- LendingClub’s charge off grows from 4.58% to 6.31%. Some people claim it is due to the company verifying only 26.8% of borrower’s income vs 49% in 2013. However, there was a higher proportion of bad loans among those verified than those that weren’t verified, roughly 12% vs 7% respectively. The real culprit seems to be that 46% of borrowers, after refinancing their credit cards with Lending Club, go back and spend more money on credit cards. A dangerously human and interesting trend.
- Legislation has been proposed in Congress to counteract Madden vs Midland. It is unlikely to pass. Another bill was introduced that would require the IRS to use “website-based, real-time responses” for personal income verification by lenders. Great initiative.
- Amazon is setup to start securitizing the $1.5bil in SME loans it already originated. Testing SME lendig with a small $1.5bil origination volume, a good indicator of the sheer volume Amazon could do in the close future.
- New York beat Silicon Valley in Fintech funding in Q1 2016. It makes sense for Boston to be Biotech, SV to be Software, and NY to be Fintech. Where is the Make-revolution going to be focused ?
- FED’s Williams is already discussing what the FED should do for the next crisis, and compare plans with the ECB.
- Regulators sound alerts on bank’s commercial real estate lending practices. Good news for real estate crowdfunding if the banks use an arbitrary tightening approach. Perhaps not if the banks use a reasonable tightening approach as investors may be spooked from deploying capital due to concerned of receiving only the loans the banks judge too risky.
- Today’s hearing by the House Financial Services Subcommittee also triggered a report in support of FinTechs. The report shows how “fintechs could struggle to comply with decades of regulations geared toward traditional banks”. Perhaps 1 regulation fits all is not optimum indeed.
- And interestingly, TransUnion shows that auto-loan maturity has increased significantly over the last 6 years. The interesting part though is that due to early payoffs, the auto-loan risk factors, according to TransUnion, have not degraded. We did see last week a report from MorningStar showing an increase in auto-loan defaults. Who are we to believe ? Perhaps the one that makes the most sense.
- Private sales in the European Asset-Backed bond market have grown from 30 billion EUR to 78 billion EUR in 1H2016 vs 1H2015. Perhaps there is potential for a much larger market once the market finds a good rhythm and conduit.
- RateSetter decided to be less transparent after the previous articles discussing the potential insufficiency of their provision fund. A strange response for sure. The company also tweaked its fund calculations to add “expected futures income” to the fund size. A much more reasonable change this time. Transparency is a double cutting sword, and withdrawing transparency is often more damaging than providing context for negative information.
- And the financial markets welcome stability and predictability in Leadsom’s quitting the Prime Minister race.
- There are 20 p2p lenders in Korea. As some promise 15% returns, the Korean financial regulator has rightfully started investigating and working with the police as needed.
- An education loan marketplace, GyanDhan, raises a seed round from Stanford and Harvard Angels. They offer loans up to Rs 30 lakh without any collateral for higher education abroad. They claim to have processed about 2,500 applications to date and has helped students avail loans worth Rs 10 crore.
- An interesting thought: p2p lenders will help borrowers borrow even from banks…because p2p lenders will sell qualified leads to banks, in India. First, I think that banks have higher lending standards in most countries and while this may be possible in India, it is unlikely to be a viable business in the US. And second, the cost of customer acquisition of fintechs is typically much higher than a banks’, so once again I am not sure if/how this would work.
- Harmoney is offering “repayment waivers” allowing borrowers to skip payments if in “unforeseen hardship”. 2 things jump to mind: will borrowers abuse this system ? And, what about yield effect? Missing principal payments is very expensive and will hurt the yield considerably. A reminder that Harmoney has raised $30 million in working capital, assessed more than $2 billion in loan applications and paid more than $24 million in interest to lenders.
- News Comments
- LendingClub’s Newest Problem: Its Borrowers, (Wall Street Journal), Rated: AAA
- Legislation Proposed to Counteract Court Ruling on State Usury Caps, (Wall Street Journal), Rated: AAA
- Amazon Looks Set to Deliver in Structured Credit After Hire, (PeerIQ), Rated: AAA
- How New York Beat Silicon Valley in Fintech Funding in Q1, (Datamation), Rated: AAA
- Fed’s Williams Prefers MBS Buying to ECB Tactics in Next Crisis, (Bloomberg), Rated: AAA
- Regulator sounds new alert on banks’ property lending, (Financial Times), Rated: AAA
- U.S. bank regulator toughens commercial real estate oversight, (KFGO), Rated: AAA
- Tech coalition targets financial startups’ regulatory hurdles, (The Hill), Rated: A
- Surprise: Auto Loan Durations Decrease Despite Popularity of Extended 72 and 84 Month Loan Terms, (TransUnion), Rated: A
- European Union
- Europe’s Asset-Backed Bond Market Is Growing More Mysterious, (Bloomberg), Rated: AAA
- United Kingdom
- Re-setting Ratesetter’s default ratings, (FT Alphaville), Rated: AAA
- Financial markets welcome Leadsom quitting UK’s Prime Minister race, (Press Release), Rated: AAA
- P2P raises concerns about fraud, (Korea JoongAng Daily), Rated: A
- Education loans marketplace GyanDhan gets funding from Stanford Angels, Harvard Angels, (Techcircle), Rated: A
- Peer-to-peer lenders will help you borrow even from banks or non-bank financial corporations, (DNA India), Rated: A
- New Zealand
- Harmoney’s P2P loan insurance a Kiwi world first, (Biz Edge), Rated: A
LendingClub’s Newest Problem: Its Borrowers, (Wall Street Journal), Rated: AAA
From loans made in 2013 through the first quarter of 2015, gross charge-offs of LendingClub’s lower-graded loans a year after issuance jumped to 6.31% from 4.58%, an increase of 38% or 1.73 percentage points. Charge-off rates on top-graded loans—which go to borrowers with stronger credit histories—rose less dramatically, to 1.51% from 1.46%, according to a presentation by the firm in May. Note: Do not mix charge-off rate and non-performing rate. Charge-off is a usually small subset of non-performing.
Charge-offs are ticking up at some other lenders. As of May, about 4.2% of the principal amount lent by Prosper Marketplace Inc. in the first quarter of 2015 had been charged off, according to MyCRO, a data tracker from online lending and securitization platform Insikt. Loans made a year or two earlier had seen charge-offs of 3.0% and 3.8%, respectively, after a similar amount of time had passed. A Prosper spokeswoman had no immediate comment.
Meanwhile, the percentage of loans written off by banks on their credit-card books last year hit the lowest level since the 1980s, according to Federal Reserve data. The rate was 3.16% in the first quarter versus 3.78% at the beginning of 2013, according to the regulator’s data.
As part of their loan-approval process, most lenders have automated the processes of checking borrowers’ credit metrics and looking up their histories while in many cases avoiding more labor-intensive practices of collecting and reviewing pay stubs or tax returns. For instance, this year, through the first quarter of 2016, LendingClub had verified actual income for 26.8% of loans, down from a peak of 49% in 2013. The company also has argued that verifying every applicant’s income is unnecessary. For loans made in 2012, for example, there was a higher portion of bad loans among those verified than those that weren’t verified—roughly 12% and 7%, respectively.
While about one-third of borrowers said they were paying down credit cards with their online loans, 46% actually started carrying at least 10% more in credit-card debt after getting the loan—well above the 30% rate for unsecured personal loans made by all lenders, Experian said.
LendingClub borrowers are among those who have become more indebted as the firm expanded. Debt-to-income ratios—a common credit measure—for LendingClub borrowers rose to 19.2 in 2015 from 13.8 in 2011, according to an analysis of loan data by research firm MonJa.
Legislation Proposed to Counteract Court Ruling on State Usury Caps, (Wall Street Journal), Rated: AAA
A Republican lawmaker late Monday introduced a bill aimed at helping debt buyers bypass state interest-rate caps, mounting a direct response to a case the Supreme Court recently declined to hear. The move comes after the Supreme Court declined to hear a case in which the Second U.S. Circuit Court of Appeals in New York determined debt buyer Midland Funding LLC couldn’t charge an interest rate higher than New York’s usury cap after purchasing the debt from a Bank of America Corp. unit.
“This ruling will restrict the expansion of credit and restrict innovation” and “poses a risk to the secondary credit markets. It also undermines peer-to-peer lending platforms in the current business model,” Mr. McHenry, a top Republican on the House Financial Services Committee, said in an interview with The Wall Street Journal. “The consequences of the court ruling is what we’re seeking to fix.”
The proposal is likely to generate as much opposition as the case, with debt buyers wanting to keep federal pre-emption and consumer groups pushing hard for states’ rights to protect consumers from being charged high interest rates. Analysts have already predicted any legislation in this area would be difficult to pass.
“It will have trouble passing because the Democrats are going to look at it as a means of circumventing consumers and Republicans will look at it as an unnecessary overlay of states’ rights,” said Isaac Boltansky, an analyst at Compass Point Research & Trading LLC.
The proposal is among a series of bills that Mr. McHenry has been rolling out as part of a package to promote financial innovation called the Innovation Initiative.
As a part of the initiative, Mr. McHenry introduced another bill Monday to the House Ways and Means Committee that would require the Internal Revenue Service to use “website-based, real time responses” when a lender requests a document from the IRS to verify a person’s income and other data points to approve a loan.
Amazon Looks Set to Deliver in Structured Credit After Hire, (PeerIQ), Rated: AAA
Online retailer Amazon has been quietly building a business lending to its customers and now looks set to open this asset book up to investors by securitizing some of these loans.
Nick Clemente, a former director with BNP Paribas’ structured credit team responsible for origination and execution of structured credit and credit derivatives, has joined the tech giant to run capital markets for its Amazon Lending business.
A recent investor newsletter from the firm referred to the group as having provided financing of over $1.5 billion to small and medium-sized businesses across the US, UK and Japan. Amazon Lending specialises in short-term lending and is said to be sitting on $400 million of loans.
The newsletter adds that Amazon Lending is looking to partner with a bank so that these dealers can manage the “bulk of the credit risk”.
How New York Beat Silicon Valley in Fintech Funding in Q1, (Datamation), Rated: AAA
In the first quarter (Q1) of 2016, and for the first time ever, New York City beat Silicon Valley in terms of fintech (financial technology) financing, $690 million versus $511 million, states Fintech’s Golden Age, a new report from Accenture and the Partnership Fund for New York City. In all of 2015, investments in New York totaled $2.3 billion, triple the amount raised by the area’s fintech startups the previous year.
It’s easy to attribute New York City’s rise in fintech scene to the proximity local startups enjoy to Wall Street banks and financial firms. But there are other forces at play, said Maria Gotsch, president and CEO of the Partnership Fund for New York City and co-founder of the FinTech Innovation Lab.
With ready access to funding, established customer relationships and their own considerable experience in maintaining large and complex IT ecosystems, New York City’s banks and other big financial institutions became natural allies for fledgling fintech companies. Funding aside, the area’s deep-pocketed firms are also looking to cut deals with startups that can help them bolster their services offerings.
“Financial institutions have made some major acquisitions,” said Gotsch. “Exits are always good.”
Fed’s Williams Prefers MBS Buying to ECB Tactics in Next Crisis, (Bloomberg), Rated: AAA
When the next crisis comes, don’t expect Federal Reserve Bank of San Francisco chief John Williams to try persuading his colleagues to pull a Mario Draghi.
The European Central Bank president has gotten creative with monetary policy as euro-area growth and inflation have remained sluggish despite rock-bottom interest rates. He’s tried charging banks for overnight deposits to encourage them to lend the cash instead, doling out long-term loans at ultra-low costs to credit institutions, and adding corporate bonds to his quantitative-easing program. He’s also employed measures that the Fed has also used, like signaling policy stance through forward guidance.
Draghi’s innovations would either come in second to tried-and-proven quantitative easing in the U.S. or would be purely off the table, in Williams’ view.
Regulator sounds new alert on banks’ property lending, (Financial Times), Rated: AAA
A top US regulator has sounded a new alert over banks’ commercial real estate lending, adding to concerns that bubbles may be forming in parts of the country’s property market.
CRE loans originated by banks in the first quarter leapt by 44 per cent from the same period in 2015, according to Morgan Stanley. Banks’ share of CRE originations has risen from just over a third in 2014 to more than half in the first quarter of 2016 — a record.
Thomas Curry, comptroller of the currency, used the watchdog’s twice-yearly report on financial risks published on Monday to warn about looser underwriting standards and concentrations in banks’ CRE portfolios. “Our exams found looser underwriting standards with less-restrictive covenants, extended maturities, longer interest-only periods, limited guarantor requirements, and deficient-stress testing practices.”
Several bank executives signalled during the last results season that they weretightening up CRE lending standards, and a survey of loan officers by regulators in the first quarter suggested many were indeed doing so.
Morgan Stanley identified 25 institutions that “may face pressure from regulators given rapid growth and high concentrations”. This “could lead smaller banks to pull back on CRE lending, raise equity and/or drive M&A”, said its report.
U.S. bank regulator toughens commercial real estate oversight, (KFGO), Rated: AAA
Credit risks have risen in U.S. commercial real estate as lenders compete more fiercely in a low rate environment, a federal banking regulator said on Monday, adding that it was stepping up its scrutiny of the sector.
The Office of the Comptroller of the Currency (OCC) said in its semiannual risk report that while the financial performance of lenders improved in 2015 compared to a year earlier, credit risks were higher across the industry. The agency has escalated its oversight of commercial real estate risk from ordinary monitoring to “additional emphasis.”
Curry also mentioned financial technology and marketplace lending as areas the OCC is keeping a close eye on.
Small U.S. banks are delivering healthier profits than their bigger peers, the report noted. Banks with less than $1 billion in total assets delivered return on equity above 10 percent last year while larger banks only delivered single-digit returns.
Tech coalition targets financial startups’ regulatory hurdles, (The Hill), Rated: A
Financial Innovation Now released a report Monday evening detailing how new financial technology (“FinTech”) companies struggle with a patchwork system of state laws and federal laws geared toward traditional institutions.
The report explains how two theoretical FinTech companies–a lending company and a payments processing company–could struggle to comply with decades of regulations geared toward traditional banks. “Our hope is that this report helps policymakers understand the regulatory landscape for financial technology,” said Peters.
Congress on Tuesday will take a crack at understanding the landscape for marketplace lending companies with a House Financial Services Subcommittee hearing.
The report also tries to tamp down on cybersecurity concerns by boasting financial technology companies’ knowledge and capability with modern tech security features. The report argues FinTech companies are better equipped and more experienced to handle threats than traditional institutions. “Anecdotal breaches will always occur at technology companies just as at other businesses,” the report reads. But “they pale into insignificance compared to the breaches at banks and major retailers.”
Surprise: Auto Loan Durations Decrease Despite Popularity of Extended 72 and 84 Month Loan Terms, (TransUnion), Rated: A
The study found that the average term for new auto loans rose from 62 months in 2010 to 67 months in 2015. In the third quarter of 2015, seven in 10 new auto loans had terms longer than 60 months. Five years prior, only half of all loans had terms longer than 60 months.
While the length of typical auto loans (with prices averaging ~$21K) have extended to as long as 84 months, the risk factors for these consumers extending to lower their monthly payments, did not change. In fact, many of these loans are not coming to term as the durations of the loans have actually decreased by one month. Cars are either sold before payoff or the loans can often be re-financed. Most
Europe’s Asset-Backed Bond Market Is Growing More Mysterious, (Bloomberg), Rated: AAA
Europe’s asset-backed securities market (ABS) is going underground. Private bilateral sales of the bonds, which are typically backed by collateral such as car loans or mortgages, now outstrip public sales to investors, according to Bank of America Corp. analysts led by Alexander Batchvarov.
So-called retained transactions, which are kept on banks’ balance sheets, rose to 78 billion euros ($87 billion) in the first six months of the year, which is more than double the 30 billion euros sold in the same period of 2015, according to Bank of America data. For investors in the public market, new-issue supply totalled just 41 billion euros, or roughly half the volume recorded a year earlier.
Synthetic securitizations, in which credit derivatives are used to transfer risk, are also said to be growing in favor as banks seek to bolster their balance sheets — and even as regulators push back against use of such “regulatory capital” trades.
“Discussions with market participants suggest that the volume may be (much) larger,” Batchvarov wrote. “The revival of synthetic securitisations speak[s] to the need of the banks to manage their capital and credit risk of their balance sheet, but apparently this is now done through bilateral transactions, mostly not rated, and rarely seen.”
Re-setting Ratesetter’s default ratings, (FT Alphaville), Rated: AAA
At the end of last month, we reported on Ratesetter’s higher than expected default rates, which has raised questions about the resilience of its provision fund. The story was based on information from the Ratesetter website, where the level of provisioning per year and the expected vs. actual default rates were made available to investors, along with other information like how much of the yearly provisions had been been used up.
That’s the nature of transparency: you should disclose the bad as well as the good.
But now Ratesetter has decided that publishing expected default rates for each year “are not meaningful for [our] model, since investors do not need to provide for defaults”.
And that’s not the only change.
Ratesetter is now tweaking the way it calculates its provision fund coverage ratio. Instead of just subtracting expected losses from the current value of the provision fund, Ratesetter will now add “expected future income” in as well, thereby boosting the coverage ratio. Here’s their explanation of the change:
The “Expected Future Income” from open loans will be included in the calculation of the Coverage Ratio. This will be introduced alongside our regular update of the Expected Future Losses figure. Two years ago we made the strategic choice to spread more of the Provision Fund’s fees over the lifetime of loans as opposed to all being upfront when the loans are made. This obviously changed the short term flow of cash into the Provision Fund but we believe, in the long run, it is a more sustainable model. Today the total value of this contracted future income stands at over £6m.
The provision fund, which at one point Ratesetter thought to invest in its own loans, currently has almost £17.4m covering for £610m worth of lending — that figure doesn’t yet appear to account for the £6m of future income (nor does it account for any recoveries on defaulted debt, Ratesetter points out in its blog). The loss rate expected is 2.3 per cent, while a rate of 2.85 per cent would eat up all of the provisions. That’s a 55 basis point margin of error and probably the number worth remembering even after all these changes.
Financial markets welcome Leadsom quitting UK’s Prime Minister race, (Press Release), Rated: AAA
Andrea Leadsom’s decision to quit the UK’s Conservative party leadership battle is likely to be welcomed by the financial markets, affirms the boss of one of the world’s largest independent financial advisory organizations.
“First, Leadsom quitting eradicates one layer of the uncertainty that has been hanging over the UK since the historic vote to leave the EU. The many question marks since the Brexit decision have, unsurprisingly, created volatility in the markets. With Leadsom pulling out there is one less question mark.
“May could possibly kick triggering Article 50 way into the long grass, or go for the Norwegian model and allow free movement in exchange for access to the single market.
“This kind of ‘Brexit-Lite’ might well please the markets – which had widely priced in and were largely relying upon a Remain victory before the shock result.”
P2P raises concerns about fraud, (Korea JoongAng Daily), Rated: A
As of March, there were 20 P2P lenders in Korea that directly connect lenders and borrowers without intermediation by existing financial companies.
The average loan issuance was 22.1 million won per head. Individual loans on credit accounted for about 85 percent of all P2P lending, the data showed. About 6 percent of individual borrowers took out loans from P2P businesses, taking their properties as collateral.
“I was introduced to the company by one of my acquaintances and heard it was a thriving P2P lender that attracts quite a lot investors as it promises 15 percent returns annually,” Choi said.
The FSS has reported such complaints by consumers to police and prosecutors and said it will enhance monitoring on similar practices.
Education loans marketplace GyanDhan gets funding from Stanford Angels, Harvard Angels, (Techcircle), Rated: A
GyanDhan, an education loans marketplace operated by Delhi-based Senbonzakura Consultancy Pvt. Ltd, has raised an undisclosed amount in seed funding from Stanford Angels & Entrepreneurs and Harvard Angels.
GyanDhan had earlier received angel funding from Satyen Kothari, founder of Cube and Citrus Pay, to grow operations from the concept phase to its first loan disbursal.
The company will use the money raised in the latest round to build the tech platform to provide a better experience both to banks and students, and to develop its data sciences capabilities.
GyanDhan’s product offerings include loans up to Rs 30 lakh without any collateral for higher education abroad.
The company claims it has processed about 2,500 applications to date and has helped students avail loans worth Rs 10 crore through its partner financial institutions. The firm expects to process transactions worth Rs 30 crore by the end of the year.
Peer-to-peer lenders will help you borrow even from banks or non-bank financial corporations, (DNA India), Rated: A
Online businesses like BankBazaar, Paisabazaar, Policy Bazaar, etc have emerged and established themselves as loan aggregators, thereby passing on leads to financial companies like banks and NBFC’s. However, the quality of the lead has to be still ascertained by the banks and NBFCs through their own efforts, due diligence and filtering to assess the suitability of these leads and the conversion from a lead to a prospect and finally to a borrower.
The need to meet deployment targets is another major reason that banks have challenges in finding adequate numbers of borrowers who meet all their criteria.
A P2P platform provides a curated list of pre-verified, credit assessed list of borrowers from whom the financial companies can cherry-pick based on their appetite and provide loans, thereby significantly reducing their loan origination cost and improving their operating spreads.
Increasingly, banks and other financial companies will see a lot of value accruing to their business by aligning themselves with P2P marketplaces who perform all the necessary verification, credit assessment and also use various social and other information to rate borrowers and build a lot of analytics for intelligent credit decisions over and above the conventional methods which will prove to be an irresistible proposition to conventional financial institutions.
Harmoney’s P2P loan insurance a Kiwi world first, (Biz Edge), Rated: A
Harmoney has claimed to be the first in the world to use peer-to-peer lending for ‘unforeseen hardship’ on loans, the company reports. Its Payment Protect offering is a ‘repayment waiver’ that can protect against unexpected events that can affect loan repayment, such as death, terminal illness, disability or redundancy.
“For an individual loan, the waived repayments could be greater than the Payment Protect fee earned. However, across a whole portfolio the fee income and additional interest should outweigh any waived repayments and fee costs,’ Hagstrom explains.
Hagstrom says the method of delivering ‘peace of mind’ to customers through peer-to-peer lending is a rival to traditional insurance and borrowing methods, while providing lender returns through interest income, returns and yield enhancement.
The Financial Markets Authority issued Harmoney the first P2P lending licence in 2014. The company has raised $30 million in working capital, assessed more than $2 billion in loan applications and paid more than $24 million in interest to lenders.