Wednesday January 18 2017, Daily News Digest

Morningstar

News Comments Today’s main news: PRA resets FSCS limit at 85K BP. SoFi double downs on mortgages. Today’s main analysis: High-yield bonds outperform investment grade. Today’s thought-provoking articles: ApplePie podcast on franchise financing in MPL. Dianrong hits year-on-year increase of 148%. FinTech lending opening opps for SMEs in Indonesia. United States Mortgages take center stage at SoFi. AT: “It’s unclear […]

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News Summary

United States

Mortgages Taking Center Stage at Online Lender SoFi (National Mortgage News), Rated: AAA

Social Finance, the online lender that made its name refinancing student loans for high-earning millennials, is doubling down on mortgages as rising interest rates are expected to make originations scarcer.

The company says it has endured by eschewing the strategy of some of its competitors in favor of product diversification and building up capital.

With interest rates expected to rise in 2017, loans to purchase homes will find stronger demand than mortgage refinancings. SoFi says it’s well suited to compete in such an environment — roughly two-thirds of its mortgage originations are purchase loans.

Beyond product offerings, SoFi is exploring the potential applications in mortgages of new technologies such as blockchains — the distributed, auditable, cryptographically secured ledgers that underpin bitcoin and other digital currencies. The company is among several groups studying whether these systems offer a better way to track ownership of real-world assets — in this case, real estate.

SoFi will seek growth in mortgages partly by entering new markets. It began marketing to consumers in San Francisco, where its earliest student loan product customers were.

Now, it is picking new markets based on demand for its primary jumbo product.

So far, SoFi has received licenses in 27 states with the addition of New York.

Next on its list is Massachusetts — eventually the company wants to be licensed in all 50 states.

Morningstar Corporate Credit Research Highlights (Morningstar Email), Rated: AAA

Since the beginning of the year, the average corporate credit spread of the Morningstar Corporate Bond Index, our proxy for the investment-grade bond market, has tightened 1 basis point, whereas in the high-yield market, the credit spread of the Bank of America Merrill Lynch High Yield Master Index has tightened 19 basis points. Between tightening credit spreads and a slight rebound in Treasury bonds, fixed-income securities have performed well. Year to date, the Morningstar Corporate Bond Index has risen 0.53% and the high-yield index has risen 1.08%. However, risk assets with higher betas have risen even higher; for example, the S&P 500 has risen 1.6% over the same period.

At these levels, both investment-grade and high-yield corporate bonds are trading much tighter than their long-term averages, and the S&P 500 is only slightly below its all-time high. Currently, the average spread of the Morningstar Corporate Bond Index is +127, which is 41 basis points tighter than its longterm average of +168 since the end of 1998. The average spread of the Bank of America Merrill Lynch High Yield Master Index is currently +402, which is 178 basis points tighter than its long-term average of +580 basis points since the end of 1996. As a point of reference, the tightest that the Morningstar Corporate Bond Index has ever traded was +80 in February 2007, and the tightest the high-yield index registered was +241 in June 2007.

Denise Thomas of ApplePie Capital (Lend Academy), Rated: AAA

So it’s very important that the brand know how to select operators.

The second is that they know how to select and carve out the United States’ for territories because if you think about the number of people that need to support and purchase goods and services in an area, you have to know that that business is located in a spot where that’s going to be a positive unit economic situation because that’s how franchisees make money. When the franchisee makes money so does the parent franchisor because they’re paid in royalty fees off of the revenues of those units. So it’s very, very important that they get those two things right and there’s aligned incentives in that.

The third thing they have to do is franchisors have to support their franchisees in many ways; training, the blueprint for how to start that business, how to market in the area, advertising dollars for national marketing or local marketing. They have to provide a lot of ongoing support to make that franchisee successful and so we interview, we have a very multi-dimensional screening process for the franchisor and then they in turn screen their potential operators and many franchise businesses like to have an operator that opens more than one unit because they’re not training someone twice and they’re really getting leverage. We like those too because they’ve already shown that they can succeed in one location. So it’s a very interesting model because of the leverage points you get all the way through the system.

Listen to the full podcast.

SoFi officially licensed to lend in New York (Housingwire), Rated: A

State estimated to be future No. 2 market for SoFi

After roughly a year to get finalized, SoFi officially received its license to lend in New York, which is one of the most difficult states to acquire a license in, Michael Tannenbaum, SoFi’s chief revenue officer, said in an interview.

After roughly a year to get finalized, SoFi officially received its license to lend in New York, which is one of the most difficult states to acquire a license in, Michael Tannenbaum, SoFi’s chief revenue officer, said in an interview.

However, he noted that there are a lot of nuances to New York licensing and not too many out of state lenders receive approval.

It’s a very concentrated market that already has an awareness of SoFi and will likely be as large as California in business, which is SoFi’s No. 1 market, he noted. Washington State is slated as SoFi’s No. 2 market right now. SoFi is currently licensed in 29 states, also jumping into Montana recently.

From here, Tannenbaum said Massachusetts would be the last remaining big state that SoFi needs to jump into, pointing out the potential Boston could bring, especially since SoFi already has a solid student loan base there.

Rust Belt City Gets Rated Highest Yield for Single Family Rental Market (Crowdfund Insider), Rated: A

HomeUnion, a new online real estate management platform that helps landlords invest in property and then rent it out, has published their list of top Single Family Rental (SFR) markets in terms of yield. Cleveland is the best market, according to HomeUnion with yields of 10.9%. Meanwhile, hot metropolitan markets like San Francisco and Los Angeles are at the bottom of the yield barrel (Orange County is at the very bottom).

Alternatives firms get gobbled up (Pensions & Investments), Rated: A

Alternative investment consultant acquisitions in the past 12 months include:

nGeneral consulting firm Pavilion Financial Corp. acquired alternative investment consulting firm Altius Holdings Ltd. in September. Pavilion already purchased Sacramento, Calif.-based private equity consultant LP Capital in 2014. Pavilion now has $60 billion in alternative assets under advisement.

nSeattle-based consultant Verus Advisory Inc. closed its acquisition of San Francisco-based private equity consulting firm Strategic Investment Solutions on Dec. 31, 2015. The combined firm has responsibility for more than $380 billion in assets under advisement. Eight months earlier, Verus started bulking up its alternative investment capability when it contracted with hedge fund and private credit consulting firm Aksia LLC to gain access to its hedge fund investment team and due diligence reviews.

OnDeck strikes agreement with WEX to offer financing to small business customers (SNL), Rated: B

Online lender On Deck Capital will provide business financing to small business customers of payment solutions provider WEX.

2017 Cloud Lending Summit & Expo to Feature Larry Chiavaro (Benzinga), Rated: B

Larry Chiavaro, Executive Vice President of First Associates Loan Servicing will be moderating two panels at the iiBIG Marketplace Cloud Lending Summit and Expo on Thursday, January 19th.

The Funding & Liquidity in Marketplace Cloud Lending session will feature Chiavaro and other industry leaders, providing insights into securitization, working with institutional investors, crowdfunding, secondary markets and more. The Loan Origination, Servicing & Collection Solutions for Cloud-based Marketplace Lenders session will delve into the latest developments and best practices to increase efficiency and maximize portfolio performance.

United Kingdom

FSCS limit reset to £85k, but what’s the impact for P2P? (altfi), Rated: AAA

The Prudential Regulation Authority (PRA) has announced its intention to raise the level of coverage provided by the Financial Services Compensation Scheme. In a newly published policy statement, after factoring in feedback from interest parties, the PRA has proposed to reset the deposit protection limit to £85k as of 30 January 2017.

When the scheme’s limit was lowered to £75k in July, RateSetter CEO Rhydian Lewis said that it only strengthened the case to “refresh the FSCS”. But is the resetting of the limit to £85k bad news for peer-to-peer lending?

The Bank of England dropped the base rate to the historic low of 0.25 per cent in August. The peer-to-peer lending industry was overwhelmingly positive in reacting to the move, however a number have since been forced to adjust their own rates in the context of increasingly competitive credit markets in the UK.

Meet the P2P lender that wants to take the awkwardness out of lending money to your mates (BDaily), Rated: A

Flender has been in development for the last two years and is built around harnessing the power of social networks, both online and offline, to help individuals and businesses raise capital.

He said: “We were really shocked to discover how big that was. We surveyed the size of the friends lending market across the UK and when you translate that into value, we almost fell off our chairs.”

Using the example of someone trying to fund an MBA, Cavanagh explained that while people could theoretically do a whip around of friends and family, asking to borrow £500 to £1000 from 10 to 15 people, no one does due to the inherent complications and awkwardness associated with such lending.

Using the example of someone trying to fund an MBA, Cavanagh explained that while people could theoretically do a whip around of friends and family, asking to borrow £500 to £1000 from 10 to 15 people, no one does due to the inherent complications and awkwardness associated with such lending.

Cavanagh disagrees and argues that by making it both more formal and so easy to do, Flender’s solution is actually a lot less awkward than lending £500 to a mate, which is then never paid back.

“It’s going to maintain friendships more than anything,” he argued. “[Informal lending] is already going on to the value of £2.9bn a year, and that’s creating problems because it’s not formalised.

“It’s going to maintain friendships more than anything,” he argued. “[Informal lending] is already going on to the value of £2.9bn a year, and that’s creating problems because it’s not formalised.

P2P lender Saving Stream reaches £250m milestone (Mortgage Introducer), Rated: A

Peer-to-peer lending platform Saving Stream has raised £250m in capital from property investors since its launch in 2012.

The platform, which is owned by bridging and development finance provider Lendy Finance, provides loans up to 70% loan-to-value and has attracted 13,000 registered users.

The amount invested has increased by £150m to £250m in the last 12 months, with investors making an annual return of up to 12%.

Orca Money is one of the leading research and comparison facilities for P2P lending in the UK (Invezz), Rated: B

With the Orca Money comparison engine, IFISA investors are encouraged to research and compare thoroughly before they invest, as the rules are different to other ISA products. Orca research materials translate the guidelines governing the Innovative Finance ISA into simple, consumable and easy-to-understand content. Retail investors can get a quick overview of IFISA providers or dig into greater detail about the IFISA and/or the P2P lending platforms who offer them.

China

Dianrong Announces a Year-on-Year Increase of 148% (Yahoo! Finance), Rated: AAA

Dianrong, a Chinese P2P lending pioneer and technology leader announces that 2016 loan originations reached approximately 16.23 Billion RMB, representing a 148% increase over 2015. Growth in loans issued was funded by an astonishing 3.62 million investors, illustrating the breadth and scope of Dianrong’s business model.

During the year, Dianrong was named one of China’s top three online lenders by the renowned rating website, Wdzj.com, and Yingcan Consulting Company in their “Development Index Rating of the Top 100 Online Lending Platforms for October 2016”.

Last year marked the fourth consecutive year of strong growth in origination for Dianrong, hitting approximately RMB 60 million, RMB 790 million, RMB 6.55 billion and RMB 16.23 billion in 2013, 2014, 2015 and 2016 respectively.

Harneys wins two Deal of the Year awards in China (Cayman Compass), Rated: A

Offshore law firm Harneys has won two Deal of the Year awards from China Business Law Journal for its work on the Kaisa Group’s debt restructuring and HengXinLi’s launch of the first global real estate crowdfunding platform in China. Award winners were announced on Jan. 13.

The first global real estate crowdfunding platform in China is designed to provide Chinese investors with access to real estate in major international cities. The platform is aimed at middle-class Chinese nationals who want to invest in real estate in countries such as the U.K. and the U.S.

Innovation economy is next for China: Sky9 Capital founder (Asia Times), Rated: A

How many investment projects do you usually review, and how many do you typically invest in?

We look at over 1,000 opportunities a year, of which we typically do something like five to six projects. I am pretty sure that China will have the world’s biggest companies in fintech, robotics, and areas like cloud computing and software.

If you have to pick one, which start-up in China looks the most promising to you?

Hard to pick a winner, but in my portfolio, I am very excited about the prospects of Tujia, the Airbnb of China; FangDD, the largest online/offline real estate transaction platform; and PPDai, the largest pure-play peer-to-peer lending platform. These all have the opportunities to become decacorns.

LendIt China Launches LendIt News on WeChat (Yahoo! Finance), Rated: B

LendIt, the world’s biggest show in lending and fintech, made several major announcements today related to China.  First, LendIt announced the official launch of Lang Di Fintech 2017, its 2nd annual Chinese fintech conference held on July 15-16 at the Kerry Hotel, Pudong, Shanghai. Second, LendIt announced its partnership with JadeValue Fintech, a leading Chinese fintech incubator, to co-host the 2nd annual Chinese edition of the PitchIt@LendIt startup competition.  Finally, LendIt officially launched its daily fintech news channel called LendIt News on its brand new Lang Di WeChat channel.

This daily news brief is curated by the LendIt content staff to highlight the most important fintech news stories from around the world. This is the first launch of LendIt News, which rolls out in the U.S. in the coming months.  You can find LendIt News at or at WeChat account langdifintech.

Asia

Fintech lending opens up opportunities for SMEs (The Jakarta Post), Rated: AAA

According to the World Bank, only 36 percent of Indonesians have access to banking services and merely 13 percent borrow from formal financial institutions. While there are almost 60 million MSMEs, which provide over 100 million jobs in the country. Most of them cannot get the financing they need to expand.

Fintech-based lending can potentially fill the country’s existing financing gap of almost Rp 1 quadrillion (US$75 billion). In addition, peer-to-peer lending and crowdfunding fintech particularly can tap into the MSMEs, of which only 20 percent are currently bankable. Giving them access to initial or additional funding will definitely enable them to launch or to expand their business.

OJK issues regulations to regulate peer-to-peer lending (Lexology), Rated: B

The IT-Based Lending Regulation is the most developed articulation we have seen of a set of basic rules for the conduct of marketplace lending in Indonesia, although the regulation provides that further details regarding many detailed operational aspects will be regulated in further OJK Circular Letters.

Authors:

George Popescu
Allen Taylor

Why U.S. P2P Lenders Need a UK Law Firm

uk p2p regulation

The Consumer Financial Protection Bureau (CFPB) in the U.S. is the trend setter in financial regulations. Other markets follow their lead. However, The Financial Conduct Authority (FCA), and to a certain extent the Prudential Regulatory Authority (PRA), both in the UK, have been way ahead in regulating alternate financial institutions engaged in distributing consumer credit […]

uk p2p regulation

The Consumer Financial Protection Bureau (CFPB) in the U.S. is the trend setter in financial regulations. Other markets follow their lead. However, The Financial Conduct Authority (FCA), and to a certain extent the Prudential Regulatory Authority (PRA), both in the UK, have been way ahead in regulating alternate financial institutions engaged in distributing consumer credit and/or taking public deposits. The higher threshold has led to a consolidation in the industry with only serious, well-capitalized firms left in the market. This has also led to increased investor confidence with FinTech valuations firming up in the UK.

U.S. companies that want to enter the UK market must keep an eye on the regulatory environment. In fact, ensuring your company is on the right side of the FCA and PRA is an important part of a CEO’s job. With the CFPB cracking the whip on the U.S. companies, startups are looking for new avenues to expand and grow. One of the most lucrative markets is the UK, the birthplace of peer-to-peer lending.

One advantage to doing business in the UK is they’ve already gone through a massive regulatory upheaval. Now the dust has settled and there are clearer rules than in the U.S. The FCA has been considerably more responsive to challenger banks than the U.S., but a lot of that has to do with the public mistrust of banks after the recession in the U.S., and the LIBOR fixing scandal. Big banks vacated the consumer and small business lending space while challenger banks like Metro, Fidor and Atom took it upon themselves to capture the UK market.

U.S. firms are also looking to take a bite of the pie via mergers and acquisitions in the UK. But it is extremely important for American firms to be cognizant of UK laws governing the sector. A specialist UK law firm is a wise investment.

What a UK Law Firm Can Do For Your U.S. Company

Walker Morris is a renowned full-service commercial law firm in Leeds ranked among the top 20 law firms in the UK by Bloomberg. Their specialty is helping U.S. companies establish a foothold in the UK market. They’ve previously represented U.S.-based alternate finance providers Enova and Avant, both os which raised hundreds of millions in VC money for expansion into the UK. Jeanette Burgess, a partner at Walker Morris LLP, heads the regulatory services team. She advises U.S. lenders acquiring in the UK on all aspects of UK regulations that include financial services, health and safety, and data protection. Debbie Jackson, one of the partners in the corporate group at the firm, specializes in handling compliance issues such as M&As and corporate governance.

While the UK government has been supportive of the FinTech sector, there has been a public clamor for tougher regulations for alternative finance providers. This has led to the FCA examining whether retail lenders understand the risks of such platforms.

Another area of concern is investor demand. As demand increases and more funds flow to platforms, startups are forced to dilute their lending criteria, which leads to default rate increases. Burgess and Jackson are worried this could lead to a dot-com-like crash if left unattended, which is why the firm favors tighter compliance. They believe it will lead to fewer alternate finance platforms taking advantage of less experienced lenders.

There is increasing global concern about the effect of Brexit on the British alternative lending market. Walker Morris, however, does not see any major adverse consequences coming from Brexit.

Another factor in play is that England will start exit proceedings by March 2017 and the divorce from the European Union should take around two years. So there might be some lag time in feeling the full ramifications of the vote. Walking Morris has actually seen an uptick in business with many continental firms looking to establish a presence in the UK.

In response to public and political pressure, the FCA has become cautious. Usually, the process of P2P firm authorization is less onerous than for full-service credit firms. The FCA has a statutory maximum of six months for deciding on an application. They can extend that up to 12 months and more if they require more information. Walker Morris has seen a lot of startups wait in limbo for getting their license. This increases the attraction for U.S. firm to buy an already-licensed UK company as compared to waiting for over a year to gain entry to the UK market.

UK regulatory bodies have been engaging and supportive after seeing the value of credit innovation brought by the young startups. As the sector matured and billions of pounds began pouring into the market, it became essential for the FCA to ensure the little guy investing his retirement money isn’t hurt. This led to tighter scrutiny and tougher regulations, necessitating the need for having a full-service law firm on your side. Investors will see increased value in getting a top-tier law firm on board as this could be the difference between winning and losing a fast moving market.

Authors:

Written with Heena Dhir.

Allen Taylor