Wednesday September 14th 2016, Daily News Digest

Wednesday September 14th 2016, Daily News Digest

News Comments Today’s main news : Sharestates hits $1.3bil in funding capacity; MeasureOne raised $2.3 mil for student loan analytics ; Indian p2p market is growing at 30-35% per month, examples, and data; Fitch claims the Chinese structure finance market is heating up. Today’s main analysis : Moody’s SME securitization challenges ; US SME loans are […]

Wednesday September 14th 2016, Daily News Digest

News Comments

United States

Israel

China

India

 

United States

Moody’s: US small business marketplace lending securitizations encounter four key risks, (Moody’s ), Rated: AAA

The report can be found here.

In a new report, Moody’s Investors Service examines several credit risks in securitizations backed by loans to small businesses which are originated by US marketplace lenders (MPLs) that focus on lending to businesses with less than $10 million in revenues. These key risks have been recent topics of discussion and debate among sector participants. As small business MPLs originate more loans, they are likely to continue to turn to asset-backed securities (ABS) to fund their loans.

1. As a result of the short history of MPLs, the lenders often have not calibrated their proprietary credit models for a long enough period of credit history, such as a full credit cycle, to be considered dependable.

2. Lack of alignment of interest between the MPL and securitization investors could pose risks to the securitizations.

3. Moody’s says the regulatory environment with regards to small business marketplace lending is relatively new and susceptible to change.”If MPLs are negatively affected by regulatory scrutiny or changes, a weakening of their financial strength could damage their securitizations in a scenario in which that outcome leads to servicing disruptions or leaves MPLs unable to honor obligations to repurchase ineligible loans from the transactions under their representations and warranties, among other potential risks,”

4. The ability of small business MPLs to carry out servicing responsibilities through a credit downturn is a risk in small business marketplace lending transactions because MPLs have short operating histories and may be financially vulnerable in a credit downturn if loan origination volumes deteriorate significantly.

Comptroller Discusses Marketplace Lending, (OCC.gov), Rated: AAA

The speach can be found here.

I’ve been fortunate to oversee financial services, banks, and savings associations of all shapes and sizes for more than 30 years, at the federal and state levels.

Marketplace lending may use new technology or techniques, but it’s still about extending credit to borrowers—something that’s been done for more than 3,000 years. As entrepreneurs, you recognized an opportunity to deliver greater value by improving how credit is provided, making it faster, cheaper, and more convenient.

The rapid growth in marketplace lending over the past few years suggests that, as a group, you are on to something. The surging demand for this type of service has gotten investors’ attention. Whole loan sales to institutional investors have been increasing as a source of cost-effective funding, and asset-backed securities have provided an additional source of funding. In 2015, institutions originated about $6.6 billion in securities backed by marketplace loans—that’s three-fourths of the $8.2 billion in such securities originated to date.2 Maintaining strong, stable funding sources is critical to sustaining the sort of growth we’ve seen in marketplace lending.

However, the growth that we’ve witnessed has occurred under relatively positive conditions.

Long-term performance is just one thing to watch. The expansion of marketplace lending raises four other important policy and regulatory questions.

First, do new techniques, technologies, and products raise concerns about compliance with existing laws and regulations? Let’s take the example of the new algorithms for determining the creditworthiness of a consumer. While they have the potential to make credit available to more people who may not have otherwise qualified, do they raise issues of illegal bias? Does an underwriting model create a disparate impact on a particular protected class? New companies and companies deploying new technology should understand and ensure their products and services comply with existing laws, such as the Equal Credit Opportunity Act, that apply to all creditors—even those that are not banks. Lenders who operate without considering these questions may be accruing underappreciated financial risks and reputational liabilities.

Second, are existing laws and regulations adequate? I understand that earlier today, you heard from Congressman McHenry, who has been a real thought leader on these issues, about his views on the adequacy of the current statutory framework.

Third, do innovative activities, products, or services present a need for entirely new regulation or law to protect the public’s interest or prevent risk to the broader financial system?

The fourth type of policy question regarding innovation involves answering should innovation be regulated and, if so, “who” should be responsible for regulating an organization or activity. To some extent, the conversation about whether there should be a national substantive law or a federal license or charter for marketplace lenders and fintech firms is part of answering the question of “who” should regulate the activity.

We have heard voices on both sides of whether to grant federal banking charters to fintechs. Some have suggested that federal charters could ensure that fintechs engaging in banking activity receive rigorous, bank-like federal regulation and ongoing supervision. This may also provide a more level playing field for financial services offered on a national scale. Others have suggested that federal charters could help fintechs better navigate the existing regulatory landscape by consolidating oversight, reducing licensing burden, and applying a single uniform set of rules

On the other side, some have expressed concerns that, if granted a limited charter, companies might face lighter supervision or fewer consumer protections would apply. Others expressed concern that fintechs may seek federal charters to avoid consumer protections granted by state laws. The agency faced similar questions when it granted the first charter for Internet based banks in the late 1990s.

If we at the OCC do decide to grant limited-purpose charters in this area, the institutions who receive the charters will be held to the same strict standards of safety, soundness, and fairness that other federally chartered institutions must meet.

These four types of policy questions are among the many that our Innovation Framework Development Team is considering in their work to create a framework to enable the OCC to assess responsible innovation.

One. The framework will support responsible innovation.

Two. The framework will foster a culture within the OCC that is receptive.

U.S. bank overseer plans report on marketplace lending this fall, (Reuters), Rated: A

The U.S. Comptroller of the Currency said on Tuesday his agency plans to complete this autumn a framework to regulate marketplace lending, citing concerns that new financial-technology innovations may pose risks to consumers and the banking system.

Sharestates Hits the $ 1.3 Billion Mark in Funding Capacity, (PR Newswire), Rated: AAA

New York based Sharestates, one of the US online real estate crowdfunding platforms, announced today that it has surpassed $1 billion in committed capital for the purchase of loans.

Sharestates launched its full operation less than two years ago in February of 2015. Since then, the firm has originated over $150 million in loans across more than 210 projects, with an average loan size of approximately $728,000. To date, Sharestates has returned over $50 million to investors with an average return rate of 11.36% for 2016, with zero loss of principal. Sharestates’ current trajectory has it on a $25-$30 million month to month origination volume, leading it to break over $200 million in originations by years end.

This new round of financing comes a few months after Sharestates received $300 million in loan purchase commitments, driven by collaborations with Prime Meridian Capital Management and Colony American Finance.

To compete in the market, Sharestates leverages proprietary technology and a close partnership with The Atlantis Organization, which – founded by Radni Davoodi and Raymond Y. Davoodi in 2004  – has become one of the nation’s leading title agencies with over $4 billion in closed transactions.

Finding Cheap Loans Is Getting Harder For Small Businesses Around the World, (Bloomberg), Rated: AAA

Only 48 percent of small- and medium-sized businesses said they can get financing at rates below 8 percent, according to a new survey from C2FO, a financial technology startup that has created a marketplace where small- and medium-sized businesses can get paid early by the large companies they supply. The inaugural such survey, released last year, showed nearly 60 percent of respondents were able to secure funding at rates below 8 percent.

C2FO canvassed more than 1,800 small- and medium-sized businesses (SMEs) in the U.S., U.K., Germany, France, and Italy, with 80 percent of those firms having $2 million or less in gross annual revenue. It found borrowing was priciest in the U.K. and the U.S. with 42 percent and 47 percent of SMEs borrowing at a rate of below 8 percent, respectively. That compares with 52 of respondents in France, 51 percent in Germany, and 58 percent in Italy.

An apparent higher cost of capital has caused some of these firms to look at other sources, such as peer-to-peer, or marketplace, lending that involves directly matching would-be borrowers with lenders. On average, 18 percent of respondents in each country reported using peer-to-peer lending at some point.

More expensive credit in the U.S. stands somewhat at odds with the most recent survey from the National Federation for Independent Business (NFIB), which showed just 3 percent of small business owners reporting in July that their borrowing needs were not satisfied — 1 percentage point above the record low reached in September of last year. Still, the NFIB small business optimism survey has been sputtering with sentiment making little to no improvement over the last year, falling 0.2 point in August to a three-month low of 94.4.

“Uncertainty is high, expectations for better business conditions are low, and future business investments look weak,” NFIB Chief Economist Bill Dunkelberg said in a statement. “Our data indicates that there is little hope for a surge in the small business sector anytime soon.”

MeasureOne – Higher Education and Student Loan Analytics Firm – Provides Improved Insights into Student Loan Repayment and Risk, (PR Newswire), Rated: A

MeasureOne, a higher education data and analytics firm focused on the $1.4 trillion-dollar student loan market, today announced $2.3 million Seed financing led by Socratic Ventures along with Colchis Capital and University Ventures. The investment will allow MeasureOne to expand its rich data repository and analytics capabilities to help higher education institutions and lenders invest in talent, with better insights into student risk and potential.

MeasureOne specializes in data-driven insight for the higher education finance industry, and its most recent report on private student lending shows that families are effectively managing their private student loans.

MeasureOne, founded in San Francisco with offices in Dallas, TX and Ahmedabad, India. MeasureOne is applying data science and industry expertise in order to increase understanding of student loans and empower student loan lending, risk assessment, repayment, capital market investments and public policy development.

Wall Street’s Insatiable Lust: Data, Data, Data, (Wall Street Journal), Rated: AAA

A new species is prowling America’s most obscure industry conferences: the data hunter.

In one recent example, Mr. Haines discovered a mobile advertising company that also collected data on the type of device someone was using when displaying an ad to them. The data helped estimate iPhone sales ahead of Apple Inc.’s announcements in 2011 and 2012, and it was lucrative for Mr. Haines’s old company, Quanton Data.

Erik Haines, head of data and analytics at New York-based Guidepoint Global LLC, trawls the globe for meaningful data to sell to hedge-fund clients.

Hedge funds and other sophisticated investors are increasingly relying on intermediaries like Mr. Haines, 35 years old, as they seek insights into a company’s sales and health that aren’t readily available from conventional sources.

Gone are the days when a hedge fund would call up a random sampling of Aéropostale stores to ask managers about sales or simply visit big-box retailers to get a feel for the traffic.

The firm struck a deal with a large insurance company to find out every day what kinds of cars received insurance policies, a possible indicator of how sales are going for automobile manufacturers. Another deal is with a company that surveys construction permits across county municipal offices, which is a “proxy for construction activity,” he said.

There are also companies set up to create exhaust. In those cases, often a person’s data is the price of a free phone application or service. For example, app provider Slice Technologies Inc. lets users track the arrival of packages to their homes in its signature Slice app or block spam through another service it owns called Unroll.me without charge. But in exchange for those services, about four million users allow the company to read their emails.  Slice, in turn, also analyzes receipts and other data in a person’s email which it packages into anonymized data for advertisers and hedge funds. It might showAmazon.com Inc. selling more of a particularly profitable item or an increase in Netflixsubscriptions, which investors can use as a factor in their trades.

Steve Schwarzman, Blackstone CEO, interview analysis, (Termsheet, Email), Rated: AAA

Dan Primack in Termsheet reports:

“Blackstone boss Steve Schwarzman was interviewed at a CNBC conference yesterday by Becky Quick, and said four things of particular interest: (1) He believes much of the hedge fund industry will deviate from 2/20 due to performance troubles; (2) When asked what Blackstone’s stock price drop over the past year is a reflection of, he replied: “That’s a reflection that investors are wrong.” (3) The Fed will eventually raise rates (in part because the media is “daring” it to do so), but he believes the only real impact will be on financial markets, not on the real economy. (4) He declined to endorse either presidential candidate, and also seemed to accept the idea of changing the tax treatment of carried interest, as part of a more comprehensive tax reform package.”

Lending Club names former WaMu exec as its new finance chief, as bid to reassure investors continues. (San Francisco Business Times), Rated: A

Comment: We covered these news yesterday. More information today.

Thomas Casey will start his term at Lending Club Sept. 19. He was the finance head at WaMu prior to its sale to J.P. Morgan Chase & Co. in 2008 and was most recently finance chief for Acelity LP Inc.

In mid-July, Lending Club appointed BlackRock Inc. veteran Patrick Dunne as its new chief capital officer, as the company continues to struggle to restore investor confidence after forcing out its former CEO amid a lending scandal. Dunne is well known in Bay Area finance circles, having formerly headed BlackRock’s S.F. office.

P2P lenders not like having money with a bank, (Bendigo Advertisers), Rated: B

A new wave of online marketplaces is offering savers, investors and those running their own super funds much higher interest rates on their cash than they can get from banks.

All use “risk-based pricing”, where borrowers with the best credit scores pay lower rates of interest than those with poorer creditworthiness.

With a bank, everyone who wants a car loan who is considered a good risk pays the same interest rate.

With P2P lenders, the investors say how much money they want to invest, the term and the interest rate they want to receive. Then it is an auction process to match-up lenders with borrowers. [Comment: To my knowledge there are very few P2P lenders who still do reverse auction if any at all ].

While P2P lenders could be a good option as part of a well-diversified portfolio, they are not like having your money with a bank. [Comment: It is in the entire industry’s interest to make sure retail investors have a realistic expectation of risk vs reward of what they are getting into. Unhappy retail investors who have the impression that fraud was committed usually attracts draconian regulation. ]

Israel

A new fintech coworking space finds big bank partners, (Tradestreaming), Rated: AAA

For banks, just keeping up with customer expectations forces them to run at breakneck speed. To do this, some institutions run hackathons or add bean bags and an open space floor plan.

A new model developed by Israeli fintech hub, The Floor, solves this problem. Four of the world’s largest banks, HSBC, Santander, RBS and Intesa SanPaolo partnered with the the coworking space, looking for better dealflow. In addition, Accenture, KMPG and Intel are also cooperating with the new program.

The Chinese Pando Group, a $250 million venture firm, is an investor in The Floor and also provides a bridge to the East Asian market, traditionally ignored by Israeli companies.

Citi and Barclays also operate fintech accelerators in Israel, but those are focused on seed stage startups and operate as any other accelerator. The Floor targets companies in growth stage that have already raised at least $1.5 million in equity. “The goal is to get these startups integrated in banks,” explained Cohen.

The banks have a final say in approving companies into the coworking space. “We are a boutique coworking space,” said Moises Cohen, one of The Floor’s founders.

The Floor targets companies in growth stage that have already raised at least $1.5 million in equity. “The goal is to get these startups integrated in banks,” explained Cohen.

The Floor’s management team uses their industry connections to dramatically shorten the time it takes a participating fintech firm to get a pilot with a major bank. In at least one case, the team managed to get a startup integrated with a partner in under 2 months.

The model has attracted 10 companies since the hub was founded early this year. The Floor plans to expand that number to 25, or 5% of the fintech firms located in Israel. The new coworking space opened in August in the Tel Aviv Stock Exchange building. Before that, the companies worked in their own spaces. One company relocated from Russia to join The Floor.

China

Fitch: Chinese Structured Finance Market Continues to Expand, (Reuters), Rated: AAA

China’s structured finance market will continue expanding in both scope and scale, with increased asset-class diversification.

A total of CNY193.4bn (USD29.8bn) of Chinese structured finance transactions were issued in 2Q16, representing a 96% yoy increase. The increase was principally driven by 242% growth in the Asset-Backed Specific Plan scheme, which is regulated by the China Securities Regulatory Commission.

Issuance under the Credit Asset Securitization (CAS) scheme, which is regulated by the People’s Bank of China and China Banking Regulatory Commission and is the leading structured finance market by size, increased 43% yoy. The increase was predominately due to residential mortgage-backed securities (RMBS) and auto-loan asset-backed securities (ABS) issuances, although limited by a significant fall in collateralised loan obligation issuance. Fitch expects both RMBS and ABS asset-classes to maintain the growth momentum in 2H16.

Highlights for 2H16 include the issuance of three non-performing loan (NPL) ABS and two asset-backed note (ABN) securitisation transactions.

The three NPL ABS deals, originated by Bank of China Ltd. (A/Stable) and China Merchants Bank (BBB/Stable) were pilot transactions, as the regulators have restricted the market during the 2008 global financial crisis.

Fitch expects more NPL ABS to be launched in the near-term, as the government has granted quotas of CNY50bn to six commercial banks to help them deal with rising NPL ratios.

The two ABN securitisation transactions adopted a special purpose trust structure similar to CAS scheme, the first time this asset-class has used this structure since inception in 2012. This type of instrument allows non-financial corporates to issue asset backed notes in China’s interbank bond market.

The opening up of the interbank securitisation market to non-financial corporates leads Fitch to expect a continued flow of ABN issuance, as it provides a deeper investor-base than the stock-exchange bond market

A full copy of the report, China Structured Finance Quarterly – 2Q16, can be found here.

 

India

P2P lending on growth trajectory ahead of RBI guidelines, (Business Standard), Rated: A

While RBI prepares the blueprint to regulate the sector, for some of the pioneers in the field, business is growing at the rate of an average 30-35 per cent on a monthly basis.

Delhi-based Faircent, which started operations around 2014, saw almost more than ten times growth in loan transactions in the last one year, according to Rajat Gandhi, founder and CEO, Faircent. So far, the company has raised close to $3.5 million, with one of the investors being Mohandas Pai, former director at Infosys. On an average, there has been an almost 35-40 per cent growth in monthly business for the company, according to Gandhi. The number of loan requests in the platform too has doubled between April-September 2016, from about 14746 in April to about 29108 in the beginning of September.

Another P2P lending platform, Lendbox, which started operations about ten months back, has already facilitated loans of around Rs 9 crore in its platform. Loan disbursements through the platform has been growing at around 30-32 per cent on a monthly basis, according to Ekmeet Singh, CEO, Lendbox. Further, the company is looking to raise around $3 million from investors.

The industry is expecting RBI to create separate category of NBFCs (non-banking finance company) for P2P lending on the lines of NBFC MFIs (Microfinance Institutions), which in turn is expected to give a strong footing to P2P facilitators.

“Since P2P platforms do not undertake lending themselves, and are mere facilitators, capital requirement of Rs 2 crore, which is at a par with NBFCs, could be too high for most P2P platforms to meet. Hence, we suggested RBI to create a separate category of NBFCs,” according to the founder of a P2P company.

“After came out with draft regulations on P2P lending, there has been an increase in interest in the sector from institutional investors as well as borrowers and lenders. We are in advanced stages of discussions for raising around $3million to fund growth,” said Singh.

Micrograam, a rural-centric P2P firm is looking to raise around Rs 10 crore from investors, said Rangan Vardan, founder, Micrograam. At present, the capital base of the company is close to Rs 2.5 crore. The company has facilitated lending of about Rs 21 crore in the last five years. In 2014, the company had roped in V Balakrishnan, former Chief Financial Officer of Infosys, as its chairman.

Hyderabad-based i-Lend, which started operations around 2013, has been going slow in lending, but is expecting a surge in business and institutional lending after comes out with final guidelines on P2P lending. The company is looking to raise around $1.5-2 million from investors.

“At present, we are growing at a rate of around 15-20 per cent on a monthly basis. We are present in three cities–Hyderabad, Chennai and Chandigarh. We are planning to expand to Bangalore soon. The sector is waiting for guidelines. Once it comes out, institutional investments are likely to increase significantly,” said Shankar Vaddadi, Founder & Director, founder and director, i-lend.

With new RBI norms, P2P lending startups are hoping to attract VCs , (Economic Times), Rated: B

There are about 40 [P2P lending] entities in the country, according to Xeler8, which tracks startup activity in the country. Mohandas Pai, who has backed Faircent, said the Reserve Bank of India’s regulatory guidelines will bring clarity, which will attract more players and intensify competition.

On the other hand, regulation may also lead to many players shutting shop if they’re unable to meet requirements such as maintenance of Rs 2-crore capital and an interest rate cap, which were published in the RBI’s discussion paper in May.

“I know of at least five startups from this space that will have to shut down once the final guidelines are out,” said Sunil Kumar, founder, Bengaluru-based P2P startup Loan-Meet, which has been bootstrapped since it started operations last year.

Author:

George Popescu

July 5th 2016, Daily News Digest

July 5th 2016, Daily News Digest

News Comments United States According to the bond market yield-curve there is 60% chance of recession. However, the equity market doesn’t agree. Interesting times. A short survey on the different US regulators’ interaction with the marketplace lending space. New Capital Rules likely to be imposed on wall street will likely push bank-dealers to shut down […]

July 5th 2016, Daily News Digest

News Comments

United States

  • According to the bond market yield-curve there is 60% chance of recession. However, the equity market doesn’t agree. Interesting times.
  • A short survey on the different US regulators’ interaction with the marketplace lending space.
  • New Capital Rules likely to be imposed on wall street will likely push bank-dealers to shut down trading units in debt-securitization due to insufficient return on equity. This change could have a huge impact on marketplace asset backed securitization.
  • Wells Fargo continues to push FastFlex, their own quick SME financing product competing with OnDeck, Kabbage, CAN Capital and all other SME marketplace lenders.
  • Morgan Stanley is pointing out all the positive data coming out of Lending Club: higher origination than predicted in Q2 2016 and much more.
  • Lending Club’s CIO unvailing the future plans for Lending Club : Point-of-Sales, offline and a cloud-base micro-services platform.
  • CFPB’s monthly report points out the most-complained-about companies in consumer loans. It would be interesting to plot company size vs number of complaints.
  • Square analysts believe that more regulation in marketplace lending will favor Square vs its competitors.
  • Last week news, worth a reminder after the long weekend: Avant is downsizing, again.
  • Boston, feeling left behind in fintech, is launching a fintech hub initiative supported by Fidelity, Putnam, Santander Bank, U.S. Bank and Boston Private Financial.

United Kingdom

  • An interesting way to leverage your p2p investments: buying discounted P2P public fund shares at the present 20% discount, and relying on stock buy-backs to bet on up side in yield + equity appreciation.
  • Brexit: in short, fintech firms fear for staff shortages and lost EU customer access.

European Union

  • Insurer Aviva France, in partnership with Eiffel Investment Group and AG2R La Mondiale launching a €100 million fund to invest in “crowdlending SME debt” in France and elsewhere.
  • A list, without any transparency on the inclusion criteria,  of the top 11 p2p lending platforms in Europe, (Pre-Brexit), per Fintechnews.ch. And a very interesting map of relative p2p lending market size in European countries.

Australia

  • Public p2p lender DirectMoney preparing a new share issuance to finance loans as loan demand outstrips funding.”DirectMoney chief Peter Beaumont yesterday defended the fintech company’s stockmarket listing and expressed disappointment over losses worn by shareholders.”
  • OnDeck Australia and Commonwealth Bank (CBA) receiving the Fintech-Bank Collaboration of the Year Award.

India

  • P2P players are moving towards institutional capital for growth. Following in the footsteps of their US cousins, we hope the Indian p2p lenders have learned their lessons from Prosper, Lendnig Club and Avant’s experiences with institutional capital.

China

  • P2P lenders exiting office space in Shanghai have brought office space vacancies supply to a 10-year-high level.

Korea

  • Interesting data and information on one of the 1st Korean p2p lending companies we learn about.

News Summary

Unites States

Bond Markets Have a Message About the Economy That Stock Investors Might Not Want to Hear, (Bloomberg), Rated: AAA

There’s a big disagreement brewing in global markets.

There’s 60 percent chance of recession, according to a Deutsche Bank model.

While risky assets including equities have surged following the U.K. electorate’s historic vote to leave the European Union, government bonds have also rallied; two things that ought to suggest different outlooks for economic growth. Soaring bond prices have sent yields on the perceived safe havens of government debt plumbing fresh lows, even while expectations of looser monetary policy produce a burst of animal spirits in stock markets.

The flight to safety has prompted some analysts to question the durability of the rally in equities, where the S&P 500 was up 3.5 percent last week and the FTSE 100 has erased its post-referendum dip — at least, in local-currency terms. Still others say that money is pouring into stocks as lower bond yields force investors to search for returns in alternative asset classes.

The spread between the yield on 10-year and two-year U.S. Treasury notes narrowed in the immediate aftermath of the June 23rd referendum, widened briefly, and is now shrinking again as investors continue to flock to the perceived safety of U.S. government debt. A model maintained by Deutsche Bank AG’s Steven Zeng, who adjusts the spread for historically low short-term interest rates, suggests the yield curve is now signaling a 60 percent chance of a U.S. recession in the next 12 months — up from a 55 percent probability as of mid-June, and the highest implied odds since August 2008.

“This relentless flattening of the curve is worrisome,” Deutsche analysts led by Dominic Konstam said in their note on the model. “Given the historical tendency of a very flat or inverted yield curve to precede a U.S. recession, the odds of the next economic downturn are rising.”

The 10-year yield is currently at 1.44 percent, making a recession just about 40 basis points away according to this particular interpretation of the bond market’s moves.

Rundown of Regulator Interest in Marketplace Lending, (Lend Academy), Rated: AAA

U.S. Treasury

The Treasury first publicly showed interest in marketplace lending with a request for information(RFI) back in July 2015. Over 100 companies responded to the RFI and the Treasury reported on their findings in May 2016 where they shared their response in the form of a white paper. It did not provide any recommendations for new regulations and was generally quite positive on the industry.

Office of Comptroller of the Currency (OCC)

On March 31, the OCC released a white paper titled Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective. More recently, the head of the OCC, Thomas Curry, reaffirmed his commitment to responsible innovation in a speech just last week. He brought up the idea of a “regulatory sandbox” – a place where fintech companies can have a conversation about what the rules of the road are for their new ideas. He also brought up the idea of a limited purpose charter for fintech firms as a possible way forward.

Federal Deposit Insurance Corporation (FDIC)

The FDIC first addressed marketplace lending in a paper titled Supervisory Insights. They are concerned about the impact on banks as well as the general risk to financial services.

Consumer Financial Protection Bureau (CFPB)

Early this year, the CFPB made two announcements impacting marketplace lending. They said that they would begin accepting complaints directly from consumers about marketplace lending companies. Around the same time they issued a new No-Action letter policy that was designed to encourage innovation in financial services.

According to the Wall Street Journal the CFPB is planning to supervise marketplace lenders and will release a proposal some time in the fall. The CFPB has not commented publicly on this news so right now it is just a possibility but it makes sense.

Securities and Exchange Commission (SEC)

SEC involvement in marketplace lending goes back to the early days of Lending Club and Prosper. In 2008 the SEC decided that the notes issued by these companies were securities and should be registered as such. The result was Lending Club and Prosper filing a S-1 registration and becoming quasi public companies with quarterly financials being filed with the SEC.

Now that Lending Club is a public company it is has more responsibilities to both equity and debt investors both of which come under the purview of the SEC. The reality is while the SEC keeps a close eye on marketplace lending it is unlikely there will be much in the way of new developments here.

Federal Trade Commission (FTC)

The FTC recently hosted a financial technology forum on marketplace lending. The forum sought to look at consumer protections in marketplace lending and fintech more broadly. According to Jessica Rich, director of the FTC’s consumer-protection bureau marketplace lenders haven’t done enough in borrower protection.

United States Congress

In May 2015, the House Small Business Committee held a hearing on Capital Hill.

In January, in the wake of the San Bernardino shooting tragedy, the House Financial Services Committee held a hearing on terrorism financing that included a discussion of marketplace lending. But no new initiatives have come yet from these hearings.

Financial Stability Oversight Council (FSOC)

The FSOC most recently included their thoughts on marketplace lending in their annual report. Although the report highlights the lower cost and efficiencies of marketplace lenders they also discuss risks and concerns. One of the main concerns listed are the new and untested underwriting models used by platforms.

Conclusion

This list is only a start of the involvement we are likely to see from regulators as it pertains to marketplace lending. Due to the attention, we’ve seen many industry associations created to ensure a productive dialogue is being undertaken in Washington with all the organizations discussed here. We sincerely hope that any new regulation to come is thoughtful and comes from a well informed view of the industry.

Capital Rules Stifling Securitized-Debt Trading Profit: JPM, (PeerIQ), Rated: AAA

New layers of regulatory capital expected to be imposed on Wall Street are likely to further pressure banks to exit trading of securitized-debt, JPMorgan analysts John Sim, Kaustub Samant, Carol Zhang wrote in client note Friday.

NOTE: Reports of dealers paring or shutting down trading units have grown; banks include Barclays, DB, MS, SocGen, Jefferies, RBS, Nomura, CS

  • There’s “no path to profitability” under current and recently released capital rules
  • JPM analysts calculated ROE (return on equity) for hypothetical RMBS portfolio based on impact from Basel’s Fundamental Review of the Trading Book
  • Concluded ROE of ~4%, “clearly not attractive enough to entice dealers to enter the space and make markets”
  • Adjusted model to various hypotheticals, such as reallocation, bid-ask, turnover rates
  • Concluded the “cumulative effect of all of these realistic and unrealistic changes would only increase the return to 7%, which is far short of our 10% to 15% ROE threshold”
  • “Running ROEs for hypothetical ABS and CMBS businesses would not result in markedly different results”
  • Primary market and business of underwriting new-issue securitizations can still be attractive, however, contingent  underwriting volumes
  • Revenue derived from underwriting fees without consuming much capital; when balanced with secondary trading, ROEs for the business can become attractive, depending on volumes
  • Liquidity will continue to be constrained for non-agency RMBS, particularly in legacy space where dealers have no commensurate underwriting
  • CRT deals will also suffer from limited trading activity relative to market size; expect limited liquidity for Jumbo RMBS and SFR deals

How Wells Fargo Aims to Satisfy ‘Need for Speed’ From Millennial Borrowers, (The Street), Rated: AAA

Known as FastFlex, the San Francisco-based bank’s product offers customers with a business checking account a one-year loan of up to $100,000. Wells Fargo is considering expanding the availability of the loan next year, Lisa Stevens, the company’s head of small business, said in an interview.

FastFlex is designed for businesses with under $5 million a year in revenue who have “quick short-term needs to do some type of expansion or cash management,” Stevens said.

Some 67% of millennials are willing to take some financial risks to grow their businesses, compared with just 54% of older owners.

The FastFlex loan is one effort to meet that demand, he said, by providing a digital service with a rapid turnaround, two of the qualities that millennials have said they value most highly in financial services products. “We wanted to design our own product that would compete well in the marketplace-lending environment,” Case said.

Lending Club Corp : Positive Updates from the Annual Meeting, (Morgan Stanley), Rated: AAA

2Q16 originations down ⅓ from 1Q equates to ~$1.8bn in originations or -4.4% YoY,vs. our $1.4bn (-25% YoY) estimate.Assuming volumes for the first five weeks in the quarter (prior to

Assuming volumes for the first five weeks in the quarter (prior to announcement of irregularities and CEO resignation) were consistent with the 1Q run rate, this suggests volumes over the remaining 8 weeks were down ~50% sequentially and 37% YoY.

LC has had dialog with hundreds of investors,and none have outrightly refused to come back as an investor on the platform. Most investors need to go through a due diligence process and LC appears confident in its ability to bring them back to prior levels of investment over the long term.

While investors from every category have returned to the platform, banks and large investors are taking longer with their audits, which is in-line with our expectations.It is unclear if 2Q represents the trough in terms of origination volumes, but management commentary on investor appetiteand conservativeapproach on origination expectations suggests 3Q and

It is unclear if 2Q represents the trough in terms of origination volumes, but management commentary on investor appetiteand conservativeapproach on origination expectations suggests 3Q and
4Q volumes should be similar to 2Q with potential for upward bias.

LC expects to incur $9mn of investor incentives (to be booked as contra-revenues) in 2Q , which are likely to continue in 3Q with a plan to eliminate these by 4Q.

LC expects to “resume revenue and EBITDA growth in 1H17” though it remains unclear to us if this comment suggests sequential or YoY growth.We expect LC to return to origination, revenue,and adjusted EBITDA growth by 2Q17, though we expect 1H17 to remain below 1H16 given tough comps on 1Q17e.

2016 Bay Area CIO of the Year Innovation/Transportation finalist: A conversation with LendingClub’s John MacIlwaine, (Silicon Valley Business Journal), Rated: AAA

How do you predict your company will be different in two years, and how do you see yourself shaping that change?

We’ll also have a wider set of financing products that will be accessible online, offline, and at point of sale, while expanding our partnerships with banks and other non-financial institutions. We’re enabling that change by building our cloud-based micro-services platform, which simplifies integration of our solution for our partners and allow us to quickly and efficiently scale our core business and expand our product set.

What do you feel has been your biggest impact/success at this company? My biggest impact on LendingClub has been building a world-class team of engineers, scaling our technology platform to support the company’s incredible growth (compound annual growth rate of 124 percent Q4 2009 to Q4 2015 and well over $16 billion in loan originations to date), and setting a clear vision for a technology platform that is flexible and adaptable enough to handle future loan origination growth, partnership integration, and regulatory compliance updates.

What are your top three priorities for 2016-2017?

  1. Transform our current technology platform into a suite of cloud-based micro-services;
  2. Move our platform hosting environments to AWS (Amazon Web Services);
  3. Double the size of our world-class technology team.

CFPB June 2016 complaint report highlights consumer loan complaints, complaints from Arkansas consumers, (JDSupra Business Advisor), Rated: AAA

The CFPB has issued its June 2016 complaint report which highlights complaints about consumer loans and complaints from consumers in Arkansas and the Little Rock metro area.

The report does not specifically identify any complaints as involving marketplace lending.  Unlike prior monthly complaint reports, the June 2016 report includes a “Sub Product spotlight” section that highlights auto lending.

  • The most-complained-about issue involved managing the loan, lease or line of credit.  Other complaint issues included problems arising when the consumer was unable to pay, such as issues relating to debt collection, bankruptcy, and default.
Source: CFPB June complaint report.

General findings include the following:

  • Complaints about student loans showed the greatest percentage increase based on a three-month average, increasing about 61 percent from the same time last year (March to May 2015 compared with March to May 2016).  As we noted in our blog posts about the April and May2016 complaint reports, rather than reflecting an increase in the number of borrowers making student loan complaints, the increase most likely reflects that in March 2016, the CFPB began accepting complaints about federal student loans.  Previously, such complaints were directed to the Department of Education.
  • Payday loan complaints showed the greatest percentage decrease based on a three-month average, decreasing about 15 percent from the same time last year (March to May 2015 compared with March to May 2016).  Complaints during those periods decreased from 479 complaints in 2015 to 405 complaints in 2016.  In the March, April, and May 2016 complaint reports, payday loan complaints also showed the greatest percentage decrease based on a three-month average.

Square Inc Better Risk Reflection Leads to Upgrade: Wedbush, (Bidness Etc), Rated: A

Helmed by Twitter CEO, Jack Dorsey, the Square’s lending business encountered a substantial obstacle in May, in the form of new and strict scrutiny from regulatory authorities. In a comprehensive study, the US Department of Treasury along with several other government agencies put forward recommendations, to safeguard the access and growth to credit through the continued developments of online marketplace lending.

Wedbush analysts believe that regulatory scrutiny is likely to increase the company’s lending business.

For the 2Q, Square projects revenue to fall between $151–156 million. Wedbush expects the company to surpass its own expectations — reporting closer to the sell-side firm’s own $168 million estimates — but foresees considerable downside to the financial services company’s shares, if it reports within its given guidance range.

Interestingly enough, in a research note published yesterday, Morgan Stanley lowered its prices target on Square stock from $12 to $10, following a meeting with the company. The sell-side firm also raised its Stock-Based Comp estimates, in light of the company’s transition from private to a public entity and higher comp to select personnel vs. prior expectations.

Why Online Lender Avant Is Cutting Down Its Workforce Again, (Fortune), Rated: A

After also deciding to pull back in May from new verticals such as auto loans to concentrate on its core personal loans business, Avant is now cutting its lending target for that unit by 50% to about $100 million per month, Bloomberg reported.

Avant’s problem, like much of the so-called peer-to-peer lending market, isn’t a lack of demand from potential borrowers. Instead, the company and other online lenders are having increasing difficulty raising money to lend out as hedge funds and other investors outside the usual banking circles that backed the industry have grown wary.

The company had grown quickly for the past few years, reaching $3.5 billion in total loan volume. But with less access to capital, business has slowed recently, and loan volume declined 27% in the first quarter from the fourth quarter—the first such quarter-to-quarter drop since Avant started in 2012.

LendingClub’s Negative Press Blitz Continues, (Yahoo Finance), Rated: A

An $800 million LendingClub Corp (NYSE: LC) fund that invests in the company’s online consumer loans is expected to report its first monthly loss in the past 64 months in June. According to a letter to investors from LendingClub CEO Scott Sanborn, LendingClub’s Broad Based Consumer Credit (Q) Fund’s June return “is likely to be negative.”

The fund is LendingCub’s largest and has regularly returned around 0.5 percent per month throughout its five-year history. However, default rates on the fund’s loans have begun to rise in recent months and returns have dropped, prompting a number of investor redemption requests

The Wall Street Journal’s Peter Rudegeair reported that as of June 17, LendingClub had received $442 million in redemption requests representing about 58 percent of the value of the fund. In response to the large number of redemption requests, LendingClub announced it was placing restrictions on withdrawals and would be considering winding down the fund entirely.

Group led by State Street, Putnam launches fintech initiative, (Boston Business Journal), Rated: A

The Boston Financial Services Leadership Council and the business consulting group Mass Insight have created Financial Technology Boston, under which they will host networking events and possibly job fairs involving fintech professionals from the corporate, startup, government and higher-education worlds.

In addition to State Street (NYSE: STT), Fidelity and Putnam, the BFSLC includes Santander Bank, U.S. Bank and Boston Private Financial (Nasdaq: BPFH).

Boston is already home to fintech-focused incubators FinTech Sandbox and the DCU Center of Excellence in Financial Services, as well as a monthly meetup for fintech professionals.

United Kingdom

Why investors should scoop up discounted P2P funds before putting cash into platforms, (AltFi News), Rated: AAA

Analysis by AltFi Data shows loan origination has more or less been static across the UK P2P lending industry in 2016. This somewhat contrasts with the rapid growth seen in 2015 and 2014. Any number of explanations are given for this including a broad risk-off attitude from markets as well as the ongoing fiasco at the major US platform Lending Club.

However, for professional and private investors alike who are not dissuaded from the adverse headlines, and attracted by the high yields on offer from investing in the market, there is a clear argument to avoid investing directly on platforms. While this is the normal route for many, buying shares in the investment trusts offering exposure to loans originated from the platforms that are heavily discounted at present arguably makes more sense.

Over time in addition to the 7.4 per cent yield on offer, a narrowing of this discount or perhaps even a move to a premium could significantly bolster returns.

The table below shows what will happen to the share price following a 20 per cent return in net asset value alongside changes in the discount/premium. It clearly shows that buying at a premium massively adds to the total return.

Of course there is always the risk that the discount moves out further. This could be caused by investors going off the trusts even more. Or it could be broader negative sentiment towards equity markets that sees index level selling of the FTSE 250 – in the case of P2P GI – or FTSE All Share selling in the case of VPC Specialty Lending. This would add to weakness in both trusts’ share prices, and potentially widen the discount.

However, as AltFi reported last week P2P GI has started to defend its discount by buying up its shares using spare cash. Last week it bought £2m of its shares at an average price of 827p, says Monica Tepes, analyst at Cantor Fitzgerald.

This did temporarily lower P2P GI’s discount to 17.5 per cent although it has since moved back to over 20 per cent.

Brexit: FinTech firms fear for staff shortages and lost EU customers, (Tech Republic), Rated: AAA

London is a major player in the international FinTech market, with startups in the UK capital securing more venture capital funding last year than their European counterparts.

That status won’t necessarily change after Britain leaves the EU but FinTech firms have said it will complicate the picture, particularly when it comes to their ability to sell services to Europe and attract new talent.

Controlling migration was the second most important reason for quitting the EU, according to those who voted Leave in last week’s referendum.

Access to the single market allows goods and finance to be moved between EU countries without tariffs. However, full access also requires free movement of workers between European countries, something many Leave voters oppose.

Nevertheless, for peer-to-peer (P2P) lending platform MarketInvoice, as for many other London-based FinTech firms, free movement of European labor is essential to meet its demands for skills.

“Here at MarketInvoice we have a super-diverse team from all corners of the globe. Most notably within our software-engineering and data-science teams. Many FinTech founders themselves come from outside the UK,” said Anil Stocker, CEO of MarketInvoice.

European Union

Insurer Aviva France to Lend €50 Million to SMEs Through Crowdlending Platforms, (Crowdfund Insider),Rated: AAA

Aviva France, together with two partners, alternative asset management firm Eiffel Investment Group and insurer AG2R La Mondiale, is launching an investment fund called “Prêtons Ensemble” (Lending together) dedicated to financing loans to small and medium-size enterprises (SMEs) provided through crowdlending platforms.

Starting with an initial endowment of €50 million from Aviva France and €20 million from AG2R La Mondiale, the fund is expected to quickly grow to €100 million by rallying other institutional investors around the project.

The goal is to invest in the French real economy by financing SME loans granted through regulated crowdfunding platforms. Eiffel Investment Group is a specialist with more than eight years of experience in investing on crowdlending platforms, notably in the more advanced UK and US markets. Eiffel Investment will be in charge of the due diligence on the platforms and their loan portfolios. Currently, they have identified around 100 platforms and have made contact with 50 of them. Eventually, in five years from now, the fund should be invested to 70% in lending to SMEs and minimum to 50% in France. At the onset, we’re starting with a dozen platforms, mostly, but not only from France as the market is still emerging here. The (soon-to-be published) list includes names such as Younited Credit, Finexkap and Lendix.

The fund will be diversified in terms of the platforms’ business model and of the type of credit provided to SMEs. This means that it will include both unsecured and secured loans, short-term invoice financing as well as mid-term loans. On average, the loans are expected to have a maturity of 2.5 years.

Our decision was made long before the Lending Club problems surfaced. Upon hearing about them, we conducted a thorough analysis of their actual causes and impact. We were quite reassured to find out that the scale of the financial issue was small, that it had been fixed, and that a subsequent audit did not uncover any other impropriety.

Europe’s Top 11 Peer-to-Peer Lending Platforms, (Fintech News), Rated: A

Comment: As author chose to label the article Europe’s top 11, and includes UK companies, we chose to do the same.

In Europe today, although the vast majority of the P2P lending activity is concentrated in the UK – which accounts for over 84% of the whole European market –, Germany, France and Nordic countries are experiencing strong growth and development in the P2P lending space with a number of homegrown startups starting to emerge as regional leaders.

Australia

Fintech losses blamed on rerating, (The Australian Business Review), Rated: AAA

DirectMoney, which writes personal loans, slid to 4.5c a share after coming to market last year at 20c via a backdoor listing. On Friday, the company unveiled a $5.7m non-renounceable capital raising at 4.2c a share on a one-new-share-for-every-two-held basis.

The raising, underwritten by Bell Potter, opens on July 11.

It follows a mixed ride for investors, with the stock exchange in February querying its financial position and DirectMoney subsequently unveiling a deal with Macquarie, which bought $5m of the company’s personal loans and took shares in the company in exchange for advisory services.

In May, DirectMoney revealed loan demand was outstripping funding as the company slowly gained traction for its personal loan fund for retail investors. In the interim, the company turned to two “large financial institutions” for funding facilities, signing a non-binding term sheet with one for $20m.

Part of the cash from the $5.7m raising will be used as upfront collateral for the funding facilities. “We’ve proven our ability to originate loans; that is difficult for some organisations and what we are now doing is establishing committed funding programs of sufficient size so we can leverage the assets we’ve built,” Mr Beaumont said.

DirectMoney has written $17.6m of unsecured personal loans up to $35,000 for three to five years. Revenue in the financial year to the end of May was $1.19m, compared to $435,513 in the six months to December 31.

DirectMoney chief Peter Beaumont yesterday defended the fintech company’s stockmarket listing and expressed disappointment over losses worn by shareholders, arguing there were many benefits and the sector globally had suffered a de-rating.

“We’re disappointed there were investors that came in at higher prices and have had capital losses at this point, but marketplace lending globally has experienced a resetting of valuations, whether it’s LendingClub in the US or others, since last year,” he said.

The inaugural Australian Fintech Awards regonised innovation in the finance industry, with OnDeck Australia and Commonwealth Bank (CBA) receiving the Fintech-Bank Collaboration of the Year Award. OnDeck entered the Australian market last year with CBA and online accounting software provider, MYOB, as distribution partners.

India

P2P players bank on institutional lenders for growth, (Economic Times), Rated: AAA

I-lend has stitched a partnership with Hyderabad-based non-banking finance company Star Finserve, becoming the first peer-topeer online lending platform to join hands with an institutional lender while several other players including MicroGraam, Faircent and LenDenClub are in talks for similar pacts.

“The cost of loan origination is going up steadily for NBFCs and banks, the number of successful applications is declining and through these partnerships the institutional lenders can cut down on incurring origination of loan and administration costs,” said VVSB Shankar, founder of i-lend.

Shankar said the decline in the number of applications could be attributed to several factors such as competition among institutional lenders, quality of borrowers or involvement of non-performing assets. The company’s loan book size is about `1.5 crore and lenders on the platform can opt for borrowers who pay 18-21% interest.

Peer-to-peer platforms have reported an increase in the number of high net worth individuals or HNIs they have attracted over the past six months. “HNIs and family offices are showing interest in the peer-to-peer space. Since there is a criterion for lenders to have an income of over `10 lakh, this is bound to happen. Our top lenders have invested more than `40-50 lakh each, with the highest being around Rs 60 lakh,” said Rajat Gandhi, founder of Faircent, which has a loan book size of Rs 6.5 crore.

Smaller players including LenDen-Club said they have also seen increasing interest from HNIs, specifically from Maharashtra and Gujarat, spending about Rs 15 lakh individually. Since retail investors are central to how such platforms function, the companies aim to firm up a select few partnerships with institutional lenders over the next one year.

China

Exit of P2P lenders from Shanghai office market poses a challenge, (South China Morning Post),Rated: A

The recent collapse and exodus of numerous peer-to-peer lending (P2P) companies in China after a government crackdown on fraud has rattled the Shanghai CBD office market and may “pose a challenge for landlords”, experts say.

In the second quarter of the year, supply spiked to a 10-year high, according to real estate firm Colliers International, as overall vacancy rates in the area increased 3.2 per cent quarter on quarter to 7.2 per cent.

Korea

8PERCENT: Men in 30s Major P2P Investors, (The Korea Bizwire), Rated: A

8PERCENT, a P2P (peer-to-peer) lending company, revealed on July 4 that 30-something men who live in metropolitan areas are their primary investors.

As of June 30, top P2P lending company 8PERCENT’s total accrued loans summed up to 26.6 billion won ($23 million), with a total of 8,283 investors investing 3.21 million won ($2800) on average per person.

The average age of the investors was 34.3, and more than 90 percent of the investors were between the ages of 20 and 40. 8PERCENT also revealed that 77 percent of the investors lived in metropolitan areas, and that 67.5 percent were male and 32.5 percent, female.

The largest investment made so far was 453 million won ($395,000) diversified into 1,115 different bonds.

“Until last year, 90 percent of investors were from metropolitan areas, but the portion from non-metropolitan areas increased to 23 percent this year. Investment from women also increased from the low 20s to 30 percent, and we’re seeing growth in the number of investors in their 50s as well,” said Kang Seok-hwan, chief marking officer of 8PERCENT.

Small credit loans of 24.2 billion won ($21 million) comprise more than 90 percent of the total investments. Out of the total amount, 13.4 billion won ($11 million) was loaned to individuals, and 10.8 billion won ($9.4 million) to corporations.

Besides credit loans, borrowers also obtained real estate mortgage loans of 2.4 million won ($2 million).

 

Author:

George Popescu