- Today’s most interesting article is Prosper’s Transparency Report. Other interesting news : lending milestones broken by companies in Europe. Peer Street receives FCA approval. And a new Australian SME lenders raises $3mil. We practically have daily fund raising news recently. Perhaps the fintech lender investment market has also thawed.
- A useful very short commentary from MonJa explaining 2 reasons why some P2P funds have seen bad results recently : in a rising rates environment, funds need to re-evaluate the value of the old loans on the books to make returns match the latest returns.
- The now regular Prosper Transparency Report for July 2016. We applaud the initiative. We also applaud the numbers : an expected 7.4% is outstanding. We also applaud the courage : going on the record with a number is dangerous and opens the door to liabilities on representations. Also, if in the future the results are less positive, one can’t stop publishing “the transparency report”. In fact, readers should expect the Prosper numbers to go up for some time, and go down for other periods. The opposite will look very suspicious.
- A 3rd article commenting on Prosper’s success after adjusting the lending policies. Note that investors-applauding equals borrowers-booing.
- A new article commenting on Lending Club’s abrupt CFO departure and pointing out the strange timing and speed.
- Banks have to follow since 1977 a Community Reinvestment Act. Marketplace lenders apparently don’t really follow it. Does it seem unfair ? How to remediate ? Are there other regulations put in place for banks for valid reasons that marketplace lenders don’t really follow ? The answer is probably yes.
- Small Business Optimism grew a tiny bit in June 2016, despite the article’s title. Many investment and consumption (read: borrowing) decisions are driven more by moral than by financial analysis. Consumer and Small Business Optimism ratings are important.
- Lend360 conference announces 4 keynote speakers. An event worth attending.
- A longer article about LendingHome’s efforts to build a rock solid risk team. Hires new Chief Risk Officer with great record. Brings in advisors among whom some have taken Lending Club public. I guess LendingHome is closer and perhaps closing on an IPO than Elevate Credit.
- Money360 lending volume passes the $100mil mark. Congratulations !
- Many UK P2P platforms operate without FCA approval. Why ? Because the FCA , at least last time we checked, had received 86 applications and approved about a dozen only. Good news, Peer Funding is now FCA licensed. The catch : they are not active yet and will be active in the fall. What does this teach us ? It is easier to get approved when you have no business, and just plans as it probably requires less work for the FCA. And it is easier to change the plans to match the FCA recommendations than when you have an existing large business like Zopa. Even some of the best regulators in the world, like the FCA, are human.
- LendInvest points out dynamic and growing areas in the UK voted against Brexit. I think everybody agrees Brexit was a protest vote. In my eyes Brexit was a good reminder on the need to share wealth building, we hope the rest of the world learned the lesson.
- Mintos reaches 50 mil Euro in loan volume in 1.5 years since launching. Congratulations !
- EstateGuru reaches 10 mil Euro in loan volume as well. Congratulations !
- News Comments
- United States
- Why Did Funds Appear To Have Poor Q1/Q2 Returns?, (MonJa), Rated: AAA
- Prosper July 2016 Profitability Report, (Prosper), Rated: AAA
- Prosper Says Policy Changes Have Driven Lower Loan Delinquencies, ( Crowdfund Insider), Rated: AAA
- Lending Club: After Q2, Still Not For The Faint Of Heart, ( Seeking Alpha), Rated: A
- Instant Analysis: LendingClub CFO Follows CEO Out the Door, (Motley Fool), Rated: A
- Reimagining Community Reinvestment Act in the Marketplace Lending Era, ( American Banker), Rated: A
- Small-business optimism remains flat: report, (The Hill) ,Rated: A
- LEND360 Announces Line-Up of Keynote Speakers, ( EIN News), Rated: A
- LendingHome Hires Chief Risk Officer to Form Seasoned Mortgage Risk Team, Offers Better Investor Protection, (Press Release), Rated: A
- Money360 Exceeds $ 100 Million Mark in Closed Commercial Real Estate Loans, ( Marketwired), Rated: A
- United Kingdom
- Peer Funding, a P2P lending platform, obtains license from FCA, (SMN Weekly), Rated: A
- LendInvest: What landlords can learn from Brexit vote, ( Bridging and Commercial), Rated: A
- European Union
- More than EUR 50 million in loans financed through peer-to-peer lending marketplace Mintos, (Press Release), Rated: A
- EstateGuru reaches €10 million in loan volume, (Press Release), Rated: A
- Small business lending marketplace secures seed funding, ( Inside Small Business) , Rated: A
Why Did Funds Appear To Have Poor Q1/Q2 Returns?, (MonJa), Rated: AAA
Most likely, it’s due to Fair Market Value adjustments.
While FMV methodologies differ, there are typically two reasons a fund would mark down the loans, independent of any actual losses:
1. Increasing primary origination interest rates: Similar to bonds, a change in discount rates will impact loan pricing. Lending Club has been increasing rates to bring investors onto the platform, making the older loans held by LCA (and everyone else) less attractive; hence the price adjustment to equalize returns.
2. Increase in forward expected losses: Lending Club has been revising the expected losses upwards, which LCA would most likely need to incorporate. Incorporating the newer loss curves will push down the NPV of the cashflow.
We estimate the spread duration of LCA’s blended portfolio is probably somewhere between 1.3 – 1.5, which means even a 50 bps in adjustments of #1 and #2 combined would mean a 75 bps return hit. If you take the adjustment all in one month, that can wipe out that month’s return entirely.
What Can Investors Expect Going Forward? Prosper Shows Case For Optimism
Moving past Q1 performance, certain funds have demonstrated performance improvement through Q2. In Prosper Platform’s June 2016 Performance Update, they highlighted an expected return of June 2016 production being just above the 7.4% on average.
Source: Prosper profitability report
For more in depth portfolio analysis, here’s the full report. In addition to the return improvements, the vintages have seen in uptick in June 2016.
Source: Prosper profitability report
Specifically, the Estimated IRR has rose to 7.42% in June, exceeding the Q2 performance 6.82% mark. Prosper’s June performance gives positive signs to investors of future fund performance.
To an outsider, marketplace lending funds may look terrible. While investors may be hesitant about marketplace lending, it’s imperative to drill down deeper in performance analysis to understand what underlies the caution. In this situation, examining fair market value explains fund performance inconsistencies. What other portfolio metrics can provide similar insights that give investors a more well-rounded perspective? It’s important investors know the full story, especially as they provide regular updates to their clients.
Comment: Very interesting comment from Jason Jones ( LendIt Founder) to this article :
I would be interested in seeing the relative weighting of three elements that are the inputs in monthly returns: 1) the monthly adjustment due to changes in interest rates, 2) the monthly adjustment allocated to forward expected losses, and 3) the “core” return that you get when you back out the previous two adjustments.
It is possible to run a simulated monthly return stream using LC’s publicly available data to show the trends in these three inputs?”
Prosper July 2016 Profitability Report, (Prosper), Rated: AAA
Prosper Portfolio Highlights:
• Estimated return on July 2016 production continues to be slightly over 7.4% on average. iii
• The origination data continues the trend towards a more conservative portfolio with a greater coupon (table on right.)
• Early delinquency for 2016Q2 vintages are below 2015Q4 and 2016Q1 levels. Prosper believes the lower delinquency in this vintage is an early, but positive, result of policy conservatism implemented throughout 2016Q1 and 2016Q2.
• All delinquency and loss patterns since 2013 remain well below the loss and delinquency levels experienced in 2012. The lower level of risk is attributed to changes made to Prosper’s credit risk program at the end of 2012. Today, early delinquency continues to be a crucial input as future policy and pricing changes for the portfolio are assessed.
• Cumulative gross charge-offs remain above 2013 trend, which we believe are a result of environmental changes observed in the broad consumer credit market at the end of 2015.
• Pre-payment patterns remain relatively stable with vintages from 2015 and 2016 tracking the early pre-payment patterns of the 2013 vintage more closely than that of the 2014 vintage.
Prosper Says Policy Changes Have Driven Lower Loan Delinquencies, ( Crowdfund Insider), Rated: AAA
Back in May, Prosper started a monthly update on performance of loans on their marketplace lending platform. The added transparency is welcomed insight – especially for smaller investors.
Today, Brad Pennington, CRO of Prosper, published the July 2016 performance report. He stated that expected returns in the first and second quarter of 2016 production are just above 7.4% on average. Their numbers also show that early delinquency for 2016 Q2 vintages are below 2015 Q4 and 2016 Q1 levels. Prosper states that policy changes that were first implemented in the third quarter of 2015 are responsible for the lower delinquency for 2016 Q2 vintages.
Other items highlighted by
- The origination data continues the trend towards a more conservative portfolio with a greater coupon.
- Cumulative gross charge-offs remain above 2013 trend as a result of environmental changes in the consumer credit market at the end of 2015.
- Pre-payment patterns remain relatively stable with vintages from 2015 and 2016 tracking the early pre-payment patterns of the 2013 vintage more closely than that of the 2014 vintage.
Lending Club: After Q2, Still Not For The Faint Of Heart, ( Seeking Alpha), Rated: A
Comment: article commenting on Lending Club Q2 results.
The losses are rolling in. Q2 operating income was -$85.3 million. [Comment: That is roughly about 10% of cash and equivalents available at the beginning of the period. No surprised.]
Originations declined 29% quarter over quarter, leading to lower transaction revenue. [Comment: I think the interesting story is the comparison with Q2 2015 !]
Cost cutting initiatives are working. [Comment: It is hard to control revenue, it is easier to control expenses. ]
There is no clear roadmap regarding the revival of institutional capital. [Comment: I disagree, Scott Sanborn clearly said that 75% of instit capital is again active on the platform.]
There seems to be no major problem with managed accounts, which have been quite resilient amid the funding downturn. [Comment: This is very interesting. I did not expect it / realize it ! ]
Instant Analysis: LendingClub CFO Follows CEO Out the Door, (Motley Fool), Rated: A
The company announced that Carrie Dolan resigned from the post of CFO. The reason given was that she wanted to “pursue a new opportunity.” LendingClub did not elaborate.
Does it matter? Dolan’s departure, so close to Laplanche’s exit, doesn’t exactly build confidence in LendingClub’s business. This is compounded by the company’s Q2 results, which unhelpfully were released the same day the CFO transition was announced. [Comment: I am not sure about the timing neither. ]
Over the past week, OnDeck Capital’s share price has improved by 12%.
Reimagining Community Reinvestment Act in the Marketplace Lending Era, ( American Banker), Rated: A
Since 1977, the community responsibilities of banks have been codified in the Community Reinvestment Act, which sought to eliminate “redlining” through requirements for banks’ lending, investment and service activities in their own neighborhoods.
The CRA’s primary unit of analysis is a bank’s geographic “assessment area,” where branches, ATMs and offices are located. The objective of the law, and regulations that implement it, is to ensure banks are focused on the needs of low- and moderate-income communities as well as underserved rural areas.
But in a hyperdigital age, where technology has made the world smaller and financial services offerings are no longer correlated with geographic locations, the question is how the “good neighbor” policy of CRA can continue.
The Treasury Department provided some insight in early May in a much-anticipated white paper. The paper suggested that marketplace lenders could partner with community development financial institutions (CDFIs), which Treasury called “high-touch lenders.”
This mild recommendation was the closest the report came to ensuring or to mandating that new non-territorial lenders make good neighbors in all the areas they serve.
Small-business optimism remains flat: report, (The Hill) ,Rated: A
The National Federation of Independent Business (NFIB) said Tuesday that its latest index of small-business optimism ticked up 0.7 of a point in June to 94.5 over the January reading.
The NFIB said that the latest survey reflects a lack of enthusiasm by small businesses for making capital outlays, increasing inventories or expanding.
The index is still below the 42-year average of 98.
Four of the index’s 10 components posted a gain, three declined and three were unchanged.
More than half (56 percent) reported hiring or trying to hire, which was unchanged from earlier this year, but 48 percent reported few or no qualified applicants for the positions they were trying to fill.
Overall, 29 percent of all owners reported job openings they could not fill in the current period, up 2 points, the highest reading in this expansion.
LEND360 Announces Line-Up of Keynote Speakers, ( EIN News), Rated: A
The 2016 LEND360 keynote speakers are:
• Ron Suber, President, Prosper
• James Hobson, Chief Operating Officer, OnDeck
• Charlie Cook, Editor and Publisher, Cook Political Report
• William Phelan, President and Co-founder, PayNet
LendingHome Hires Chief Risk Officer to Form Seasoned Mortgage Risk Team, Offers Better Investor Protection, (Press Release), Rated: A
Originates $750 Million in Mortgage Loans; Over 10% Now Funded by Peer-to-Peer Investors.
Money360 Exceeds $ 100 Million Mark in Closed Commercial Real Estate Loans, ( Marketwired), Rated: A
Money360, a commercial real estate marketplace lending platform, announced today that it has surpassed the $100 million mark in closed commercial real estate loans with the completion of $15.25 million in recently closed loans that reflect the escalating growth of the marketplace lender’s portfolio.
Much of the company’s recent growth, according to Money360 founder and CEO Evan Gentry, stems from a contraction of the commercial mortgage-backed securities (CMBS) market. Money360 has seen more than a 100 percent increase in applications from borrowers turned down by bank and CMBS institutions as a result of increased regulations.
Money360’s recent transactions, totaling $15.25 million, include a bridge loan for the acquisition of a multifamily property in Tucson, Arizona; a bridge loan for the renovation of a full-service boutique hotel in Aurora, Ohio; cash-out permanent financing for a single-tenant retail building in Dayton, Ohio; and a bridge loan for the refinance of an anchored shopping center containing 206,257 square feet of rentable area in Jacksonville, Illinois.
Peer Funding, a P2P lending platform, obtains license from FCA, (SMN Weekly), Rated: A
Peer Funding Limited, a recently established UK peer-to-peer business lending platform, announced it has obtained full authorization from the Financial Conduct Authority (FCA) and would start its activities in the autumn of 2016.
Currently Peer Funding is offering early bird registration on its website. The pre-launch offer applies to the first 150 qualifying registrants on a first come first served basis.
LendInvest: What landlords can learn from Brexit vote, ( Bridging and Commercial), Rated: A
The top 20 list of region with highest real estate capital gains is dominated by districts that voted to remain in the EU, specifically locations in Greater London: places such as the City of London, Waltham Forest, Hackney and Lambeth.
Just two of the top 20 districts for capital gains voted in favour of Brexit – Barking & Dagenham and Spelthorne in Surrey. Looking at the top 50, just 18 of these districts voted for Brexit.
More than EUR 50 million in loans financed through peer-to-peer lending marketplace Mintos, (Press Release), Rated: A
Only a year and a half into beginning operations, peer-to-peer lending marketplace Mintos has seen investors funding already more than EUR 50 million in loans to both private individuals, as well as small and medium sized businesses. The Mintos marketplace hosts loans from 14 non-bank lenders, which have joined the marketplace from the Czech Republic, Estonia, Latvia, Lithuania, and Poland.
According to funded loan volume, to date, the most money has flowed into Latvia’s economy – 33%, Lithuania’s – 31% and Estonia’s – 23%.
This July, the investors financed EUR 7 million in loans through Mintos.
Investors have already received more than EUR 1 million in interest over the past year and a half. More than 10,000 investors finance loans on the Mintos marketplace. The average invested amount of each investor on the platform is approximately EUR 4,000.
The Mintos marketplace is used by investors from 49 countries across the globe, including Japan, Australia, Singapore, Sweden, Finland, and others; however, the most active investors are from Germany, Estonia, Latvia, the Netherlands, and the United Kingdom.
EstateGuru reaches €10 million in loan volume, (Press Release), Rated: A
EstateGuru is an online peer-to-peer debt funding platform. In two years of operating EstateGuru has funded over 60 Estonian property projects with the aid of Estonian and foreign investors.
Despite low business turnover during the summer months, projects through the EstateGuru platform obtain fast financing. The existing record is €31,000 in 31 minutes! Average loan sizes through the platform are €162,227, with the LTV being 59.32% and historical average returns of 11.77%. To date €3.1 million from the loans provided has already been repaid and investors have received a total of €376,383 in interest. None of the loans have defaulted and all repayments are on schedule.
EstateGuru is an online peer-to-peer debt funding platform enabling physical and legal persons to invest in loans secured against properties, whilst obtaining capital direct from investors without the involvement of banks. EstateGuru’s mission is to become the leading cross border property secured debt funding platform with the aid of over 4300 investors. EstateGuru’s investors are from 27 countries with the majority being Estonian.
Small business lending marketplace secures seed funding, ( Inside Small Business) , Rated: A
Fintech small business lending marketplace Bigstone said it has completed a $3 million seed funding round. Proceeds from the capital raise will be used to fuel expansion, grow the marketing team, extend the reach of Bigstone’s channel partner network and further build out Bigstone’s small business loan market platform.
“The leadership team of Bigstone is what first excited us about this opportunity.”