have to do everything differently,” said CAN Capital Chief Legal Officer Parris Sanz in an interview with the publication. “I can’t give you a rundown of all the various moving parts that would be affected, but I can tell you for sure that it would be significant.”

In a separate interview with Bloomberg BNA, Richard Eckman, a partner at Delaware-based Pepper Hamilton LLP, said alternative lenders are probably wise to pay attention to this possibility.

REFILE-Marlette gets second ever online loan ABS over the line, (Reuters), Rated: AAA

Marlette Funding got its second-ever bond backed by personal loans easily over the line on Wednesday, but investors said the primary market was still wary of deals from the online lending industry.

Marlette’s deal narrowed its pricing from guidance, but investors said global low rates had turned all types of US consumer debt-related assets with yield into a hot commodity.

And similar deals from a year ago were pricing far tighter.

Marlette priced its top US$149m of 1-year Single A (rated by Kroll) notes at 225bp over EDSF, tighter than a 235bp-250bp area guidance, two investors said.

Last July, Citigroup cleared its top class of A3 (rated by Moody’s) bonds – one notch lower – of Prosper Marketplace loans at 140bp over EDSF, according to IFR data.

Riskier Ba3 notes from Citigroup priced at 385bp over interpolated swaps, whereas Marlette’s BBs Wednesday printed at a whopping 825bp over swaps.

By another measure, the BBs were about 75bp more than a deep subprime auto ABS sold this week by lender Consumer Portfolio Services, according to IFR data.

“Marlette’s business model ensures an alignment of interests among the company, the originating bank and institutional loan buyers,” Kroll Bond Ratings wrote in its presale report.

The hunt for yield, meanwhile, has prompted two banks with exposure to online loans to revive postponed deals in the primary market, buyside sources said.

Non-bank Jefferies has rekindled a roughly US$140m bond deal of near-prime Lending Club loans, which was shelved for two months after Laplanche stepped down from Lending Club.

Bankers said that Goldman Sachs could also look to bring out its paused prime-quality Lending Club deal after Jefferies.

United Kingdom

Oxford economist John Kay: Where the opportunities are for fintech, (Alt Fi Credit), Rated: A

Large scale financial services firms are still ripe for disruption, according to the economist John Kay, who believes the City of London and other major financial centres have taken a wrong turn.

Kay explains that he sees four main ways that fintech can be successful and help the real economy by disrupting financial services.

These are firstly; the payments system This is the system that enables the payment of wages and salaries as well as bills. Secondly; capital allocation. This how peoples’ savings become invested in the physical assets and infrastructure of a country. Risk management is third, i.e mitigating the risks of everyday life such as insurance. Lastly is wealth management in a broader sense.

Technology will take over a lot this spectrum and he argues wealth management “is an area of major disruption”, encompassing P2P lending/investing, robo-advice and other discretionary investment services. However, he says payments is the one that will most clearly disrupt things and change our lives. He thinks cash will “seem crazy” in 20 years’ time.

Kay has a sizeable investment in online investment management firm Nutmeg, however, which is one of the dominant players seeking to disrupt the fund management and wealth management industries although they have yet to announce a P2P/market place lending function.

City regulator warns on peer-to-peer lending, (Financial Times), Rated: A

Chris Philp, a Conservative MP on the Treasury committee, said many consumers do not understand the dangers they are exposed to through P2P.

He said the way P2P sites are paid fees without taking on the risk of loans on a balance sheet is akin to the securitisation of subprime loans before the financial crisis.

Mr Bailey said in response, “I agree with you on the risks”.

Mr Bailey noted that although some platforms have so-called reserve funds to pay out to investors in the event that borrowers default, there is “no guarantee in that fund”.

European Union

Renowned investor Peter Thiel increases investment in leading European fintech, Deposit Solutions, (Press Release), Rated: AAA

Prominent venture capital firms today announce they have invested €15 million in European fintech company Deposit Solutions GmbH, a fast growing fintech innovator operating in the €9 trillion market for retail deposits in Europe.

The key highlights include:  PayPal co-founder and Facebook’s first outside investor, Peter Thiel, and German leading fintech investor FinLab jointly increase their share in the company  US investor Greycroft Partners, the global growth fund of e.ventures as well as Valar Ventures come on board as three new partners  The funding round increases the valuation of Deposit Solutions to €110 million.  This is the second successful investment round for Deposit Solutions within a year, following last year´s investment into the Company of €6.5 million. Since then the valuation of the company more than quadrupled.  The funds raised will be used to further develop the proprietary technology platform and continue Deposit Solutions´ international expansion, having already recently expanded to the UK and Switzerland.  Deposit Solutions will increase the number of employees at its UK HQ in the City of London and is expected to launch its retail platform in the UK in 2017.

“We are seeing substantial demand from banks looking to offer their clients attractive deposit products under the existing account relationship. As a result we have gained access to millions of clients and billions of deposit appetite in a very short amount of time. This in turn is very attractive to banks wanting to raise deposits through our platform.”

Max von Bismarck, Chief Business Officer and Managing Director of Deposit Solutions, said: “We address an important structural problem in European banking today for banks and retail customers: Many banks are unable to offer attractive interest rates to their clients. At the same time other banks find it difficult and costly to gain access to retail deposit funding. Our platform provides a solution for both while savers find it easier to get access to better rates.”

ECrowd! Spanish Crowdlending Platform Receives License by the CNMV, (Crowdfunding Insider), Rated: A

Debt-based crowdfunding platform ECrowd! is one of the first Spanish sites to receive a formal operating license from the Comision del Mercado de Valores (CNMV), the securities regulatory agency in Spain. ECrowd!, based in Barcelona, has joined Crowdcube Spain, Lendix and MyTripleA in receiving official approval as a Collaborative Finance Platform under regulations enacted in 2015.

They were on track to achieve 100% growth during 2016. [Comment: Some authors have issues with important verb tenses, it is unclear if the author meant they are or they were.]

Switzerland

The era of Crowlending opens new market for startups, (Startup Ticker), Rated: AAA

In Switzerland significant growth in Crowdlending was achieved in the previous year. The Crowdfunding monitoring report 2016 published by theUniversity of Applied Sciences Luzern early this year reported a significant increase in the total amount of money raised through Crowdlending in the year 2015. A total sum of CHF 7.9 Million was collected through crowdlending with a growth rate of +126%. 266 campaigns were financed. Crowdlending has continued to become more popular not only among start-ups but also among investors.

The crowdlending market in Switzerland is booming and has opened new opportunities for entrepreneurs. New startups operating crowdlending platforms are been established and many projects have been successfully financed. Today, there are 7 crowdlending platforms: the pioneer Cashare for both SMEs and private ventures, CreditGate24 for private and institutional investors, creditworld for both private and on SME loan, Lend, splendid that is specifically focusing on education loans,swisspeers for SMEs and Wecan.fund for SMEs. Other platforms – such as Miteinander-Erfolgreich and Raizers – also operate alongside other models as crowdlending platforms.

India

India’s Mywish Marketplaces raises $ 15 M to expand to new financial products, (Tech Crunch), Rated: AAA

This isn’t a huge round compared to what other companies have closed, but it is entirely strategic. The capital was proved by Franklin Templeton, the U.S. banking giant with more than $700 billion in assets under management. Puru Vashishtha, who is board director at Mywish Marketplaces, told me in an interview that the company didn’t need to raise the funds and it wasn’t short of interest, but it did so for growth opportunities and was very deliberate with the capital that it did close.

“We were chased by a lot of venture capitalists and investors globally,” Vashishtha said. “Because we were profitable, we did not need to raise a lot and didn’t want to dilute too much too soon — that’s one of the reasons we chose Franklin Templeton. Also, Franklin Templeton has built a very big emerging market business, we want to leverage the experience and leadership of their team.”

To backtrack a little, Mywish Marketplaces operates Deal4Loans, a price comparison and loan aggregation website in India. Its products include credit cards, home loans, business loans and personal loans.

Like Credit Karma in the U.S. and countless others worldwide, it works with banks, credit card companies and other financial institutes to help drive customers, while for its users, it tries to provide a holistic look at financing option and which one suits best for each case. The Deal4Loans site claims to have served more than 6.3 million “satisfied” customers, while the company says it has dispersed a total of $2 billion loans in the last six years at a current rate of $400-$450 million per year.

So why is this profitable company — profitable from day one, it claims — raising money?

I hinted at it earlier, but Mywish Marketplaces wants to expand into more verticals with new financing products for Indian consumers.

P2P lender Faircent makes strategic C-suite appointments, (Economic Times), Rated: B

India’s largest peer- to- peer (P2P) lending marketplace, Faircent.com, on Wednesday announced the appointment of Shivam Gupta, who was a part of the global risk management team of Standard Chartered Bank based in Singapore, as chief risk officer and Karun Thareja, who was a part of the leadership at an analytics startup called WyzMindz, as head of marketing.

Thareja, on the other hand has extensive experience in Marketing, Sales and Business Management spanning more than 20 years. His domain expertise includes Analytics, Enterprise Systems, Contact Center Management and Process Management. In his prior roles he has led multi-fold growth in business units at companies like IBM, Microsoft, Oracle, Dassault Systems and NIIT.

Singapore

Online lending platform to offer investor insurance, (Straits Business), Rated: AAA

Online peer-to-peer funding platform Validus Capital has partnered home-grown insurance provider EQ Insurance to offer investor protection on some of the financing it provides to small and medium-sized enterprises (SMEs).

It will be the first platform in Singapore to provide investor insurance on its invoice financing services, the company said.

The platform, which was founded last year, has had a zero-per-cent default rate to date thanks to its “rigorous due diligence”, the company said. In the last few months, the company has had 27 SMEs approved for invoice financing services, each with an average revenue of $5 million.

Mr Prakash Somosundram, co-founder of Pealo – an aggregated marketplace for SMEs to access working capital – said the firm is looking into investor protection products. “This will definitely help us to attract more investors, and more people will see this form of investing as an asset class,” he added.

Pealo’s platform was launched in January – 300 SMEs have signed up and there are 46 live campaigns under way.

Mr Brian Teng, chief executive of InvoiceInterchange – which allows SMEs to put up their unpaid invoices for auction – also said the platform hopes to eventually make insurance available to investors.

Mr Teng declined to reveal how many SMEs have used the platform, but said there is significant room for invoice financing to grow as a source of funds for SMEs here.

“The penetration rate of invoice financing in Singapore is still low when compared with nations like Britain and the United States,” he noted. The company has funded $4 million of invoices since its launch in 2015.

Mr Roger Crook, chief executive of Capital Springboard – which runs a crowdfunding platform for invoice financing – said more than 100 SMEs have used the service.

The platform has funded over $85 million worth of invoices over the past year, with over 50 accredited and institutional investors taking part.

Australia

Online home loan marketplace exceeds billion in loans, (Broker News), Rated: AAA

HashChing, an online home loan marketplace, has surpassed $1 billion of home loans as momentum builds for the Sydney fintech company. The platform officially launched in August 2015 with just a few brokers on board across Australia. Now, more than a billion dollars’ worth of loans have been received and more than 1,200 mortgage brokers across the country have signed up. The platform works as an online marketplace connecting consumers to mortgage brokers.

“Customers aren’t just looking to save time. The key to our success is that our offer extends far beyond convenience. We’re able to offer pre-negotiated home loan deals from different lenders with equal features, the same products, but with an even better rate,” Sodhi, co-founder and CEO said.

Narang, co-founder and CIO added: “Our broker registration process has been automated to make it really easy and quick by allowing them to digitally sign the contract which instantly activates their account and saves the paper clutter at both ends.”

As the platform continues to build momentum, Sodhi and Narang have welcomed Claire Wivell Plater of The Fold Legal to their advisory board. Wivell Plater is a long standing member of the Business Advisory Committee to ASIC’s Licensing Division and was recently appointed to the Treasurer’s Fintech Advisory Group.

Narang explains HashChing 2.0 will involve more intelligent use of analytics for a better consumer experience.

China

How Chinese Search Giant Baidu Is Getting Deeper Into Banking, (Fortune), Rated: AAA

Chinese search giant Baidu is investing more deeply in financial technology startups as it seeks to expand its own lending efforts.

On Monday, Baidu announced an investment in ZestFinance, a startup taking on the credit scoring industry by using machine learning and a wide variety of data about borrowers to rate their ability to repay loans.

While the amount of the backing was not disclosed, Baidu also invested Bitcoin payments startup Circle Internet Financial last month, the Nikkei Asian Review reported on Wednesday.

Both investments followed Baidu’s decision last year to form an online bank in partnership with Citic Group’s banking unit. The new bank would be the first in China that “truly understands both the Internet and financial services,” Baidu CEO Robin Li said at the time.

Baidu had also made several notable hires from the finance sector, the Nikkei paper reported, including executives with experience from American Express , online financial marketplace Lufax, and Everbright Bank in China.

While online lending sites like Lending Club LC -0.22% have faltered in the United States, the market is strong in China. The peer-to-peer lending market reached almost $67 billion last year, the largest in the world, Nikkei reported citing data from Citigroup.

Baidu will use ZestFinance’s credit rating technology to assess the creditworthiness of its own users. Unlike the U.S., China lacks centralized credit bureaus, and only a small portion of the population has a credit card.

Author:

George Popescu
George Popescu

July 20st 2016, Daily News Digest

News Comments United States A very interesting risk that has not been clearly described so far: the risk that small SMB loans end up being regulated like personal loans. A fascinating read on politics and regulators. Goldman announcing their p2p lender will be live in the fall with $16bil in lending capital from depositors. Goldman […]

News Comments

United States

United Kingdom

India

Singapore

China

  • The take away from Lendit China per Orchard and Lendit Organizer Jason Jones :
    • There continues to be strong interest from Chinese Wealth Management firms to invest in US Online Lending loans
    • Investor interest is focused on making strategic equity investments in all types of global FinTech firms within Online Lending
    • Chinese Marketplace Lenders continue to increase their focus on offering more diversified products to clients including wealth management, insurance, and other financial services
    • Implementing a robust operational infrastructure is widely understood as a necessity required to successfully invest in the US Online Lending industry
United States

Small-Biz Online Lenders Aim to Dodge Consumer-Loan ‘Nightmare’, (Bloomberg DNA), Rated: AAA

Online marketplace lenders would face significantly higher regulatory hurdles if most of their loans to small businesses were reclassified as consumer loans, as the Treasury Department has recommended, an industry representative and a legal expert told Bloomberg BNA.

Officials discussed the need for greater transparency and noted that small-business loans under $100,000 “share common characteristics with consumer loans, yet do not enjoy the same consumer protections.”

The industry is pushing hard to head off the suggestion.

“They’re very smart in being concerned about that,” said Richard Eckman, a partner at Pepper Hamilton LLP in Wilmington, Del. “There are a whole host of consumer laws that apply to loans that are for personal, family and household purposes; that’s sort of the definition of a consumer loan.”

The federal consumer protection law that ranks as the biggest concern of marketplace lenders such as CAN Capital, which cater exclusively to small businesses, is the Truth in Lending Act (TILA).

“TILA, in particular, is onerous,” Eckman, a specialist in marketplace-lending law, said in an e-mail.

On May 3, 16 members of the committee’s Republican majority and three of its minority Democrats, along with House Small Business Committee Chairman Steve Chabot (R-Ohio), sent a letter to Treasury Secretary Jack Lew sounding themes that foreshadowed Sanz’s testimony. The Treasury Department at that time was preparing its report on marketplace lending, and the House members wrote that they wished “to raise concerns with recent comments by public officials that seem to indicate a preference to regulate lending to small businesses and consumers similarly.”

“[W]e believe it is important for the Department to carefully study and understand key distinctions between commercial and consumer lending markets,” the letter said. “Mistaken efforts to conflate these categories would restrict the availability of capital to small business owners.”

“There’s no reason why small businesses shouldn’t have the same protection as consumers,” Lauren Saunders, associate director of the nonprofit National Consumer Law Center, in Washington, told Bloomberg BNA.

“The research has shown that these small-business owners who borrow smaller loans, under $100,000, are not that sophisticated and at times they really don’t understand the fine print, the hidden terms and conditions that we see in the typical fintech loans to small businesses,” she said. “These contracts are very opaque. The fees and terms are hidden in a way that really makes it impossible for the borrower to do any kind of comparison shopping.”

Goldman’s Shot Across LendingClub’s Bow, (Bloomberg), Rated: AAA

There wasn’t a ton to get excited about in Goldman Sachs’searnings report on Tuesday.

Sure, per-share earnings beat analysts’ estimates, but how excited can you get over beating an estimate that dropped like this?

However, there was a tantalizing detail or two offered on the conference call by Chief Financial Officer Harvey Schwartz about the firm’s intriguing efforts to tap into the Main Street customer base. Schwartz said that the bank would roll out its consumer lending platform this fall after surveying thousands of consumers on what they would look for in such a thing. The bank developed one product involving unsecured loans, Schwartz said as way of teaser, telling analysts to standby for more information in the fall.

This may not end up being a big enough business alone to return Goldman’s revenue to record highs, at least not in the short term. Rather, the intrigue lies in its potential to disrupt the disruptors — the online startups that have pioneered the brave new world of peer-to-peer or marketplace lending.

With 20,000 customers opening up new savings accounts on top of the $16 billion in deposits it acquired from General Electric’s online bank in the second quarter, Goldman theoretically should be able to fill in the gaps easily at times when investor demand gets skittish.

Will deposit accounts be the next wave of fintech innovation?, (DailyFintech), Rated: AAA

There’s one sector of finance that really doesn’t get a lot of airtime when it comes to fintech – deposits. Checking accounts, savings accounts, transaction accounts – while they’re the bread and butter of banking, they’ve been relatively untouched since they were first invented. You put money in, and, if you’re lucky, earn a little interest before you take the money out.

Is there an opportunity here for a fintech startup to slice away this part of a bank’s core business, by adding a little flavour to the whole deposit experience?

Serial fintech investor and entrepreneur Peter Thiel certainly thinks there are opportunity in deposits. In January of this year he invested €1M into a German fintech startup Deposit Solutions.

Deposit Solutions is the first open architecture platform for retail deposits in Europe. Among many things, it solves one of the central problems for account holders related to accessing great deposit products – it eliminates the need to switch banks. Instead, a saver requires just one master account with Deposit Solutions and can then pick and choose their deposit product of choice from the Deposit Solutions marketplace.

There are a number of other fintech startups playing in this space, either building the deposits piece from scratch or interfacing into an existing authorized deposit-taking institution. Digit,SmartyPig and Qapital are a notable few. With lending having taken most of the glory to date, opportunities here are getting thin on the ground. Maybe the humble bank account is the next big fintech play.

Bridging the Great Divide: Collaboration Considerations for Banks and Marketplace Lenders, (Lexology), Rated: A

Online Platforms as Chartered Banks

The increasingly close relationship between banks and marketplace-lending platforms, as well as the uncertainty surrounding the “rent-a-charter” model to avoid state usury limits described above, have led to speculation that marketplace lenders may ultimately obtain bank charters. A fundamental issue is whether the equity and institutional investment markets will provide a stable long-term source of funding for the industry. This issue has garnered attention in recent months as leading marketplace-lending platforms have experienced steep declines in their stock prices and as questions have been raised about how lending platforms interact with fund investors and about weak secondary-market trading of asset-backed securities. The question may acquire renewed urgency in light of the governance issues at a leading marketplace lender that recently made headlines, along with its disclosure that the DOJ is now investigating. [5]

An important prudential regulatory concern with acquisitions of bank charters by marketplace lenders is a desire to avoid making the marketplace-lending industry an attractive supplier of brokered deposits, which are an unstable source of capital and may be particularly risky where a bank has inadequate anti-money-laundering controls or is undercapitalized. Regulators also anticipate grappling with the activities of many lending platforms that may be incompatible with partner banks that have charters limiting their activities to those activities that are considered “incidental to the business of banking”—typically insurance and securities work. The edgy innovations of marketplace-lending platforms that use technology in creative ways to marry finance with social media offerings are a particular challenge in this regard.

Will Madden v Midland Disrupt Loan Sales and Platform Lending?, ( National Law Review), Rated: AAA

Although Madden v. Midland applies directly only to cases where a national bank is selling or assigning a loan, the policy underlying the decision to limit the exporting authority under the NBA might also be applied to a state bank’s rate exportation powers under Section 27 of the Federal Deposit Insurance Act (the state bank equivalent to section 85 of the National Bank Act). Secondary market participants and marketplace lenders now wait for the decision from the District Court on remand.  If the court upholds the Delaware choice of law provision, market participants may manage the impact of the Madden v. Midlanddecision by electing a favorable choice of law provision in the underlying debt contract.  That at least will provide an option for continuing to work with national banks despite the Madden case.

Unfortunately, that solution will not work for buyers and sellers of existing loans, although presumably such parties are not too inconvenienced by a limit on the post-assignment interest that can be charged on a loan after substantial interest has already accrued, particularly if they have purchased the debt at a substantial discount.   Other lenders may continue to rely on the state banks’ ability to export interest rates.  In that situation, lenders should choose state banks whose state has a generous interest rate cap and is outside the Second Circuit.

The group impacted most by the Madden v. Midland decision appear to be marketplace lenders who acquire a loan shortly after origination and therefore have essentially all accruing interest at risk of challenge.  One alternative option  adopted by one on-line marketplace lender picking up on the “substantial interest” distinction in the Madden decision, is to require the bank loan originator to maintain an on-going economic interest in all loans after sale and receive certain payments on the loans only when borrowers made payments.

What remains following the Supreme Court’s refusal to hear Madden v. Midland is an outlier Second Circuit on the issue of the “valid-when-made” rule, and the blueprint for how to apply preemption under the National Bank Act as provided by the Solicitor General in its brief, a brief that as noted above clearly considers theMadden v. Midland decision to be wrong.  Unfortunately, until such time as the right case comes along, market participants will have to make adjustments to accommodate the decision as necessary to address its impact on their particular situation.

The Outlook for Fixed Income: Stagnant Prices, Tighter Money, (Enterprising Investor), Rated: AAA

The start of a new credit cycle means that income investors will have to adjust to stagnant bond prices, and new opportunities in credit markets from peer-to-peer lending will be tested by tighter monetary policy, according to David Schawel, CFA.

Returns for fixed-income investors consist of the coupon; the shortening of the bond, known as the roll; and price appreciation. Since the 1980s, falling interest rates have caused existing bonds to appreciate, as their prices increased to match the yields of bonds issued at lower interest rates. Schawel, a portfolio manager for New River Investments, thinks interest rates are nearing a lower bound.

“Most likely we’re not going to be in a 30-year bull market for interest rates falling again,” Schawel told Will Ortel during a recent Take 15 interview.

Schawel cautions fixed-income investors against assuming that bonds will continue to appreciate. Instead, the coupon and the roll will drive returns from bonds. With the roll becoming more important, investors need to pay close attention to the yield curve. Much of the return from bonds will come from the roll while the bond is on the steep part of the curve. Recently, the curve has flattened, reducing the yield premium, as the US Federal Reserve moved to tighten monetary policy.

Schawel sees the rise of marketplace or peer-to-peer lending as indicative of inefficiencies in yield.

30 Best Workplaces sin Finance and Insurance, (Fortune), Rated: B

#23: OnDeck Capital

# of work sites 3
U.S. employees 625
Global employees 638

United Kingdom

Fintech MarketInvoice Attracts m In First ‘P2P Lender’ Major Fundraise Post Brexit, (Forbes), Rated: AAA

MarketInvoice, a 100-strong firm based on the edge of The City in the confines of London’s Silicon Roundabout, has just announced a multi-million investment totalling £7.2 million (c.$9.5m) led by MCI.TechVentures Fund of MCI Capital, a listed Polish private equity group. Sylwester Janik, a senior partner of MCI Capital, a multi-stage private equity group based in Warsaw with nearly two decades of expertise of investing in digital economy companies, has at the same time joined MarketInvoice’s board.

To date the platform has provided £850m (c.$1.11bn at current exchange rate) worth of funding to UK businesses, and the firm is set on path to reach the £1bn mark before the end of 2016. At present the firm provides over £1.5m (c.$2m) per day in cash flow finance to UK businesses via its platform. At present MarketInvoice has a current market share of around 13% in its P2P alternative financing segment.

MarketInvoice, which has seem 100% year-on-year growth over the last three years, typically charges between 2%-3% on invoices handled for clients depending on the amount of the invoice. Businesses can select those invoices they want to finance, unlocking tied-up cash in 24 hours.

“In the wake of Brexit, we think the coming months present a big opportunity for MarketInvoice. Recent intervention by the Bank of England suggests that we might see significant reductions in bank lending.”

Funding Circle SME Income Fund Raises GBP14.5 Million In Placing, (London South East), Rated: AAA

Funding Circle SME Income Fund Ltd on Wednesday said it has raised GBP14.5 million via a share placing.

The London-listed closed-ended fund, set up to invest in loans originated through peer-to-peer lending marketplace Funding Circle, said it had issued 14.3 million shares at 101.53 pence per share.

Shares in Funding Circle SME were untraded on Wednesday, having last traded at 98.00p.

The new funds from the share placing will be used to back investment plans.

Can it really be “business as usual”, (Alt Fi), Rated: AAA

Funding Circle co-founder James Meekings said “the process of leaving the European Union will take two years and there will be no immediate change to Funding Circle’s day to day operations”.

A few weeks ago, AltFi Data cut its projection for 2016 UK origination by 14%, after the £840m originated in Q2 2016 became the first quarterly volume figure ever to fail to eclipse the sum originated in the preceding quarter.

Matthias Knecht quit Funding Circle Continental Europe at the end of June. Knecht was a member of Funding Circle’s global leadership team and a former co-founder of Zencap, a peer-to-peer lending outfit which Funding Circle acquired in October 2015. An article in Gründerszene suggested that a conflict had arisen between Knecht and Funding Circle CEO Samir Desai over the allocation of resources.

LendInvest, the UK’s largest marketplace for real estate loans, has also been making changes. In the immediate aftermath of the Leave vote, LendInvest tightened its lending criteria for loans worth more than £3m, adjusting the cap on LTVs for these loans to 65%. The company has also temporarily paused lending on new second charge applications.

Funding Circle CEO Samir Desai described 2015 as the year in which “it looked like we were turning water into wine”. He described 2016, by contrast, as a year for getting heads down, and for getting on with building business.

Lately the Wall Street Journal has been set to attack mode. Its coverage of the US marketplace lending sector has become almost exclusively cynical. The Times, The Telegraph and This is Money covered the recent insolvency and subsequent acquisition of the business lender FundingKnight. How many other news items in the history of the peer-to-peer lending industry have enjoyed that level of attention in the national press? Not many!

Ben McLannahan, US Banking Editor at the FT, aptly summed the whole thing up when he posted on Twitter saying “#LendingClub = have we hit the trough of disillusionment?” He was referring to something called the Gartner Hype Cycle, which is an attempt to chart the typical growth trajectory of disruptive technology companies.

UK firm claims largest ever P2P loan, (Finextra), Rated: A

UK-based Nucleus Commercial Finance claims it has made the largest ever P2P loan to date following a £14.5 million financing facility offered to UK steel stockholder Industrial Metal Services (IMS). The company has lent more than £400m to date and Shah claims that 90% of this has already been pad back with just £5,800 incurred in bad debts.

P2P lender launches new website, (Bridging and Commercial), Rated: A

The new BridgeCrowd website features a fully online view of the current live and historic loan book, a loan performance update system and an E-Wallet, where investors can place capital into loans and manage their account and interest.

The BridgeCrowd has launched a new website with added features following strong growth over the last 18 months.

Bridge Crowd offers 68% LTVs across residential owner occupied and buy-to-let properties.

Zopa names Ronen Benchetrit CTO, (Finextra), Rated: B

The UK’s oldest peer-to-peer lending service Zopa, has today announced that Ronen Benchetrit will become the company’s new Chief Technology Officer (CTO) in a strategic hire for the fintech business.

Most recently, Ronen served as CTO for leading online gaming operator PokerStars. In this role, Ronen was responsible for the provision of the areas of technology and for management of the company’s product roadmap, ensuring the quality, reliability and security of external and internal systems, networks and platforms.

India

LenDenClub Launches Automated P2P Lending Platform Adhering to Proposed RBI Guidelines, (PR Newswire), Rated: A

LenDenClub has launched its new version of P2P lending platform with features such as end-to-end automation of lender-borrower transaction cycle right from registration, document verification, credit analysis, transaction matching to report generation. An algorithmic-based program, built based on artificial intelligence, will be used for reviewing borrower’s creditworthiness. For the company, the upgradation of P2P platform will accomplish a major milestone and prepare them for payment and digital signature automation to bring 100% automation in lending process through right technology for borrower identification, data collection, digital signature usage, payment automation, etc.
The company had successfully raised seed funding recently.

Singapore

Overview of the Regulatory Framework for P2P Lending and Equity-based Crowdfunding in Singapore, ( P2P Banking), Rated: AAA

From the document published by the MAS on Lending-based Crowdfunding – Frequently Asked Questions (FAQs)[11], generally, the operation of P2P lending is restricted by MAS under the Securities and Futures Act (Cap. 289) (SFA) and the Financial Advisers Act (Cap. 110) (FFA).

Specifically, the P2P lending business needs to prepare and register a prospectus with MAS in accordance with Section 239(3) of the SFA. In addition, not only the registration of the prospectus but also the P2P lending platform need to follow the licensing requirements, particularly, the P2P lending business which fall within the scope provided by MAS needs to hold a Capital Market Services (CMS) license.

From the document, MAS states in paragraph 10 that “ …Platform operators should now ensure that the participants on their platforms are aware that each lender has to lend at least $100,000 if the borrower is to fall within the Promissory Note Exclusion. Offers of consolidated promissory notes commenced after the date of these FAQs must comply with the Prospectus Requirements” This means, that the P2P lending platforms, which previously used a single promissory note issued by the borrowers, need to apply for a license, if they still want to proceed their lending business; however, as provided in the MAS document, the removal of the Promissory Note Exclusion will be effected after the amendment of SFA.

This will affect many of existing P2P lending platforms such as MoolahSense and Capital Match which have the main function to help businesses to find loan from investors because some of P2P lending platforms are using a promissory note exemption without a Capital Market Services (CMS) license; however, MAS will make it easier for licensed P2P platforms. Therefore, a small offer exemption in accordance with the aforementioned law might be used by many P2P lending platforms.

China

Orchard Platform’s Jeremy Todd Shares Lang Di Fintech Experience Highlights, (Crowdfund Insider), Rated: AAA

  • There continues to be strong interest from Chinese Wealth Management firms to invest in US Online Lending loans
  • Investor interest is focused on making strategic equity investments in all types of global FinTech firms within Online Lending
  • Chinese Marketplace Lenders continue to increase their focus on offering more diversified products to clients including wealth management, insurance, and other financial services
  • Implementing a robust operational infrastructure is widely understood as a necessity required to successfully invest in the US Online Lending industry

Increased interest in US Online Lenders from Chinese investors and notable US-Chinese partnerships such as those between DriveWealth and CreditEase, Robinhood and Baidu, and Saxo Bank and Lufax — that further emphasize the importance of this series of events.

Author:

George Popescu
George Popescu

July 12th 2016, Daily News Digest

July 12th 2016, Daily News Digest

News Comments United States LendingClub’s charge off grows from 4.58% to 6.31%. Some people claim it is due to the company verifying only 26.8% of borrower’s income vs 49% in 2013. However, there was a higher proportion of bad loans among those verified than those that weren’t verified, roughly 12% vs 7% respectively. The real […]

July 12th 2016, Daily News Digest

News Comments

United States

European Union

United Kingdom

Korea

India

New Zealand

News Summary

 

Country

LendingClub’s Newest Problem: Its Borrowers, (Wall Street Journal), Rated: AAA

From loans made in 2013 through the first quarter of 2015, gross charge-offs of LendingClub’s lower-graded loans a year after issuance jumped to 6.31% from 4.58%, an increase of 38% or 1.73 percentage points. Charge-off rates on top-graded loans—which go to borrowers with stronger credit histories—rose less dramatically, to 1.51% from 1.46%, according to a presentation by the firm in May. Note: Do not mix charge-off rate and non-performing rate. Charge-off is a usually small subset of non-performing.

Charge-offs are ticking up at some other lenders. As of May, about 4.2% of the principal amount lent by Prosper Marketplace Inc. in the first quarter of 2015 had been charged off, according to MyCRO, a data tracker from online lending and securitization platform Insikt. Loans made a year or two earlier had seen charge-offs of 3.0% and 3.8%, respectively, after a similar amount of time had passed. A Prosper spokeswoman had no immediate comment.

Meanwhile, the percentage of loans written off by banks on their credit-card books last year hit the lowest level since the 1980s, according to Federal Reserve data. The rate was 3.16% in the first quarter versus 3.78% at the beginning of 2013, according to the regulator’s data.

As part of their loan-approval process, most lenders have automated the processes of checking borrowers’ credit metrics and looking up their histories while in many cases avoiding more labor-intensive practices of collecting and reviewing pay stubs or tax returns. For instance, this year, through the first quarter of 2016, LendingClub had verified actual income for 26.8% of loans, down from a peak of 49% in 2013. The company also has argued that verifying every applicant’s income is unnecessary. For loans made in 2012, for example, there was a higher portion of bad loans among those verified than those that weren’t verified—roughly 12% and 7%, respectively.

While about one-third of borrowers said they were paying down credit cards with their online loans, 46% actually started carrying at least 10% more in credit-card debt after getting the loan—well above the 30% rate for unsecured personal loans made by all lenders, Experian said.

LendingClub borrowers are among those who have become more indebted as the firm expanded. Debt-to-income ratios—a common credit measure—for LendingClub borrowers rose to 19.2 in 2015 from 13.8 in 2011, according to an analysis of loan data by research firm MonJa.

Legislation Proposed to Counteract Court Ruling on State Usury Caps, (Wall Street Journal), Rated: AAA

A Republican lawmaker late Monday introduced a bill aimed at helping debt buyers bypass state interest-rate caps, mounting a direct response to a case the Supreme Court recently declined to hear. The move comes after the Supreme Court declined to hear a case in which the Second U.S. Circuit Court of Appeals in New York determined debt buyer Midland Funding LLC couldn’t charge an interest rate higher than New York’s usury cap after purchasing the debt from a Bank of America Corp. unit.

“This ruling will restrict the expansion of credit and restrict innovation” and “poses a risk to the secondary credit markets. It also undermines peer-to-peer lending platforms in the current business model,” Mr. McHenry, a top Republican on the House Financial Services Committee, said in an interview with The Wall Street Journal. “The consequences of the court ruling is what we’re seeking to fix.”

The proposal is likely to generate as much opposition as the case, with debt buyers wanting to keep federal pre-emption and consumer groups pushing hard for states’ rights to protect consumers from being charged high interest rates. Analysts have already predicted any legislation in this area would be difficult to pass.

“It will have trouble passing because the Democrats are going to look at it as a means of circumventing consumers and Republicans will look at it as an unnecessary overlay of states’ rights,” said Isaac Boltansky, an analyst at Compass Point Research & Trading LLC.

The proposal is among a series of bills that Mr. McHenry has been rolling out as part of a package to promote financial innovation called the Innovation Initiative.

As a part of the initiative, Mr. McHenry introduced another bill Monday to the House Ways and Means Committee that would require the Internal Revenue Service to use “website-based, real time responses” when a lender requests a document from the IRS to verify a person’s income and other data points to approve a loan.

Amazon Looks Set to Deliver in Structured Credit After Hire, (PeerIQ), Rated: AAA

Online retailer Amazon has been quietly building a business lending to its customers and now looks set to open this asset book up to investors by securitizing some of these loans.

Nick Clemente, a former director with BNP Paribas’ structured credit team responsible for origination and execution of structured credit and credit derivatives, has joined the tech giant to run capital markets for its Amazon Lending business.

A recent investor newsletter from the firm referred to the group as having provided financing of over $1.5 billion to small and medium-sized businesses across the US, UK and Japan. Amazon Lending specialises in short-term lending and is said to be sitting on $400 million of loans.

The newsletter adds that Amazon Lending is looking to partner with a bank so that these dealers can manage the “bulk of the credit risk”.

How New York Beat Silicon Valley in Fintech Funding in Q1, (Datamation), Rated: AAA

In the first quarter (Q1) of 2016, and for the first time ever, New York City beat Silicon Valley in terms of fintech (financial technology) financing, $690 million versus $511 million, states Fintech’s Golden Age, a new report from Accenture and the Partnership Fund for New York City. In all of 2015, investments in New York totaled $2.3 billion, triple the amount raised by the area’s fintech startups the previous year.

It’s easy to attribute New York City’s rise in fintech scene to the proximity local startups enjoy to Wall Street banks and financial firms. But there are other forces at play, said Maria Gotsch, president and CEO of the Partnership Fund for New York City and co-founder of the FinTech Innovation Lab.

With ready access to funding, established customer relationships and their own considerable experience in maintaining large and complex IT ecosystems, New York City’s banks and other big financial institutions became natural allies for fledgling fintech companies. Funding aside, the area’s deep-pocketed firms are also looking to cut deals with startups that can help them bolster their services offerings.

“Financial institutions have made some major acquisitions,” said Gotsch. “Exits are always good.”

Fed’s Williams Prefers MBS Buying to ECB Tactics in Next Crisis, (Bloomberg), Rated: AAA

When the next crisis comes, don’t expect Federal Reserve Bank of San Francisco chief John Williams to try persuading his colleagues to pull a Mario Draghi.

The European Central Bank president has gotten creative with monetary policy as euro-area growth and inflation have remained sluggish despite rock-bottom interest rates. He’s tried charging banks for overnight deposits to encourage them to lend the cash instead, doling out long-term loans at ultra-low costs to credit institutions, and adding corporate bonds to his quantitative-easing program. He’s also employed measures that the Fed has also used, like signaling policy stance through forward guidance.

Draghi’s innovations would either come in second to tried-and-proven quantitative easing in the U.S. or would be purely off the table, in Williams’ view.

Regulator sounds new alert on banks’ property lending, (Financial Times), Rated: AAA

A top US regulator has sounded a new alert over banks’ commercial real estate lending, adding to concerns that bubbles may be forming in parts of the country’s property market.

CRE loans originated by banks in the first quarter leapt by 44 per cent from the same period in 2015, according to Morgan Stanley. Banks’ share of CRE originations has risen from just over a third in 2014 to more than half in the first quarter of 2016 — a record.

Thomas Curry, comptroller of the currency, used the watchdog’s twice-yearly report on financial risks published on Monday to warn about looser underwriting standards and concentrations in banks’ CRE portfolios. “Our exams found looser underwriting standards with less-restrictive covenants, extended maturities, longer interest-only periods, limited guarantor requirements, and deficient-stress testing practices.”

Several bank executives signalled during the last results season that they weretightening up CRE lending standards, and a survey of loan officers by regulators in the first quarter suggested many were indeed doing so.

Morgan Stanley identified 25 institutions that “may face pressure from regulators given rapid growth and high concentrations”. This “could lead smaller banks to pull back on CRE lending, raise equity and/or drive M&A”, said its report.

U.S. bank regulator toughens commercial real estate oversight, (KFGO), Rated: AAA

Credit risks have risen in U.S. commercial real estate as lenders compete more fiercely in a low rate environment, a federal banking regulator said on Monday, adding that it was stepping up its scrutiny of the sector.

The Office of the Comptroller of the Currency (OCC) said in its semiannual risk report that while the financial performance of lenders improved in 2015 compared to a year earlier, credit risks were higher across the industry. The agency has escalated its oversight of commercial real estate risk from ordinary monitoring to “additional emphasis.”

Curry also mentioned financial technology and marketplace lending as areas the OCC is keeping a close eye on.

Small U.S. banks are delivering healthier profits than their bigger peers, the report noted. Banks with less than $1 billion in total assets delivered return on equity above 10 percent last year while larger banks only delivered single-digit returns.

Tech coalition targets financial startups’ regulatory hurdles, (The Hill), Rated: A

Financial Innovation Now released a report Monday evening detailing how new financial technology (“FinTech”) companies struggle with a patchwork system of state laws and federal laws geared toward traditional institutions.

The report explains how two theoretical FinTech companies–a lending company and a payments processing company–could struggle to comply with decades of regulations geared toward traditional banks.  “Our hope is that this report helps policymakers understand the regulatory landscape for financial technology,” said Peters.

Congress on Tuesday will take a crack at understanding the landscape for marketplace lending companies with a House Financial Services Subcommittee hearing.

The report also tries to tamp down on cybersecurity concerns by boasting financial technology companies’ knowledge and capability with modern tech security features. The report argues FinTech companies are better equipped and more experienced to handle threats than traditional institutions. “Anecdotal breaches will always occur at technology companies just as at other businesses,” the report reads. But “they pale into insignificance compared to the breaches at banks and major retailers.”

Surprise: Auto Loan Durations Decrease Despite Popularity of Extended 72 and 84 Month Loan Terms, (TransUnion), Rated: A

The TransUnion AutoLoan study can be found here.

The study found that the average term for new auto loans rose from 62 months in 2010 to 67 months in 2015. In the third quarter of 2015, seven in 10 new auto loans had terms longer than 60 months. Five years prior, only half of all loans had terms longer than 60 months.

While the length of typical auto loans (with prices averaging ~$21K) have extended to as long as 84 months, the risk factors for these consumers extending to lower their monthly payments, did not change. In fact, many of these loans are not coming to term as the durations of the loans have actually decreased by one month. Cars are either sold before payoff or the loans can often be re-financed. Most surprisingly, the longer auto loan terms actually resulted in increased serious delinquencies (beyond 60 days) for consumers who are cash squeezed.

 

European Union

Europe’s Asset-Backed Bond Market Is Growing More Mysterious, (Bloomberg), Rated: AAA

Europe’s asset-backed securities market (ABS) is going underground. Private bilateral sales of the bonds, which are typically backed by collateral such as car loans or mortgages, now outstrip public sales to investors, according to Bank of America Corp. analysts led by Alexander Batchvarov.

So-called retained transactions, which are kept on banks’  balance sheets, rose to 78 billion euros ($87 billion) in the first six months of the year, which is more than double the 30 billion euros sold in the same period of 2015, according to Bank of America data. For investors in the public market, new-issue supply totalled just 41 billion euros, or roughly half the volume recorded a year earlier.

Synthetic securitizations, in which credit derivatives are used to transfer risk, are also said to be growing in favor as banks seek to bolster their balance sheets — and even as regulators push back against use of such “regulatory capital” trades.

“Discussions with market participants suggest that the volume may be (much) larger,” Batchvarov wrote. “The revival of synthetic securitisations speak[s] to the need of the banks to manage their capital and credit risk of their balance sheet, but apparently this is now done through bilateral transactions, mostly not rated, and rarely seen.”

 

United Kingdom

Re-setting Ratesetter’s default ratings, (FT Alphaville), Rated: AAA

At the end of last month, we reported on Ratesetter’s higher than expected default rates, which has raised questions about the resilience of its provision fund. The story was based on information from the Ratesetter website, where the level of provisioning per year and the expected vs. actual default rates were made available to investors, along with other information like how much of the yearly provisions had been been used up.

That’s the nature of transparency: you should disclose the bad as well as the good.

But now Ratesetter has decided that publishing expected default rates for each year “are not meaningful for [our] model, since investors do not need to provide for defaults”.

And that’s not the only change.

Ratesetter is now tweaking the way it calculates its provision fund coverage ratio. Instead of just subtracting expected losses from the current value of the provision fund, Ratesetter will now add “expected future income” in as well, thereby boosting the coverage ratio. Here’s their explanation of the change:

The “Expected Future Income” from open loans will be included in the calculation of the Coverage Ratio. This will be introduced alongside our regular update of the Expected Future Losses figure. Two years ago we made the strategic choice to spread more of the Provision Fund’s fees over the lifetime of loans as opposed to all being upfront when the loans are made. This obviously changed the short term flow of cash into the Provision Fund but we believe, in the long run, it is a more sustainable model. Today the total value of this contracted future income stands at over £6m.

The provision fund, which at one point Ratesetter thought to invest in its own loans, currently has almost £17.4m covering for £610m worth of lending — that figure doesn’t yet appear to account for the £6m of future income (nor does it account for any recoveries on defaulted debt, Ratesetter points out in its blog). The loss rate expected is 2.3 per cent, while a rate of 2.85 per cent would eat up all of the provisions. That’s a 55 basis point margin of error and probably the number worth remembering even after all these changes.

Financial markets welcome Leadsom quitting UK’s Prime Minister race, (Press Release), Rated: AAA

Andrea Leadsom’s decision to quit the UK’s Conservative party leadership battle is likely to be welcomed by the financial markets, affirms the boss of one of the world’s largest independent financial advisory organizations.

“First, Leadsom quitting eradicates one layer of the uncertainty that has been hanging over the UK since the historic vote to leave the EU.  The many question marks since the Brexit decision have, unsurprisingly, created volatility in the markets.  With Leadsom pulling out there is one less question mark.

“May could possibly kick triggering Article 50 way into the long grass, or go for the Norwegian model and allow free movement in exchange for access to the single market.

“This kind of ‘Brexit-Lite’ might well please the markets – which had widely priced in and were largely relying upon a Remain victory before the shock result.”

 

Korea

P2P raises concerns about fraud, (Korea JoongAng Daily), Rated: A

As of March, there were 20 P2P lenders in Korea that directly connect lenders and borrowers without intermediation by existing financial companies.

The average loan issuance was 22.1 million won per head. Individual loans on credit accounted for about 85 percent of all P2P lending, the data showed. About 6 percent of individual borrowers took out loans from P2P businesses, taking their properties as collateral.

“I was introduced to the company by one of my acquaintances and heard it was a thriving P2P lender that attracts quite a lot investors as it promises 15 percent returns annually,” Choi said.

The FSS has reported such complaints by consumers to police and prosecutors and said it will enhance monitoring on similar practices.

 

India

Education loans marketplace GyanDhan gets funding from Stanford Angels, Harvard Angels, (Techcircle), Rated: A

GyanDhan, an education loans marketplace operated by Delhi-based Senbonzakura Consultancy Pvt. Ltd, has raised an undisclosed amount in seed funding from Stanford Angels & Entrepreneurs and Harvard Angels.

GyanDhan had earlier received angel funding from Satyen Kothari, founder of Cube and Citrus Pay, to grow operations from the concept phase to its first loan disbursal.

The company will use the money raised in the latest round to build the tech platform to provide a better experience both to banks and students, and to develop its data sciences capabilities.

GyanDhan’s product offerings include loans up to Rs 30 lakh without any collateral for higher education abroad.

The company claims it has processed about 2,500 applications to date and has helped students avail loans worth Rs 10 crore through its partner financial institutions. The firm expects to process transactions worth Rs 30 crore by the end of the year.

Peer-to-peer lenders will help you borrow even from banks or non-bank financial corporations, (DNA India), Rated: A

Online businesses like BankBazaar, Paisabazaar, Policy Bazaar, etc have emerged and established themselves as loan aggregators, thereby passing on leads to financial companies like banks and NBFC’s. However, the quality of the lead has to be still ascertained by the banks and NBFCs through their own efforts, due diligence and filtering to assess the suitability of these leads and the conversion from a lead to a prospect and finally to a borrower.

The need to meet deployment targets is another major reason that banks have challenges in finding adequate numbers of borrowers who meet all their criteria.

A P2P platform provides a curated list of pre-verified, credit assessed list of borrowers from whom the financial companies can cherry-pick based on their appetite and provide loans, thereby significantly reducing their loan origination cost and improving their operating spreads.

Increasingly, banks and other financial companies will see a lot of value accruing to their business by aligning themselves with P2P marketplaces who perform all the necessary verification, credit assessment and also use various social and other information to rate borrowers and build a lot of analytics for intelligent credit decisions over and above the conventional methods which will prove to be an irresistible proposition to conventional financial institutions.

New Zealand

Harmoney’s P2P loan insurance a Kiwi world first, (Biz Edge), Rated: A

Harmoney has claimed to be the first in the world to use peer-to-peer lending for ‘unforeseen hardship’ on loans, the company reports. Its Payment Protect offering is a ‘repayment waiver’ that can protect against unexpected events that can affect loan repayment, such as death, terminal illness, disability or redundancy.

“For an individual loan, the waived repayments could be greater than the Payment Protect fee earned. However, across a whole portfolio the fee income and additional interest should outweigh any waived repayments and fee costs,’ Hagstrom explains.

Hagstrom says the method of delivering ‘peace of mind’ to customers through peer-to-peer lending is a rival to traditional insurance and borrowing methods, while providing lender returns through interest income, returns and yield enhancement.

The Financial Markets Authority issued Harmoney the first P2P lending licence in 2014. The company has raised $30 million in working capital, assessed more than $2 billion in loan applications and paid more than $24 million in interest to lenders.

Author:

George Popescu