Search Google for loan fraud and you’ll get all kinds of information on lenders scamming borrowers. There is much less information available on scams perpetrated against lenders, but it happens. In fact, we could categorize unsecured personal lending scams into three basic types of fraud: Application Fraud Information Fraud Asset Theft Types of Unsecured Personal […]
Search Google for loan fraud and you’ll get all kinds of information on lenders scamming borrowers. There is much less information available on scams perpetrated against lenders, but it happens. In fact, we could categorize unsecured personal lending scams into three basic types of fraud:
Types of Unsecured Personal Loan Application Fraud
Perhaps the most basic type of loan fraud is application fraud. It occurs when a potential borrower provides misleading information on an unsecured personal loan application. Borrowers attempt to defraud lenders in a number of ways by presenting false or misleading information on their loan applications. Here are some of the most common examples of application fraud targeting unsecured personal lending institutions:
Identity Theft – With identity theft, the applicant uses someone else’s identification to secure a loan. This personal information may include name, social security number, bank account information, credit card numbers, and other personal identification while associating that information with an e-mail address, PayPal address, or other accounts where the fraudster can access the money once it has been loaned. In the case of cash loans, the fraudster need only present identification that verifies the victim exists. In some cases, they may be able to show some proof that they are that individual. In any case, once the identification of the victim has been verified, the fraudster gains access to loan funds and disappears.
Fake Bank Account – A little more difficult to pull off is the fake bank account. This usually involves the creation of a fake identification. Since the fraudster isn’t claiming to be an actual real person, the only victim of this crime is the lending institution. The borrower uses the black market or underground resources to secure a fake name, social security number, birth certificate, and other personal documents to give the impression that they are a legitimate individual. Once that is accomplished, they set up a bank account in the fictitious person’s name and use that account as the basis for applying for an unsecured loan. Once the deposit has been made, they can make a large cash withdrawal and disappear.
Other Loan Misinformation – Other types of lender fraud include subtle misinformation. For instance, misrepresenting one’s income or personal assets. Other fraudsters may include illegitimate personal references or employers. These types of fraud generally require a co-conspirator—either a friend or relative—who acts as the reference or employer on behalf of the fraudster. Once the loan has been made and the fraudsters have access to it, they all disappear. Other application fraud schemes may be more sophisticated and require multiple actors.
While many lenders have discovered ways of detecting application fraud, and law enforcement agencies have been successful in bringing fraudsters to justice, it is important to recognize that these scams continue to plague the unsecured personal lending industry and companies that do not take measures to detect and prevent it could fall victim to it at the drop of a hat. The best defense against application fraud is vigilant identity and bank account verification. Visit for more information.
Types of Unsecured Personal Loan Information Fraud
With information fraud, people use breached or compromised information to gain access to bank accounts, loan applications, and other tools to defraud lending institutions at someone else’s expense. Here are some common types of information fraud.
Web Scraping – Web scraping involves the use of web crawlers to seek out and find personally identifying information through social media accounts and other websites where people sign up for membership or set up profiles. This practice is often followed up by fraudsters setting up fake accounts themselves to troll individuals and lure them into giving away other information, which is then used to steal identities or apply for loans using application fraud techniques.
Account Hacking – A more nefarious form of lending fraud involves hacking into the bank account of an individual and applying for a loan on their behalf. The fraudster usually has a way of re-routing borrowed money into their own personal accounts and absconding with the funds before the scam is detected.
Loan Phishing Scams – A very common way in the digital age to acquire information that can then be used in the execution of a loan fraud is through phishing schemes. Fraudsters send an e-mail to unsuspecting individuals purporting to be their bank or other financial institution—PayPal has been used quite often as the face of these scammers. The fraudster attempts to get the e-mail recipient to click a link and enter account information into a site designed to look like the victim’s bank website. However, what the victim often does not know is that the site is a hoax and they are sending their bank account information to the person who will then use it to wreak havoc on their lives. Such schemes defraud the unsuspecting victim then defraud the lending institution as the information gatherer uses that falsely acquired information to apply for a loan and then runs off with the money.
Accessing Data Leaked on the Dark Web – Underneath the billions of web pages indexed by the search engines, there are billions more that are only accessible if you know how to find them. Fraudsters have become adept at searching the Dark Web, or DarkNet, to find information they can use in identity theft, account hacking, application fraud, and other types of unsecured personal lending fraud. They use a networking technology known as Tor that allows them to use the Dark Web and search for the information they are looking for anonymously.
Types of Unsecured Personal Loan Asset Theft
Asset theft takes place when an individual or institution steals money or other valuables in the process of borrowing money. Some of the common ways this is done are listed below.
Bankruptcy Fraud – When individuals file for bankruptcy, they may apply for a loan to pay off debtors and to protect certain personal assets allowed protection under the law. Bankruptcy fraud involves the hiding of assets or income or non-disclosure of certain assets or income that might cause the lending institution to deny the loan.
Wire Intercept – Similar to account hacking, wire intercepts allow fraudsters a high-tech way to re-route money transfers from their original destination into their own bank accounts. This type of fraud has become more prevalent in recent years and often involves intercepting loan funds and re-routing them to offshore or foreign bank accounts.
Account Takeover – An account takeover is a more sophisticated form of hacking that involves the added step of shutting an individual out of their own bank accounts.
P2P Money Transfers – The rise of crowdfunding, marketplace lending, and peer-to-peer (P2P) networks have allowed individuals to transfer money instantly from one party to another through mobile apps without the need for an intermediary. The problem is, these apps can often be unsecured or easily hacked by fraudsters seeking information to steal, exploit, or to use wire intercept and account takeover techniques to access borrower or lender funds.
Mule Herding – In the underground economy, fraudsters may seek out what are known as mules. These are individuals who will do the dirty work for the fraudster then send the cash to the fraudster through Western Union or other channels. They are usually found through the Dark Web and may be involved in fraud at any number of levels including information retrieval, application fraud, data breach services, and hands-on theft and delivery of assets.
In the digital age, fraud prevention is not simply the responsibility of individuals who may fall victim to fraud. It’s also the responsibility of the lending institutions whose reputations and assets may be on the line, as well. Data and information security is becoming more important daily for the protection of the entire unsecured personal lending industry. A few companies we covered previously which provide services that can help with anti-fraud solutions are and
News Comments A reminder that we brought back the links to the articles in the News Comments. An easy click away to scroll to read more details. International The monthly p2p volumes for platforms focused on the UK and Europe mostly. Growth continues for small platforms. Large platforms see a mixed bag with some reduction […]
A reminder that we brought back the links to the articles in the News Comments. An easy click away to scroll to read more details.
The monthly p2p volumes for platforms focused on the UK and Europe mostly. Growth continues for small platforms. Large platforms see a mixed bag with some reduction in volumes for RateSetter and Funding Circle and small growth for Zopa. While some platforms show great growth ( Saving Stream, Lend Invest, Assetz Capital), previously published data in this report was unreliable (May volume for LendInvest notably was off by a lot per the platform). It is, therefore, unclear if one can rely completely on the data in this report.
For our quant readers, a unique view on how to use modern portfolio theory to pick Lending Club loans. “With the variance and covariance numbers, when faced with several potential new loans to invest in, we can add prospective loans to the portfolio, analyze how the standard deviation (σσ) and Expected Return (E(r)E(r)) change, and decide which loans to invest in based on a desired risk/return profile.” A good walk through with functional description on how to reproduce the results.
Renaud Laplanche is selling for $20mil of LC stock. This probably means that he will not bid for a Lending Club take over. If I were him I wouldn’t sell the whole $20mil now unless I had an emergency need for capital. It is unlikely for the stock to go much lower than where it is now.
U.S. VC firms raise $8.8bil in Q2 2016. 37% down from record Q1 2016, and a very solid sum overall. The largest Q2 21016 fund came from Andreessen Horowitz ($1.5 billion), while Liberty Mutual Strategic Ventures raised the largest first-time fund ($150m). Andreessen Horowitz will need to find some new unicorns to invest in.
It was called Peer-to-Peer Lending. The idea was to circumvent banks, the inefficient too-big-to-fail organizations that grew fat after centuries of undeserved profits, and create a market without any intermediates, where borrowers would be matched directly with lenders. Of course, such a market would be, by itself, an intermediary. But at least there was hope that the Internet, that great crusher of incumbent businesses, would eliminate as many middlemen as possible.
Peer-to-peer lending appeared on US shores in the form of Prosper Marketplace in 2006, followed by Lending Club one year later. Prosper started as a flexible market, allowing people with not-so-stellar credit to borrow at interest rates determined by the lenders themselves. It turned out to be a disaster: people simply don’t know at which rate they should lend their own money, especially to risky borrowers.
Lending Club focused on the social aspect, building a platform to lend through Facebook. The results were also disastrous: as those of us who have ever lent money to a friend in need painfully know, lending works better between strangers and when following strict rules.
In response, these marketplaces took on a necessary larger role: determining interest rates, distributing loans, and attracting borrowers and lenders. It turns out that lending money also requires tons of extra work for regulatory and technical reasons.: credit score agencies to determine the risk of a given borrower, collection agencies to try to recover funds when a borrower walks away, a qualified custodian to hold assets and cash, and even a bank to issue the loan itself.
From the investor point of view, lending money is by itself complex and time-consuming, which means investment advisors are also needed, sooner or later. So much for building a credit market without intermediaries.
While this newer system was being built, Wall Street smelled money. The bankers and financiers and hedge fund managers came in, bringing along tons of funding that fueled amazing growth and increased obfuscation. Gone were the days of ‘Napster for finance’, it was now ‘marketplace lending’, and most of the loans were no longer funded by ordinary people but from institutional deals made behind closed doors.
Eager to make another pretty dime, institutions brought ‘securitization’ to the table. For those unaware of what securitization is, it is the art of putting a lot of small stuff in an opaque bag, then convincing potential buyers that everything inside is good and it’s not worth opening the bag to check. Unfortunately, sooner or later someone realizes that profits can be increased by sneaking in a few rotten potatoes. And then a few more,… until ultimately there’s not one single good vegetable left in the bag. Hello 2008.
At the root of all financial evil is opacity. It allows unscrupulous people to disguise Ponzi scheme as wondrous investments, and money managers to discreetly sweep away unsavory results. In most cases, it simply entices decent people to be a tad more lax than they should be. Opacity used to be a by-product of all transactions happening with the same institution, usually a bank. Lending money is a risky endeavor, and banks are here to make it theoretically safer through careful diversification and crafty financial setups. In the process, banks hide the risk from ordinary people’s eyes.
But the increasing digitization has driven down transaction costs to the point where they are essentially free and instantaneous. It is no longer necessary to opaquely keep the entire loan process in house, since splitting work between different entities doesn’t cost additional time or money. This makes the whole operation more more trustworthy and resilient.
More trustworthy, because the more participants, the harder it is to keep anything a secret.
More resilient, because even if one piece fails, the system as a whole can keep working.
Here’s how Peer Lending 2.0 could work: a company functions as a marketplace to attract borrowers and capture their personal information. The marketplace is also responsible for scoring borrowers through credit scoring agencies and listing the loans. A custodian would be responsible for holding investors’ money. Investment Advisors are delegated by investors, individual or institutions, to decide which loans to fund. When enough money is committed, the custodian asks a bank to issue the loans, wire the money from the investors, then pays the marketplace for ‘origination fees’. The loan itself would stay at the bank during its duration, which is needed in the process anyhow, and would be services by the usual loan services. The marketplace and the custodian would not be able to package loans and sell them wholesale to a third party. At no time would the advisor be able to talk directly to the marketplace, or withdraw money from the custodian, except for its management fees. At last, each transaction between all these entities would require a time-stamped signature, blockchain-like, to prevent any further tampering, and signature ledgers would be made publicly available at all time (privacy would be maintained through anonymous IDs)
Such a system would be more transparent and safer for investors. It would not cost marginally more to operate, and would be easier to regulate. Maybe we should call it ‘Super-Intermediated Lending’.
Once the headlines and hysteria die down, investors will realize that Lending Club and other marketplace lenders have merely been doing what they were set up to do. They provide a market for loans. And the performance of that market is a reflection of loan supply and investor demand. Marketplace lenders don’t resemble the risky lenders of the mortgage boom-and-bust period, as some commentators have suggested. The turmoil in marketplace lending is not necessarily the result of deteriorating quality in the underlying loans.
The culprit instead has been a misalignment of incentives. When a marketplace lender has more investors than borrowers, rates fall to entice more borrowers and investor returns suffer. Conversely, when a marketplace lender has too many borrowers and not enough investors, rates rise to attract more investors. This basic incentive to make a market has created yield uncertainty, something fixed-income investors inherently abhor.
Correcting this will require a realignment of the incentives between investors and lenders. High investor demand shouldn’t hurt returns enough to upend the market, nor should low demand upend the loan pricing structure. Capital moving into nonbank loans is going to have to do so in a way that ensures lenders have no incentive to make bad loans and less need to move interest rates based on the supply of investor capital.
There are two primary mechanisms that investors can use to achieve incentive alignment with lenders. The first is by including a service fee rebate provision in loan purchase agreements. When investors purchase loans from nonbank lenders, they typically pay servicing fees to the lender. Including a rebate provision in these agreements ensures that if a lender’s overall monthly return is below a set rate, the investor gets back some of this servicing fee. This would reduce the lender’s incentive to make bad loans or artificially set a lower interest rate.
The second mechanism involves the investors providing a loan facility, such as a single-purpose vehicle, in which the lender still owns the loans. In this model, the underlying assets serve as collateral and the investor has no direct equity interest in the loan. The investor lends to the SPV at a fixed rate of return, and the lender guarantees the facility with equity and a corporate guarantee. This means the investor earns a fixed coupon. But with the lender retaining some of the credit risk, and standing in a “first loss” position, it further aligns the incentives between the two parties. This is similar to how some marketplace lending was financed early on, and is the traditional structure that banks use in asset-backed lending.
Whichever mechanism investors choose in order to align incentives, marketplace lenders will increasingly have to have more skin in the game, while investors should hold firm and accept that the online lending industry is changing and adapting, like any maturing industry. No matter how they are funded, they will have to accept that over the long term they will need to act less like brokers, and more like lenders.
In a previous article, we conducted a preliminary investigation of applying Modern Portfolio Theory to Lending Club. We assumed that each loan grade on Lending Club (AA through GG) corresponded to an asset class, calculated variances (σ2iσi2) and covariances (σ2i,jσi,j2) of each asset class , and constructed an efficient frontier for Lending Club portfolios. While this constituted a useful exercise in theory, the results were not applicable for an individual investor because combining all AA grade loans into a single AA grade asset class is only achievable if one owned all AA grade loans. Realistically, this is something no individual investor would be able to achieve. This time we aim to find variances and covariances at the individual loan level, which allows us to calculate the variance of a portfolio by treating each loan in the portfolio as an asset.
With the variance and covariance numbers, when faced with several potential new loans to invest in, we can add prospective loans to the portfolio, analyze how the standard deviation (σσ) and Expected Return (E(r)E(r)) change, and decide which loans to invest in based on a desired risk/return profile.
As in our first diversification article, we take our calculated Expected Return at each month as the return you could get for buying/selling your loan at that month on the secondary market.
Loans of the same grade and term are assumed to have the same Expected Return, and loans of the same grade, term, and age (or age difference) are assumed to have the same amount of expected variance (covariance).
Methods & Methodologies& Detailed returns
[The interested reader should read this part, but I do not think this is interesting to the majority of our readers.]
We’re near the end of this long read, but here’s why it matters: 1) A conservative portfolio is not necessarily made up of only conservative loan grades; as we saw above, adding an EE grade loan actually reduced the portfolio’s risk more than adding another AA grade loan. 2) When faced with the choice of which loans to invest in, this analysis can be done to choose the loans that best fit the desired risk/return profile of the portfolio.
If our current world of ultra-low interest rates hasn’t already created lots of unusual effects, even lower rates — as predicted recently by Mohamed El-Erian and others — could make for even more unprecedented change. One we see likely is a boom in mobile-first banking.
That’s because as conventional banks find it increasingly difficult to earn a suitable spread on lending money, the costs of maintaining a network of physical branches become more untenable. (Attention city landlords and developers: Watch out too). That in turn will lead them to do the worst things possible for their longer term competitive positions, which is offering APYs significantly lower than online-only banks (the national savings APY now stands at a paltry 0.18%) and resurrecting ‘gotcha’ and overdraft fees.
Those fees, amazingly, are on the upswing even though nothing turns off younger consumers more than being nickel-and-dimed by a bank. We don’t believe we’re alone in our assessment that mobile-first platforms are ready for their moment. Look for large fintechs like SoFi and well-funded upstarts like Almond to soon join the ranks of digital banks.
Also, look for more financial heavyweights to get involved as our “inconceivable” interest rate environment tempts more consumers to pull the ripcord out from their brick and mortar banks. Because while some physical branches will continue to be necessary for certain activities, we think the time has come for a sea change. And retail banks sitting on millions of square feet of real estate can thank the yield curve for dramatically adding to their troubles.
The House Financial Services Committee, Subcommittee on Financial Institutions and Consumer Credit, has scheduled a hearing on the marketplace lending sector of online lending. Entitled, Examing the Opportunities and Challenges with Financial Technology (Fintech): The Development of Online Marketplace Lending,” the meeting will take place on Capitol Hill on Tuesday, July 12th, commencing at 2PM. Typically these meetings are live streamed on the HFS website.
The hearing will see the participation of the following witnesses:
Parris Sanz, Chief Legal Officer, CAN Capital, on behalf of the Electronic Transactions
Sachin Adarkar, General Counsel, Prosper Marketplace
Rob Nichols, CEO, American Bankers Association
Bimal Patel, Partner, O’Melveny & Myer
The hearing notice states that within the Fintech industry, marketplace lenders us algorithms to provide affordable and broad access to credit. During the past year, multiple regulatory agencies have expressed interest in the online lending sector “to better understand the opportunities it presents and examine the existing regulatory structure.”
The hearing is expected to help Committee members better understand this sector of Fintech.
U.S. venture capital firms raised $8.8 billion for 67 funds in Q2 2016, according to a new report from Thomson Reuters and the NVCA. That’s a 37% dollar dip from the blockbuster first quarter of 2016 — when more money was raised than in any other single quarter since Q2 2006 — but still a pretty heady figure. The largest Q2 21016 fund came from Andreessen Horowitz ($1.5 billion), while Liberty Mutual Strategic Ventures raised the largest first-time fund ($150m).
We announced to the Vouch team after failing to raise Series B that our last effort to sell the company to a strategic buyer had fallen through. Their “go/no go” decision timing was right on the heels of the Lending Club bombshells and the news from Prosper and Avant that “all was not sunshine and unicorns” in the online lending world. We had no time to try again or to find another partner. We were out of cash.
Vouch was born in late 2013. I felt grateful to be among the cofounders. I started Vouch to make a difference. To help people who were underserved. To try to find a way to sift out those borrowers who don’t get a fair shake in the credit world but who deserve one, by asking those who know them best – their friends and family – to Vouch for them.
Envestnet | Yodlee is the primary financial data source Kabbage uses to review and run financials, in order to evaluate and enable instant underwriting for a line of credit or a financial products customer. Kabbage started out using Yodlee Aggregation API and then added the Account Verification API. The results were dramatic. Real-time tracking, instant verification and end-to-end automation are part of the Kabbage success story.
The UK’s financial watchdog is probing the £2.7bn crowdfunding sector for the second time in two years, following widespread calls for tougher regulation of so-called “alternative finance” providers.
On Friday, the Financial Conduct Authority said it would scrutinise the burgeoning sector to find out if consumers who lend and invest money on peer-to-peer and similar crowdfunding platforms understood the risks they were taking — especially as the industry attracts more “retail investors who are less experienced or knowledgeable”.
According to the regulator, one of the systemic risks posed by P2P platforms is a “maturity mismatch”: between the three-to-five-year terms of the loans people make, and the promise to return their cash within 30 days if needed.
P2P lending and crowdfunding became subject to FCA regulation in 2014 and Friday’s announcement — of a post-implementation review of the rules — follows growing political pressure for more scrutiny.
P2P and crowdfunding platforms gave news of the FCA’s review a cautious welcome. Their trade body, the Peer-to-Peer Finance Association, said it created “an opportunity to ensure an appropriate balance of regulation protecting investors and borrowers, without stifling innovation and competition”.
However, the FCA views crowdfunding and P2P platforms as interchangeable, even though many in the industry argue differently, often claiming that P2P involves lending while crowdfunding is an equity investment. Instead, the regulator deems P2P “loan-based crowdfunding”, arguing that it increasingly involves pooled credit risk, where a number of investors lend to one borrower.
In its paper published on Friday, the FCA detailed a range of risks for UK investors using P2P or crowdfunding platforms. These included the “pooling of credit risk” whereby all investors become vulnerable to defaults by borrowers they did not wish to be exposed to.
The FCA expressed concern that P2P financial promotions have cropped up which are not compliant with their financial promotion rules across all types of media citing specifically statements that compare P2P to bank savings accounts.
The FCA document is a thoughtful presentation of questions that need to be answered by industry incumbents. The deadline for feedback is September 8, 2016.
FCA Questions on Crowdfunding
Q1: Do you consider that there is the potential for regulatory arbitrage with banking business? If so, what measures should be considered to address it?
Q2: Do you have any concerns about, or evidence of, differences in the treatment between retail and institutional investors?
Q3: Have you seen any initial evidence that the ISA wrapper has led to consumers not fully appreciating the risks involved in Innovative Finance ISA investments?
Q4: Are there differences in borrower protection between commercial and non-commercial agreements that would be best addressed by applying additional rules to P2P platforms, or are the existing rules adequate?
Q5: Do you agree with our analysis of the key developments in the loan-based crowdfunding sector over the last two years?
Q6: Are you aware of current or emerging risks that firms current infrastructure, systems, and controls might not be adequate to deal with?
Q7: Do you have any comments on our concerns over the development of new loan-based crowdfunding business models? Have there been other specific developments that are relevant to the high-level standards summarized above?
Q8: Do you have any comments on the standards of disclosure on loan-based crowdfunding platforms?
Q9: Are our current financial promotion rules for loan-based crowdfunding promotions proportionate? If not, can you please provide examples?
Q10: Is our approach to online and social media promotions proportionate? Do you have any suggestions as to how to improve our rules or approach on promotions?
Q11: Should we require loan-based crowdfunding platforms to assess investor knowledge or experience of the risks involved? What would a proportionate requirement look like?
Q12: What effect do you think loan-based crowdfunding has had on competition in lending and investment/savings markets?
Q13: Where do you think regulations could be amended
to increase confidence in loan-based crowdfunding markets, encourage the development of the markets in the interest of consumers or increase competition by removing uneven playing fields?
Q14: Do you have any comments on the resolution plans of firms operating loan-based crowdfunding platforms?
Q15: Are there any other matters we should take into account in the post-implementation review of loan-based crowdfunding?
Q16: What other market developments should we take into account in our review of the investment-based crowdfunding sector?
Q17: Do you have any comments on the management of conflicts of interest on investment-based crowdfunding platforms?
Q18: Do you have any comments on current due diligence standards for investment-based crowdfunding platforms?
Q19: What do you think of the current client assessment standards on investment-based crowdfunding platforms?
Q20: What do you think of the current standards of information disclosure on investment-based crowdfunding platforms?
Q21: Should we mandate the disclosure of risk warnings in relation to non-readily realizable securities held within Innovative Finance ISAs?
Q22: Are there any other matters we should take into account in the post-implementation review for investment-based crowdfunding?
Lendico, the online crowdlending marketplace which operates internationally, is moving into the corporate credit market in Switzerland. It is making this step in collaboration with the Swiss PostFinance, which will be a joint venture partner in Lendico Schweiz AG.
With a balance sheet total of more than 119 billion Swiss francs PostFinance is among the five largest Swiss banks and the market leader regarding payment transactions.
Together the partners would like to establish a new form of SME financing in Switzerland. The aim of the joint venture is to provide the numerous Swiss SMEs with a modern alternative to traditional bank financing. The two partners are contributing their complementary expertise in customer contact and the entire lending and repayment process to the joint venture.
As a marketplace for private and corporate credit which operates internationally, Lendico brings borrowers and investors into direct contact. The company, founded in 2013 by Rocket Internet in Berlin, operates in eight countries worldwide, including the newly-launched venture in Switzerland. It was originally established purely as a credit marketplace for private individuals, but in 2015 it expanded its services to include corporate credit. In the past few years, Lendico has increasingly developed into an established alternative to bank financing and has already been dubbed the best credit marketplace several times.
PostFinance is one of Switzerland’s leading financial institutions and, as the market leader in payment transactions, ensures a seamless daily flow of liquidity. Whether dealing with payments, savings, investments, retirement planning or financing, PostFinance meets its customers on their level, speaks their language and offers them straightforward products with attractive conditions. This makes it the ideal partner for everyone who wants to manage their own finances as easily as possible. PostFinance employs around 4,000 staff throughout Switzerland.
The Spanish Securities Exchange Commission (CNMV, Spain’s financial regulator) has authorized MytripleA as a Platform for Participatory Financing, the formal name for a p2p lending platform. This is one of the first actions to implement Law 5/2015 Promotion of Corporate Financing. MytripleA already benefits from a Payment Institution license (which can be passported within the EU) granted by the Bank of Spain, which authorizes MytripleA to make loan disbursements and receive loan instalments within the regulatory environment for banking payments. This is an additional regulatory requirement in Spain, which is not required by other European countries.
French Lendix announced that it received its formal CNMV accreditation to operate as a P2P lending platform in Spain. The Spanish entity will be the first Lendix international market to open. It will target financing of credits to SME, for amounts ranging from 30,000 to 2,000,000 Euro, duration of 18 to 60 months and at interestrates comprises between 5.5% et 12%. Companies presented on the platform will be selected and analyzed by Lendix credit analysis team and will need to generate a turnover of at least €400’000. Non accredited private investors* will be able to lend up to 3,000 Euro per project with a total maximum yearly amount of 10,000 Euro, while no limit will apply to accredited private investors nor institutional investors. The launch of Lendix’s spanish platform is scheduled for Q4 2016.
1. Regulatory sandbox
The regulatory sandbox allows local fintechs to experiment with their new and innovative solutions without the fear of punishment in the case of failure. The current regulations would not apply for a defined period and space for this innovation to be implemented.
2. Singapore FinTech Festival
Innovation is the fusion of different ideas and discipline. Nothing is better at nurturing innovation than to bring a large group of innovators together. The inaugural fintech Singapore festival would last from 14-18 November 2016.
3. Fintech office
The fintech office brings together multiple government agencies in Singapore. The fintech office will be led by MAS and the National Research Foundation. Other agencies would include the Economic Development Board, Infocomm Investments Pte Ltd, Info-communication Media Development Authority, and SPRING Singapore.
4. Lower requirements for securities crowdfunding
MAS had removed the need to issue prospectus for SMEs that are seeking to raise small amount of capital that is below $5 million within 12 months. Investors will still have to be informed of the risks involved and need to provide their written undertaking.
For securities crowdfunding platform, they do not have to provide a $100,000 deposit and their minimum base capital requirement will be reduced from $250,000 to $50,000. Besides these concessions, the Securities and Futures Act would apply. All these changes are meant to encourage the formation of more securities crowdfunding platform.
5. Australian collaboration
The mature equity market in Australia made it the ideal platform for fintech listing. For instance, home-grown property crowdfunding site CoAssets was listed on the National Stock Exchange of Australia last year. – See more at:
When ? Monday, August 15, 2016 5:30 PM to 8:30 PM Where ? Pepper Hamilton LLP at The New York Times Building 37th floor, 620 Eighth Avenue, New York, NY Details The supreme court decision not to hear Madden vs Midland: · National Bank Act (NBA) vs · What does this mean for securitization for […]
Monday, August 15, 2016
5:30 PM to 8:30 PM
Pepper Hamilton LLP at The New York Times Building
37th floor, 620 Eighth Avenue, New York, NY
The supreme court decision not to hear Madden vs Midland:
· National Bank Act (NBA) vs
· What does this mean for securitization for Marketplace Lenders ?
· What does this mean for Marketplace Lenders ?
· What are the next steps expected in Madden vs Midland ?
· How does this affect regions outside of New York, Vermont and Connecticut ?
· Effect on borrowers in New York, Vermont and Connecticut ?
· What about Bethune v. LendingClub, WebBank et al. ? (true lender case and test of the platforms’ mandatory arbitration clauses contained in every consumer loan agreement)
The future of Market Place Lending – Madden and beyond
Monday, Aug 15, 2016, 5:30 PM
Pepper Hamilton LLP at The New York Times Building 37th floor, 620 Eighth Avenue New York, NY
51 Executives Attending
PresentsMarketplace Lending after Madden vs Midland and related problems (true lender, mandatory arbitration,etc. )————–AgendaThe supreme court decision not to hear Madden vs Midland:· National Bank Act (NBA) vs· What does this mean for securitization for Marketplace Lenders ?· What does this mean for Marketplace Lenders ?· What ar…
Dear readers, This past week, despite a lot of people being on vacation, had important news that may affect us for the years to come: 1. According to the bond market yield curve and a Deutsche Bank model, there is 60% chance of recession. The interesting part is that the equity market, who erased the post […]
This past week, despite a lot of people being on vacation, had important news that may affect us for the years to come:
3. And on the unsecured personal side Morningstar published a report showing that the Non-housing debt is at around $3.5 trillion from $2 trillion in 2004. The report is titled “Please Sir, can you lend me some more ?”. Bad of you if you lend, bad of you if you don’t. On the bright side, default rates are not inching up yet except in sub-prime auto.
This week we also saw Avant planning to lay off 40% of their workforce. One may think this is a negative signal for the company. On the contrary, in my eyes this allows Avant to be profitable and to be ready for whatever the next 12 months throws at the overall market. In Chess, it pays to build a flexible position with many options of attack and defense vs throwing all your pieces on a single make or break attack. Avant is prepared for the worst and if the market turns around it can react fast in the same way we saw the company build $2bil in origination in only 3 years.
On the fundraising side EarnUp, a new fintech type of loan servicing which was bootstrapped so far and already has traction, raised $3mil in a seed round.
News Comments Good news: Paul @ Apollo, David and Matt @ Orchard and Kevin@Sharestates were kind enough to give me some good feedback on Lending Times at the Canaan Fintech Event last evening. They all missed the comment anchor links that take readers to the article I am commenting on. Good news! I have found […]
Good news: Paul @ Apollo, David and Matt @ Orchard and Kevin@Sharestates were kind enough to give me some good feedback on Lending Times at the Canaan Fintech Event last evening. They all missed the comment anchor links that take readers to the article I am commenting on. Good news! I have found an easy and efficient way to make the news comments link directly to the articles as it used to be. And I can do so without spending the 1 hour it used to take. We are testing today this come-back feature, per reader’s unanimous request. We hope it will work well.
The first half of the year has been a surprising reality check for the once-highflying lenders touted by some as the future of banking. For years, the companies grew at a breakneck pace, adding staff and customers tired of dealing with banks that had grown more risk averse since the financial crisis.
Avant Inc. last week became the latest company to reduce its workforce in response to a more muted outlook for the sector. The lender took the unusual step of offering buyouts to all of its 760 employees and in coming weeks will look to lay off staff if necessary to meet its targeted reduction of around 300 positions. Just nine months ago, Avant was poised to expand into auto loans and credit cards as well as into foreign markets such as Australia after securing a $325 million round of venture capital. Now, it is shelving those new initiatives to focus on profitability, which Chief Executive Al Goldstein said should come later this year.
Venture investment into lending startups fell by nearly half in the second quarter to around $250 million from the same period of 2015 after falling around 44% in the first quarter, according to preliminary figures from Dow Jones VentureSource.
Much of the pullback in the industry has centered on companies that offer personal consumer loans, with providers of refinanced student loans less hard-hit. CommonBond and Earnest have announced job cuts of around 10% and less than 5%, respectively, over the past two months, according to the companies.
LendingClub said shareholders shouldn’t expect revenue and profit to resume growth until the first half of 2017 as it looks to spend more on employee retention and incentives for investment funds to ramp up their loan purchases.
Avant meanwhile says its path to profits comes partially from its holding many of the loans on its books, rather than selling the majority to investors, as some competitors like LendingClub do. So even if loan volume slows, that doesn’t hit revenue as quickly because Avant still collects interest on older loans.
The Atlanta-based company had launched Karrot, a consumer lending business in 2014, which while relatively small generated tens of millions of dollars in loans over its history.
But “right now, we are not active with Karrot,” said Rob Frohwein, co-founder and chief executive of Kabbage, adding that it has been largely dormant for the past three to four months.
Instead of an in-house effort, Kabbage will be working as soon as next year on consumer lending portals for two foreign banks, Mr. Frohwein said.
Overall, loans originated by Kabbage in the first half of this year rose 60% over the volume in the same period of 2015, said Mr. Frohwein. The pace of growth however has slowed. In 2015, Kabbage originated about $900 million in loans, more than twice the approximately $400 million in 2014. Rival On Deck Capital loaned more than $1.9 billion, by comparison.
Kabbage’s cost of capital has also gone up — by about 1.0 to 1.5 percentage points. In recent months, Kabbage has absorbed those rising costs, without passing them along in price increases to borrowers, Mr. Frohwein said.
Founded in 2008, Kabbage has raised about $240 million from firms like BlueRun Ventures, Lumia Capital, SoftBank Capital, and UPS Strategic Enterprise Fund. It was valued late last year at $1 billion and has raised more than $1 billion in debt capital to date.
Still, the company is continuing to hire, adding 75 people this year for a total of about 350.
The company is beefing up the ranks of people working on its software product that it licenses to banks, where demand is continuing, and is hiring less for its direct lending business. It already has deals with Spain’s Banco Santanader SA and Canada’s Scotiabank.
Kabbage is continuing to spend on marketing through radio, TV, direct mail, digital media and through about 300 distribution relationships, Mr. Frohwein said. As long as the cost to acquire new borrowers is staying flat or declining, the company should continue investing, Mr. Frohwein said.
“In the last two months, we’ve been approached on eight potential acquisitions,” Mr. Frohwein said. He said he doesn’t expect to do such a deal because they cost more than acquiring customers directly.
John Donovan, co-founder and former executive of Lending Club, gives investors a peek behind the curtain of today’s marketplace lenders.
When a person with a credit card balance applies, let’s say they have an interest rate of 17%, which appears to be the average rate, they go and apply on a platform, they instantly get an offer at 15%. Typically it’s got to be 200 basis points lower for somebody to move their balance, but they say, “Hey, you know what, this makes sense.” The product is very different in that it’s an installment loan. They’re going to pay 36 to 60 months, the exact same amount.
It’s going to be automatically pulled from their bank account. These are very consumer-friendly, very responsible methods of credit that help consumers get out of debt.
The person comes in and applies, and basically, the credit bureau data and other data is pulled and they’re approved. In addition, there’s a bunch of third-party data that’s looked at, because it’s monochannel, because basically it’s an online application. It can be done much more efficiently than the banks do it, supporting credit card — because that may come in based on a written application, it may come in online, it may come in through the telephone. Typically if you go to your bank branch and you apply, they’re going to say, “Hey, call this number to go through.” Because it’s monochannel, it tends to be more efficiently managed.
There’s also a lot more data, so when a person’s coming in and applying on their computer, from an antifraud standpoint, marketplace lenders can go in and say, “Okay, hey, John’s applying for a loan. His credit passes, the IP address on his computer says Chicago but we can see on his LinkedIn profile that he works in San Francisco. Hmm, might this be fraud?
If you look at the process, let’s say 85% of applicants are declined automatically, and there is no human intervention. What’s interesting is, from a regulatory standpoint, when these platforms go through audits, the regulators are used to going into the banks and saying, “Hey, let me see your overrides. Let me see where a manager might have said, ‘You know what, I know Phil, he lives down the street from me. I’m going to sign and give him this loan.'” That’s kind of ripe for issues of, who are the types of people that you’re doing overrides for? It raises a lot of other issues. That doesn’t exist in marketplace lending; from that standpoint, the 85% of people who don’t meet credit requirements are declined automatically.
At that point, you end up with, let’s say, 15%, and there you’re going in and saying, “Hey, do we need to do additional income verification? Do we need to do employment verification, do we want to get this person on the phone and make a phone call?” What are the other types of verification that are necessary? It’s interesting, as I read a lot of things, people say, “You should verify 100%.” Guess what: The banks don’t do much income verification at all from the standpoint of credit card applications.
A person comes in, applies, they get approved; there’s a decision whether they’re going to income-verify, employment-verify, whatever that might be. The loan gets listed. At the same time, on the other side of it, these platforms started purely as individuals funding other individuals. You’ve got an investor who comes in, who’s signed up, who’s put money on the platform, and they’re choosing to allocate funds to a given loan. You basically have those two parties where the loan gets funded, and then it gets issued by a bank — so in the instance of Lending Club and Prosper, that’s WebBank — WebBank issues a loan. A couple days later, they sell it to Lending Club or Prosper to service, so that’s effectively how it ends up the model and how it ends up working.
The Fed just put up new revolving credit data. We’re talking about record levels of revolving debt, so they expect that to go over a trillion dollars this quarter. I worked at MasterCard for much of my career: 17 years. When I started there, there were 50 banks that represented less than half of all the credit debt in the United States, the revolving debt. Right now there’s five banks that represent more than half. Effectively it becomes an oligopoly, and this is a new form of competition. I don’t think you’re going to see consumers aren’t borrowing; they are. They’re certainly looking for more responsible ways of paying that back, and whether it’s the solution or something else, there will be something.
From a borrowing standpoint, all the research shows borrowers make decisions based on rate, how quickly they get the money, convenience, and maybe No. 4 is brand. I don’t think this’ll impact borrower demand or borrowers’ willingness to borrow money.
What I thought was really interesting is, I read the press release in the BancAlliance one. They ask the CEO of BancAlliance, was he going to continue the program? He said, “You know it’s on hold for…” Sorry, was he going to do it himself? He said, “Unfortunately, we can’t afford to do it ourselves, because we can’t bring the efficiencies that we need.” What he’s basically saying is: He can either bring a great product to his community and regional bank customers, through a partnership with a marketplace lender, or he can’t do it. It isn’t a choice of him doing it himself, because he just doesn’t have the efficiencies or the capabilities to drive that type of website and functionality.
I think if you look at data that’s been released by others in terms of the last downturn, in general prime consumers — the No. 1 reason why people end up defaulting is loss of job. I think after that is divorce and medical, I’m not sure which order those two are in. By far it’s loss of job. You’ve got a down economic time, people lose their jobs. It tends to happen, believe it or not, by FICOs. When you’ve got your best FICOs that might be carrying a 10-basis-point loss, it might double to 20 basis points. That’s not going to really hurt overall returns. You get down into, I think the average FICO on most of these platforms is about 700. You get into the 700 range, and let’s say it’s 4% and that’s going to go up to 7%. You’ll still have positive returns for investors, it’s certainly not going to be as high as they have in the past. You get into subprime, where losses might now be 12%, and if those double and go up to 24% or even higher, that’s why I think there are more significant issues.
It tends to be, in consumer credit at least, one of, are you talking about prime, near-prime, or subprime? Tough economic times tend to hit subprime first and foremost.
“To restore a high degree of confidence from investors in marketplace lending, some kind of independent data repository is essential,” said Cormac Leech, founder and director of Liberum Alternative Finance, the fintech incubator subsidiary of the London and New York-based investment bank Liberum (it’s a Latin word meaning “freedom of expression”).
Without central data repositories and third-party validations, he said, you’re relying on the platforms to do what they’re supposed to be doing.
A Swedish peer-to-peer lending company, ironically called TrustBuddy, declared bankruptcy in October, after management revealed that millions were missing from client accounts.
Marketplace lenders could also subsidize existing investors’ not-so-good returns with new investors’ money, the way Bernie Madoff did in his early days, Leech theorized.
There’s also the practice of “stacking” in which borrowers obtain loans from multiple online lenders at the same time, slipping through their automated systems due to hasty algorithmic underwriting and patchy reporting of the resulting loans to credit bureaus. This can result in marketplace lenders making loans without the full picture of the borrowers’ obligations and deteriorating ability to pay.
And then there’s the potential for fraudulently changing loan information, as Lending Club allegedly did to make its aging loans appear fresh. An internal investigation found that Lending Club falsified the documentation on a package of loans worth $22 million.
“Napster failed, but it changed the way consumers expect to access music and effectively killed off the physical retail music business. When was the last time you walked into Tower Records to buy an album?”
Marketplace lenders have played their part in evolving financial services.
The Supreme Court’s late-June announcement that it would not review the U.S. Court of Appeals Second Circuit decision in Madden v. Midland Fundingmeans that, for the time being, online lenders will have to manage state-by-state usury caps. But the decision hasn’t torpedoed marketplace lenders.
The CEO of one online lending company, speaking on condition of anonymity, says he is confident after reading the Solicitor General’s opinion that the Second Circuit decision was so horribly decided that it eventually will be overturned—and in the meantime, it’s no big deal.
“The Second Circuit decision applies only to three states and only to cases where the interest rate exceeds the state’s usury cap,” the executive says.
“So what do you do if you’re a lender selling loans to non-banks at this time in those three states?” the executive continued. “One: Don’t make loans above the usury rate. Two: Restructure your arrangement with the originating bank to address the criteria that the decision laid out; Three: Opt to restructure.”
For some online lenders, Madden doesn’t apply because of their customer base.
“The clients we work with are all banks, so it’s irrelevant to us,” says Brian Graham, CEO of Alliance Partners, the umbrella of the BancAlliance consortium.
At a price near book value, the stock gives very little credit for ONDK’s massive runway for growth in its core business.
Moreover, it provides investors free options on value creation in other areas.
These options include its OnDeck as a Service business, expansion in international markets, and new product offerings.
ONDK’s emerging “ODaas” initiative is an outsourced technology offering that enables partners (banks and other large lending institutions) to leverage ONDK’s underwriting capabilities and expertise in technology, data, and analytics. The initiative has the potential to become a large, profitable, and complementary business for ONDK over time.
At a 15X multiple, ODaaS alone would be worth $17.61 per ONDK share, more than triple the current price.
Until recently, ONDK has been seen as a primarily US growth story. The TAM figures most analysts use (and this article itself cites) refer to the market for SMB loans solely in the US. However, there is nothing to say the company’s success should stop domestically. ONDK recently launched operations in Canada and Australia, which should become meaningful growth drivers in the coming few years. ONDK began making loans in Canada in the summer of 2014 and the early growth there has been remarkable. Originations were up 117% YoY in Q1 2016 (according to the quarterly call).
Lending Works, the peer-to-peer lender, has received £2m in growth funding from Newcastle-based NVM Private Equity as it continues on its growth trajectory. The Farringdon-based firm will use the funding to build additional loan distribution channels, grow its team and invest in its platform as it looks to capitalise on the rapidly growing P2P lending market, which is predicted to grow to around £4.3bn this year.
“We’re expecting to launch our new IFISA imminently, which will allow lenders to earn tax-free returns through our platform.”
The Financial Conduct Authority has expressed concern that the Innovative Finance Isa might be encouraging people who don’t understand crowdfunding to put their money into it.
The regulator published a call for input as part of its post-implementation review of the rules for the regulation of crowdfunding platforms introduced in 2014.
“There is anecdotal evidence that suggests P2P investors in the past were relatively wealthy or knowledgeable,” it continued.
“The availability of P2P investment through Isas and pensions, or at retirement using money released from pensions, may create a change in the investor base toward retail investors who are less experienced or knowledgeable, who trust the Isa ‘brand’, and who may not fully appreciate the risks involved.”
The current rules for investment-based crowdfunding requires firms to assess whether prospective investors have the knowledge or experience to understand the risks involved, and to check whether investors meet certain criteria before being able to invest money.
The FCA has said it might apply the same approach for loan-based crowdfunding.
“We are aware some P2P platforms are considering moving into residential secured lending,” the paper stated.
“The business models of such operations might have the effect that there is no one responsible for the regulated lending activity, bypassing Mortgage and Home Finance: Conduct of Business Sourcebook affordability requirements and other lending responsibilities.
Comment: just a rehash of the general view on Brexit, in case you have been under a stone for the last 2 weeks.
PASSPORTING: ‘This banking licence could be valid across 500 million people or 60 million people. We don’t know.’
INVESTMENT: ‘We need to ask is how much new money will be coming in’
TALENT: ‘It’s a slap in the face’
LONDON AS A HUB: ‘We had a gem here and I think we’ve just smashed it up’
Wintermeyer agrees: “We’ve spoken to all the hubs. The reality is that the UK fintech hub on the back of the UK financial infrastructure, that’s taken years to build. It’s pretty difficult to see a European hub popping up that’s going to replace London in a short period of time. I’m sure they’ll try.”
It’s only available to customers and has had little fanfare, but PayPal has quietly written $85 million of small business loans in less than two years. According to figures released by the payments giant, PayPal Working Capital has extended more than $85m to about 3000 small businesses since launching in Australia in late 2014.
In contrast, Prospa — the biggest “fintech” online small business lender — in May revealed it had cracked the $150m mark after four years of operations.
SocietyOne, the biggest “marketplace” lender, which has also been in business for four years, pushed through $100m personal loans in April.
PayPal’s product is also different, with the unsecured loan of up to $97,000 being offered only to merchants that use its payments network, so borrowed funds can be instantly distributed following a five-minute application.
There’s a one-off upfront fee and repayments come out of daily sales, typically between 10 per cent and 30 per cent of turnover.
Interest rates are typically in the “teens and 20 per cent” range, differing based on merchants’ repayment choices and risk.
Including the US and Britain, PayPal Working Capital recently surpassed $US2 billion ($2.6bn) in loans. According to accounts filed with the corporate regulator for the year to December 31, PayPal Credit increased profit almost fourfold to $120,143 on $3.7m of revenue. But Mr Esch said profits weren’t the main motivation, citing how providing customers with more capital — typically for inventory — boosted sales and loyalty. The most prolific borrowers from PayPal in Australia include businesses in fashion, automotive parts, electronics, sports equipment, toys and jewellery.
Summary Marketplace lending securitization volume topped $1.7 billion this quarter, up 14.8% from Q1, with cumulative issuance reaching $10.3 billion. YTD issuance of the sector stands at $3.2 billion as compared to $1.8 billion from the prior year, a 77% increase. Q2 saw a total of 6 deals: 3 are backed by student loans, 2 […]
Marketplace lending securitization volume topped $1.7 billion this quarter, up 14.8% from Q1, with cumulative issuance reaching $10.3 billion. YTD issuance of the sector stands at $3.2 billion as compared to $1.8 billion from the prior year, a 77% increase. Q2 saw a total of 6 deals: 3 are backed by student loans, 2 by unsecured consumer loans, and 1 by SME loans. SoFi issued its first rated unsecured consumer loan deal and received an industry first ever AAA rating from Moody’s on its recent student loan transaction.
MPL securitizations are moving towards rated and larger transactions. The second quarter was the first to have all deals rated by one or more rating agencies. Further, the growth in average deal size continued, the average deal size grew to $267 million in 2016 as compared to $64 million in 2013.
New issuance and secondary spread tightened by quarter end, a good sign for the industry. Across all segments in MPL, Q2 2016 saw moderate spread compression in senior tranches of newly issued deals and widening in junior tranches as compared to Q1 2016.
Numerous factors, including lending platform rate increases, and spread tightening in both primary and secondary markets, look to improve future deal economics. The increase in rates from platforms increases excess spread and improves the economics of securitization for residual holders.
The demand for a higher standard of due diligence, transparency and analytics will be the norm. With the recent Lending Club headlines, ABS investors are demanding greater transparency and validation to enhance trust.
Recent Lending Club news and Brexit shocks notwithstanding, the second quarter saw an overall reduction in credit market volatility. The implied at-the-money volatilities on 3-month CDX IG and HY options have not changed significantly. On-the-run HY CDX traded range bound between 410 to 480 basis points and retracted back to low mid-400’s, similar to levels seen at the end of Q1. With this slightly lower volatility, new issuance spreads in MPL securitizations tightened in the senior debt structure, while junior tranches have widened out in Q2.
Further, the second quarter continued the gradual thaw in MPL securitization we observed in late February and March. Six deals priced, totaling $1.7 billion, representing steady growth of 14.8% from the last quarter. Year to date issuance stands at $3.2 billion, as compared to $1.8 billion for the first half of 2015. This growth now brings the total size of MPL securitization issuance volume to date to $10.3 billion.
The market continued to move towards larger deals with repeated issuers. All of the size deals issued in this quarter were rated by one or more rating agencies.
Definitions and Inclusion Rules
Our Tracker includes all transactions derived from Marketplace Lending platform, which we define as including both:
Online and other novel technologies to increase operational efficiency, risk accuracy, and borrower experience, and
Non-deposit funding for lending capital.
We appreciate rapid innovation in lending channels and welcome all comments and consideration on inclusion rules going forward.
I. Quarterly Round-up
The second quarter 2016 saw 6 securitization deals, adding $1.7 billion in new issuance. This represents 77% YoY growth in total issuance year-to-date and 14.8% growth from Q1, further evidence of the rebound from January’s freeze. Indeed, MPL securitization remains a bright spot in the ABS world, with its 77% YoY growth contrasting against at 27% YoY slowdown in non-MPL ABS issuance. Source: SIFMA, Bloomberg, PeerIQ Research.
Total securitization issuance to date now stands at $10.3 billion, with 53 deals issued to date (31 Consumer, 14 Student, and 8 SME) since September 2013.
Reviewing by underlying loan segment, we see that Consumer and Student have almost similar volume issuance, with Consumer slightly ahead with $4.6 billion issued to date, as compared to Student at $4.0 billion. OnDeck’s $250 million issuance is the only Small-Medium Enterprise (SME) deal for the quarter. SME is currently the smallest segment with $1.7 billion total issuance.
There were six new deals in Q2 2016: SCLP 2016-1, SOFI 2016-B, ONDK 2016-1, EARN 2016-B, AVNT 2016-B, and CBSLT 2016-A (Exhibit 3). Of note, SoFi issued its first rated unsecuredconsumer loan deal (SCLP 2016-1), backed by $506 million collateral. The Class A tranche was $380 MM with initial OC of 25% (targeted OC of 31%) and received an A rating by Kroll (Exhibit 4) . The deal was oversubscribed three times with 28 investors indicating interest, and 24 SoFi student loan ABS investors crossing over into the consumer unsecured deal.
While there was no securitization from Citi’s CHAI shelf this quarter, there were several repeat issuers from last quarter. In addition to SoFi, both Earnest and Avant tapped the securitization markets again.
There were also positive ratings activity this quarter. In April, DBRS upgraded SOFI 2014-A A1, SOFI 2014-A A2 and SOFI 2013-A A tranche—all backed by student loans originated by SoFi— from single A to double A. This is a welcome contrast to the 3 downgrade reviews Moody’s placed on several CHAI mezzanine bonds last quarter.
Finally, deals continue to increase in average deal size over time, led again by SoFi’s large placements. The average securitization deal size now stands at $267 million for 2016.
II. MPL Securitization League Table
Citigroup continues to lead the Bookrunner league table with 19% of market share on all deals since inception. Citi has marketed 7 deals for a total of $1.9 billion of new issuance (Exhibit 6). The top 5 book runners captured 75% market share or 34 of 41 deals.
We expect leadership positions to change. Morgan Stanley and Credit Suisse have scaled back the size of their warehouse lending and fixed income desks. We also see increased activity from Deutsche Bank and Goldman Sachs. Although Citi is no longer securitizing Prosper loans, we see Citi co-leading large transactions such as the recent SoFi deal.
III. New Issuance Spreads
New issuance spreads increased only slightly as compared to the prior quarter—though remained significantly wider than those seen in 2015 across the capital stack. Moreover, we saw a continued preference for senior tranches over riskier junior bonds, reflecting lingering concerns in the credit market. As reflected in the Exhibit 7, this overall senior preference leads to a steepening of the overall term structure, with investors demanding higher premiums for riskier tranches—and this remains true across all loan segments.
IV. Commentary on Residual Economics
We often field questions from investors on the economics of residual tranches in securitizations, particularly as impending risk retention rules require sponsors to hold on-going residual risk. Several recent developments suggest an improving climate for residual holders, including the steady increase in loan interest rates, a return to normalcy in primary market spreads, and a tightening in secondary market spreads. We find that such trends can, in aggregate, increase excess spread by 2-4%, which would make the economics of the equity tranche very attractive.
To explain, we return to first principles. Each securitization matches the weighted-average coupon (WAC) of the collateral on the asset side (i.e. the pooled loans) with the WAC of tranched bonds sold to ABS investors, less various fees and costs of securitization.
The residual holders of each securitization sit in the first-loss position with economics that tie directly to uncertain prepay and default expectations. Accordingly, residual investors require significantly higher yield in return for bearing this risk, which comes in the form of excess spread, or the difference between the inbound collateral WAC and the outbond bond WAC, less fees.
Thus, the higher coupons on the senior bonds observed in Q1 and Q2 in consumer deals increased the outbound bond WAC and thereby reduced excess spread. The extremely high bond spreads observed in the maligned CHAI 2016-PM1 transaction last quarter (with a WAC on bonds 300 bps higher than prior deals), put tremendous pressure of Citi’s returns as residual holder. Such an imbalance of return is concerning because without sufficient economics for the first loss position, securitizations will not issue and a major source of MPL funding is at risk of drying up.
Three major trends observed this quarter are correcting this imbalance, which we detail below:
1. Rising Interest Rates Offered by MPL Platforms
One lever to increase excess spread is through higher WAC on the collateral pool, which is what we are seeing across marketplace lenders. As an example, Lending Club has increased rates four times since December 2015. The December increase was in response to the Fed rate hike, the second in response to concerns about a global slowdown, the third relating to increased delinquencies, and the fourth to satisfy investor demand for increased returns.
We summarize the rate changes across grades in Exhibit 8. The average cumulative rate increase was about 194 basis points across all grades. From loan investor’s perspective, higher rates lead to higher cash-on-cash return for similar quality loans. The rate changes also reduce duration risk in investors’ loan book, as cash flow streams became more front-loaded.
2. Normalization in Primary Market
In the second quarter, we saw a return to normalcy in the primary ABS market. CHAI 2016-PM1 remains an outlier, as can be seen from our comparison to SoFi recent consumer loan transaction in June in Exhibit 9. Here we compare SoFi’s A tranche (with accounts to 75% of the transaction) to CHAI A and B tranches (which aggregate to ~75% of the transaction).
We see that, except for CHAI 2016-PM1, the cost of financing of the top 75% of the deal crowded around the same area. For the tranches in 24% to 26% credit subordination, the WAC of the top 75% of the capital structure is around 2% to 3%, whereas CHAI 2016-PM1 is 5%.
There are several reasons why SCLP 2016-1 was better received than CHAI 2016-PM1, including the better credit quality of the collateral, which we detailed in prior publications and newsletters. But the deal does presage the continued normalization of the markets. Should this trend continue, residual holders of well-executed securitizations will protect their excess spread.
3. Spreads Tightening in Secondary Market
The May 9th Lending Club news and disclosures have led many to ask us how MPL bonds are now trading. While secondary ABS trading volume remains thin, we did see credit spreads on secondaries continued to tighten—in sharp contrast to the volatility observed in the stock price of Lending Club. The tightening is most prevalent for the riskiest CHAI C bonds indicating a reduction in the market’s expectations of cumulative losses. Moreover, the SoFi senior tranches have tightened substantially. The tightening is welcome news and confirms that idiosyncratic headline risk has not reverberated deeply into secondary ABS markets. This is not surprising as securitizations are structured via bankruptcy remote vehicles that remove firm-specific corporate credit risk from the collateral risk. Investors in ABS are also afforded a significant number of additional investor protections, covenants, reps & warrants, as compared to whole loan investors.
To better understand this observance, we looked into other spread products for a broader view of investor appetite for credit risk. For Q2, “On-The-Run” (OTR) CDX Investment Grade Index tightened by 1 basis points, with OTR CDX High Yield tightening by 6 basis points since March. The AAA Commercial Mortgage-backed Securities Index (CMBX) is up 1.2% from the end of Q1.
The lack of movement on major credit spread products is in sharp contrast to the movement in the MPL space. Senior SoFi bonds tightened about 60 basis points, or roughly 30% tighter, from Q1; and CHAI-Prosper Mezz bonds tightened in roughly 252 basis points or roughly 40%. The significant tightening of MPL credit spreads shows that relative value investors keep the MPL ABS spreads in check with other credit spread products such as CDX and CMBS.
Analysis of Residual Holder Returns
In light of the three described trends, there is a reason to suspect more attractive returns for residual holders going forward. To size that opportunity, we study the impact to IRR with respect to reasonable loss assumptions and excess spread typical of the 2015 CHAI securitization. We assume a typical securitization with 10.5% thickness in the equity tranche, a weighted average life of 40 months, and a base case cumulative net loss rate of 10%. We also assume excess spread of 10-11%. Finally, we assume 1% in deal-related execution fees (e.g., structuring and placement, legal, ratings, verification agent, servicing). For our comparative case, we assume a down scenario with 12% cumulative loss (20% higher credit loss than the base case). Results are displayed in Exhibit 11.
Under base case scenario, with the excess spread between 10-11%, residual holders receive 30%-45% annual return. Even under the higher defaults case, the residual holder will still earn returns in the 10-25% range.
As the analysis makes clear, the excess spread is the primary driver of residual holder returns. Going back to CHAI-2016-PM1, where the excess spread was reduced to 8% due to the low bond pricing, we see that equity holders can incur losses, up to 12% in our higher defaults case.
Despite the troubling headlines, rated securitizations are increasingly the hallmark of MPL funding. Volumes have increased on a linked quarter basis and a year-over-year basis despite increased volatility. And we expect this growth to continue. Unlike credit facilities with roll-risk, securitization offers platforms locked-in, non-recourse financing at prevailing financing rates and enable risk transfer to across the capital markets.
By the end of Q2, the tightening in the secondary market suggests that absent major macro or headline shocks, the market should see deals with tighter new issuance spreads in Q3. We continue to believe that repeat issuers such as SoFi and OnDeck will help MPL ABS gain broader acceptance.
In our Q1 outlook, we stated that marketplace lenders will seek to shape and control their deals driving increased transparency and standardization across securitization programs. The excellent execution of SCLP 2016-1 transaction confirmed our intuition. We expect many platforms to follow suit, including through acquiring balance sheets (in some form) to both exert greater control over the securitization of their paper and to demonstrate skin in the game to the broader investor community. This should lead to increased structural variation across deals as issuers seek the best execution across changing marketing conditions.
Outside of securitization, additional modes of distribution including asset managers offering term capital, CUSIPs and credit linked notes, closed-end funds, and seasoning vehicles will expand the market of eligible investors.
This growth is not without challenges. In particular, platforms recognize that investor confidence is vital for survival and they must invest to maintain that trust. Marketplace lenders are now adjusting to the demand for greater transparency and due diligence, including independent reviews, “hot” back-up servicing arrangements, and heightened data integrity and data validation standards.
Despite the recent headlines, we remain optimistic on the marketplace lending ecosystem. The recent shake-ups enables the industry to reflect, adapt, and mature. The broad secular trends underpinning market growth remain intact. And we are hopeful that our toolkits for loan-level due diligence and analytics can accelerate the process for the entire sector.
Appendix: Marketplace Lending Securitizations to Date
About the author: PeerIQ offers portfolio monitoring and loan surveillance, structured finance analytics, third-party reporting, pricing and valuation and advisory services across both whole loans and ABS products.
News Comments United States EarnUp raises a $3mil seed round to help 200 million consumers smooth their loan repayment experience. Could EarnUp be a good lead source for lenders ? Or a good alternative data source ? A great table of MPL raises and valuations from CrunchBase, who claims that data hints at future down […]
EarnUp raises a $3mil seed round to help 200 million consumers smooth their loan repayment experience. Could EarnUp be a good lead source for lenders ? Or a good alternative data source ?
A great table of MPL raises and valuations from CrunchBase, who claims that data hints at future down rounds for marketplace lenders. However, we have recently seen BizFi, Promise Financial and more raising good rounds at decent terms. Perhaps there is a difference between fund-raising for mature MPLs and fund-raising for challenger Alt Lending 3.0 start-ups.
Very interesting 1st hand data from Morningstar about the state of US consumer debt, including trends and statistics. Credit Cards charge-off rate chart, 90 days delinquent data per asset class.
500 Startups shares fintech investment trends chart and data and discussed government policies that could and should enable fintech innovation.
Through the survey of France’s P2P and MPL lenders, a great analysis of the lessons learned from Lending Club’s crisis.
Securitization trends in Marketplace Lending. A must read.
Acquiring borrowers is difficult. Acquiring borrowers at purchase decision time is easier. Focusing on point-of-sale partnerships to generate credit demand is a very interesting direction which is, therefore, popular and gaining ground. A quick article as a reminder of this interesting direction.
Royal of Canada dumped 99.5% of their LC stock in Q1 2016. Interesting timing.
Getting SME lender’s loan data is at best difficult. In a space where we talk about transparency, SME originator’s data is a good example of the opposite. RateSetter stands out for publishing their data which lead to a nice summary, mostly figure based, article. I am not sure if this data is from RateSetter Australia only or includes other geographies.
A small article, that is not well researched, not well documented, but asks a question that is worth exploring a lot more “How can p2p lending companies fail, and what happens in that case ?” . The quick and dirty answer is: if they are setup right, where the operations and the loan books are separate with backup servicing, the only effect is that new loans stop being generated. We would love to publish a long article on this matter.
EarnUp, a consumer-first fintech platform that intelligently automates loan payments, announced its launch today with $3 million in seed funding. Blumberg Capital, Kapor Capital, Camp One Ventures, Fenway Summer Ventures, and other leading angel investors provided seed capital to accelerate the platform’s development and expand user access with a mission to improve consumer financial health. Forbes recently announced EarnUp as a winner of the prestigious Financial Solutions Lab in partnership with JPMorgan Chase & Co. (NYSE: JPM) and the Center for Financial Services Innovation. Though still in private beta, EarnUp already manages hundreds of millions of dollars in consumer loans on its platform. More information is available at www.EarnUp.com.
“Millions of Americans suffer financial stress from income volatility, where their income doesn’t match up with when loan payments are due,” said Matthew Cooper, co-founder of EarnUp. “Our product solves this issue by effectively budgeting for the consumer. We help put money aside as it comes in, giving people peace of mind in knowing the money they need will be there when loan payments need to be made. We give control back to the consumer.”
There are over 200 million Americans with debt and a typical household may have income and expenses hitting their bank accounts over 20 times a month. This financial chaos causes incredible stress for consumers, who may struggle to come up with even the minimum loan payments on time. EarnUp works by automatically putting a few dollars aside for future loan payments whenever consumers can afford it, then sending those payments and making sure they are applied in a way that reduces debt faster.
EarnUp has been bootstrapped to date and the $3 million in seed financing represents the company’s first institutional funding.
Private valuations across the lending space, where available, showed marked appreciation in 2014 and 2015. SoFi, for instance, was valued at $3.5 billion as of July, up from about 1.4 billion in early 2015 and $400 million in early 2014.
Those are post-money values, but the appreciation is well in excess of the sums invested. Avant showed a similar rise, with its post-money valuation doubling in less than a year. And Prosper more than doubled in less than a year, hitting a $1.8 billion valuation in April of last year.
Alternative lending currently looks like the reverse of the standard VC model, in which private markets are where one builds a business, and public markets are where one gets a lucrative exit.
That said, while we can expect down rounds near-term, it’s not clear VCs will lose their shirts in marketplace lending forays, particularly those who were mid- or early-stage investors.
High VC ownership levels mean that even a lackluster exit could return all or more of invested capital. Even after LendingClub’s stock plummet, for instance, VC’s post-IPO stakes would be worth more than the $392 in disclosed investments before going public.
Nonhousing consumer debt levels are increasing, with student-loan debt leading the charge, according to the Federal Reserve. Student-loan delinquencies more than 90 days past due have risen since late 2011. With the proliferation of postcrisis loans made to students, especially to those attending for-profit colleges with focused specialties, Morningstar Credit Ratings, LLC expects to see challenges in the sector.
Credit Card and Mortgage Delinquencies at Lows Since the crisis, credit-card and mortgage delinquencies have
Since the crisis, credit-card and mortgage delinquencies have improved, with the balance more than 90 days delinquent declining, according to the Federal Reserve Bank of New York. After seaking at 8.9% in the first quarter 2010, mortgage delinquencies have come down considerably from their highs, resting at 2.1% at the end of the first quarter. Credit-card delinquencies have also dropped, with the current level of 7.6% nearly half the 13.7% recorded in the first quarter of 2010. Low interest rates made it easier for consumers to either refinance or stay current on their debt obligations.
Meanwhile, after little change over the past few years, auto- loan delinquencies have edged higher, as competition among underwriters led to an increase in subprime auto loans. While we expect to see an uptick in auto delinquencies given the larger subprime component, overall auto-loan delinquency rates remain at relatively low levels. If unemployment remains in check, those auto-loan delinquency gains should be within reason, while we expect credit-card and mortgage delinquency rates to remain low.
New data that has been released since publishing solidifies the trend of consumer spending improving after a typical slow start of the year, with 1Q16 GDP growth at 1.1%. In addition, consumer confidence has strengthened.
Eye on the Road: Student and Auto Loans Bear Watching Consumers are adding to their household debt levels, with student-loan debt leading the way behind mortgages. Postcrisis, students enrolled in for-profit colleges in record numbers, with dreams of a future career. For many, those dreams never materialized, and they were left saddled with heavy student-debt obligations that they were unable to meet. This pool of nonpaying indebted students contributed to the student loan delinquency rate rising steadily since the end of 2012. While the pace of student-loan delinquencies has slowed, Morningstar Credit Ratings views the sector as vulnerable to declines in employment as the delinquency rate remains near record levels despite a generally healthy job market.
Quarterly financing to VC-backed fintech companies has been growing immensely:
But investment is not flowing freely everywhere. For example, in 1Q2016, Chinese fintech companies received $2.4 billion in funding (albeit primarily from two mega-deals), while the rest of Asia received only $0.2 billion. Meanwhile in Europe, deal count increased but the amount of capital invested did not. Even when the investment flows, the performance often does not.
Fintech’s 3 Ecosystem Challenges
1. Regulatory regimes are often ill-suited for fintech. Regulations in the finance sector are often unclear or highly complex, and regulatory processes and agencies may be slow.
2. Traditional financial institutions may hold down fintech startups, intentionally or unintentionally. Not long ago in the U.S., many banks did not even entertain meetings with or extend invitations to fintech startup founders.
3. Customer preferences may not be ready for certain fintech solutions. Customer acquisition is very difficult in fintech. Banks in the US spend over $500 to acquire a single user, and over time many startups will get there as well.
5 Ways Goverments Can Help
1. Create a “regulatory sandbox” that provides startups the opportunity to test new ideas without immediate threat of regulation. 2. Offer fast and transparent regulatory review of potential new fintech products or services.
3. Create a support system or kit to help fintech startups meet regulatory requirements.
4. Roll out consumer awareness initiatives to increase demand.
5. Encourage traditional financial institutions to invest in or partner with fintech startups — preferably non-exclusively.
Lending Club’s problems should make the sector reflect on the governance issues that arise from the mixed business models that some crowdfunding platforms have evolved into.
Banks lend their own money and take risk on their balance sheet; hence, they must meet regulatory requirements such as Basel III. Asset managers manage other people’s money and invest on their behalf; hence, they are regulated as financial advisers. Platforms must clearly choose their business model because it has regulatory consequences. It also has an impact on the market valuation of the company. Marketplaces are currently much more highly valued by investors than banks. Even before the scandal, Lending Club’s stock was valued rather like a bank’s stock. Eventually, mixed business models potentially lead to conflicts of interest of the type observed at Lending Club.
Lending Club lost its way a long time before the scandal and the subsequent dismissal of Renaud Laplanche. By progressively marginalizing retail investors and letting investment funds securitize Lending Club’s loans on their own terms, Lending Club de facto surrendered the control of the platform to the very same established finance that P2P Lending was supposed to present an alternative to. This change of course created a detrimental layer of complexity, and potentially of systemic risk, in what was supposed to be a simple and direct relationship between private lenders and borrowers.
Beyond the image problem, the impact of the incidents has been small. European institutional investors are still very much interested in marketplace lending, as can be seen from two recent announcements: a$100 million loan program through Funding Circle by the European Investment Bank and €70 million multiplatform crowdlending fund by Eiffel Investment and French insurers Aviva and AG2R La Mondiale.
Marketplace lending securitization volume topped $1.7 billion this quarter, up 14.8% from Q1, with cumulative issuance reaching $10.3 billion. YTD issuance of the sector stands at $3.2 billion as compared to $1.8 billion from prior year, a 77% increase. Q2 saw a total of 6 deals: 3 are backed by student loans, 2 by unsecured consumer loans, and 1 by SME loans. SoFi issued its first rated unsecured consumer loan deal and received an industry first ever AAA rating from Moody’s on its recent student loan transaction.
MPL securitizations are moving towards rated and larger transactions. The second quarter was the first to have all deals rated by one or more rating agencies. Further, the growth in average deal size continued, the average deal size grew to $267 million in 2016 as compared to $64 million in 2013.
New issuance and secondary spread tightened by quarter end, a good sign for the industry. Across all segments in MPL, Q2 2016 saw moderate spread compression in senior tranches of newly issued deals and widening in junior tranches as compared to Q1 2016.
Numerous factors, including lending platform rate increases, and spread tightening in both primary and secondary markets, look to improve future deal economics. The increase in rates from platforms increases excess spread and improves the economics of securitization for residual holders. The demand for
The demand for higher standard of due diligence, transparency and analytics will be the norm. With the recent Lending Club headlines, ABS investors are demanding greater transparency and validation to enhance trust.
A total of 6 deals were done in Q2 and spanned several marketplace lenders and categories. Here is the breakdown from Q2 2016:
Despite Citi stopping the securitization of Prosper loans, they continue to be the leader in marketplace lending securitizations followed closely by Morgan Stanley and Credit Suisse.
Cited as factors for an improving securitization market are increasing platform rates and spread tightening in both primary and secondary markets. A detailed analysis of specific securitizations are outlined in PeerIQ’s report.
Comment: in our market context I would think that lenders would like to acquire/partner/sign up with Point of Sales solutions to extend credit in physical stores.
One such story goes of Swedish payments giant Klarna that recently announced that they were moving beyond its online services into physical stores, which it will accomplish by partnering up with mobile point of sale (MPOS) and e-commerce company Sitoo.
We are approaching a near future where the value chain for payments as we know it will be forever altered and new constellations will surface. More specifically, we expect to see more payment providers partnering up with POS companies to add value to their services and to diversify their position. There’s also a strong possibility that we’re likely to see some of the more aggressive payment providers outright acquiring POS-companies to accelerate growth and control a larger chunk of the value chain.
Royal Bank Of Canada says it sold 35,334 shares last quarter decreasing its holdings in LendingClub Corporation Common by 99.5%. Its investment stood at $1,000 a decrease of 99.7% as of the end of the quarter.
A peer-to-peer website has been rescued after falling into administration, offering a lifeline to 900 savers who faced being unable to get their cash back.
Funding Knight was promising investors returns of up to 12pc for lending cash to small businesses.
Many feared that they would lose their money when the company ran out of cash and went into administration last month.
However, last week the firm was rescued by GLI Finance, an investment firm, which said savers cash was safe and could be withdrawn at anytime. GLI has also invested a further £1m in the business.
Despite Funding Knight savers being assured that their cash is safe by the new owners, the incident has raised concerns over the safety of peer-to-peer lending.
Any funds they lend through a peer-to- peer website are not covered by the government-backed Financial Services Compensation Scheme (FSCS), which protects bank savers up to £75,000.
A spokesman for the Peer-to-Peer Association, a trade body of which Funding Knight is not a member, said:
He said: “We have been consistent in calling for, and embracing, regulation of the sector and requires robust adherence to its published operating principles, including the publication of platform loan books in full and clear information on all fees and charges to investors and borrowers.”
“Peer-to-peer lending offers overall a lower risk profile than some other forms of investment with less volatility, but it is not entirely without risk.
“Within the peer-to-peer lending sector, there are a number of different asset classes each with their own risk-return profile.”
European banks are caught in a conundrum because they still have to clear up their bad loan portfolios, which their US counterparts have largely dealt with. This situation, together with stricter capital requirements, and a challenging policy environment with low or negative interest rates, has led to a double whammy affecting both banks and SMEs. Additionally, credit information is still very fragmented in the EU, as shown by our CFA Institute member survey on the Capital Markets Union from May 2015.
When ? September 28, 2016 Where ? Dana Point, CA Details: Lending Times subscribers receive a 10% discount towards registration by using the code MEDIA-LT10.” This one-day Summit will feature educational topics from the industry frontrunners and will bring together leading asset managers, allocators, platforms and key service providers that shape and influence the Alternative […]
September 28, 2016
Dana Point, CA
Lending Times subscribers receive a 10% discount towards registration by using the code MEDIA-LT10.”
This one-day Summit will feature educational topics from the industry frontrunners and will bring together leading asset managers, allocators, platforms and key service providers that shape and influence the Alternative Lending landscape.
FICO has had a huge impact on the everyday lives of millions of Americans. Would you be able to get the mortgage to afford the new house? Will you be approved for that credit card? All of this is directly influenced by the consumer’s FICO score. It is important to understand what does a FICO […]
FICO has had a huge impact on the everyday lives of millions of Americans. Would you be able to get the mortgage to afford the new house? Will you be approved for that credit card? All of this is directly influenced by the consumer’s FICO score. It is important to understand what does a FICO score entail and how it is scored. The below representation is for an average customer and this may change for customers with different lengths of credit history.
FICO basically takes into account the credit report supplied by credit bureaus. Experian, Equifax and Transunion are the three largest bureaus in the United States and they utilize credit data like repayment of loans, credit card usage and other relevant statistics to create a summary of consumer’s financial actions. But it has been roundly criticized by many experts for not providing a complete picture and having an adverse impact on minority and low-income borrowers. It is also essential to analyze the phenomenon of “credit invisible”, those who do not have a credit history or have a limited credit history rendering them unscorable. A study by Consumer Financial Protection Bureau in 2015 revealed that 26 million Americans do not have a credit history and 18 million Americans are unscorable because of thin credit files. Almost 20% of American adults are therefore rendered ineligible for credit because of no fault of theirs. Also, minorities and low-income consumers were reported to be more likely to be credit invisible.
The solution for credit invisible is leveraging alternative data to model and predict the behavior of the user. FICO in collaboration with Equifax and LexisNexis Risk Solutions has launched FICO Score XD and TransUnion has launched CreditVision Link to enhance its coverage of the American adult population. “ In testing, FICO XD allowed more than half of credit card applicants who were previously unscorable to receive a score”, said Jim Wehmann, executive vice president for scores at FICO. TransUnion reported that CreditVision allowed it to score 95% of Americans and resulted in 24% more loan approvals in a pilot with an auto lender. So what is the new data which has resulted in such a sharp jump in “scorables”.
Going even further, PRBC.com offers a great alternative to FICO’s XD product. PRBC uses monthly-bills payment history, income data, cash flow data, account receivables, account payables, payroll, and outside investments to provide a complete picture of a financial profile. This allows PRBC to evaluate all Americans that pay regular bills. Unlike FICO, a consumer can self-register on PRBC.com and report their own scores.
Companies like Envestnet-Yodlee and ID Analytics have launched alternative data solutions as well. Envestnet® | Yodlee® Risk Insight claims to incorporate data elements that are not available through the credit bureaus. ID Analytics has Credit Optics®, an FCRA compliant credit score which uses a repository of consumer behavior data sourced from a wide range of industries. The cross analysis of the alternate data with the traditionally available information helps solution providers present unique insights to lenders and others users.
Mortgages, Credit Card utilization, and auto loans represent the traditional data. Telecom, cable and utility bills and payments represent the new paradigm for credit analysis and scoring. Checking and saving accounts can be a particularly rich source of information for credit bureaus. Companies will also start taking into account short term loans, alternate loans and even qualitative factors like how often the consumer changes his physical address. All this information will translate into a complete 360-degree view of a prospective borrower versus the one-sided review from the current FICO score. This approach will also be a blessing for credit Invisibles who are destined to have a good credit if given the chance.
Start-ups have already jumped on this bandwagon a decade ago when they started utilizing parameters like time of application, use of upper case in the online forms and amount sought as a loan. Lenddo, a fledging start-up in the alternative lending space has gone further by assigning “Lenddo Scores” to its applicants. The company uses no traditional data but instead depends on its invention- a graph variable methodology called “Archano Score”, which is a PageRank-like scoring algorithm, incorporating attributes of each member and their social group. It uses more than 12,000 data points and analyses social profiles, communications and emails of the applicant to base its decision on whether to lend to the applicant. The social underwriting experience has been a success with the company helping lenders increase approval rates by 50% and reducing risk by 12%.
Limitations of alternative data
The new credit rating system might be a boon for some, but not for all. Credit challenged individual dependent on short-term loans or families behind on their utility dues because of peak bills in winters will be heavily penalized. Currently, the utilities only reported the serious delinquents to the credit bureaus, but this move will certainly push down the credit ratings of many Americans. Also, there is fear among consumer advocates that lenders can selectively target this data to exclude traditionally credit challenged minorities. Another lament is on the accuracy of the data provided by third party providers like telecoms which do not have strong consumer protection histories and are often in dispute with their customers due to practices of the surcharge, cramming etc.
The new normal
Alternative data is going to be the new normal is a foregone conclusion. Easier accessibility to large troves of consumer information and our digital imprint are the next frontier in the never ending quest to enhance the world of credit. But it is important to recognize that alternate data is a double-edged sword. A white salaried American with no credit history will be welcomed with open arms but a Hispanic businessman 30 days overdue on rent can be pushed to higher interest rates or even no credit. It will be good for the society if the new data sources are used to include those not covered earlier rather than exclude those arbitrarily deemed to be too risky for credit.
News Comments We believe that today we finally fixed the hyperlinks for the pictures in the analysis and events section of the daily newsletter. We apologize it took us so long to fix them. We also believe the hyperlinks to the articles in the “News Summar” section of the newsletter are also working. We have […]
We believe that today we finally fixed the hyperlinks for the pictures in the analysis and events section of the daily newsletter. We apologize it took us so long to fix them.
We also believe the hyperlinks to the articles in the “News Summar” section of the newsletter are also working. We have tested on all our devices, OSs and email clients we own but our tests are still limited. We would like to kindly ask our readers to report if you have any particular problems reading Lending Times in your favorite environment and we will continue improving in all ways possible.
Debt-to-EBITDA multiples for private equity deals with U.S. targets in 2016 has hit a whopping 6.8x. Are US companies over-leveraged ?
After testing the waters with Lendio,(as seen in our article here), AmEx is jumping both feet in with the poorly named “Working Capital Terms” venture. Why not name it AmEx Small Business Loans? In all cases, the SME lending space is heating up with a gorilla-size new entrant.
As our readers build origination platforms or lend on p2p platforms, perhaps a scenario they are not setup to handle yet is how to face low-probability-events. Such an example is “what happens in case of death of a lender”. An article surveying a few answers from different platforms.
UK Banks expected to lend £150bn , freed by Bank of England’s capital buffer rules relaxation. Since 2008 we have seen that making cheap capital available to banks has not correlated with higher bank loan origination volumes. Is, this time, different ?
Interesting discussion of different choices fund managers can make in the search for yield and the advantages of p2p fund’s yields.
LendIt rebrands “largest conference series dedicated to connecting the global fintech community” from ” largest online lending conference”.
A great survey of the French p2p market with company names and differences (“prets participatifs” in French).
Cai Jincong, the founder of Zhejiang Yinfang Investment, was sentenced to life behind bars for running a fake peer-to-peer lending scheme that conned over 88 million yuan (about 13 million U.S. dollars) from 1,200 investors.
S&P LDC reports a global average of 5.36x for Q1 2016, although the figure did top 6x in the third quarters of both 2015 and 2014. Moreover, S&P LDC data shows that large-market deals typically have higher leverage ratios than do mid-market deals, with the Q1 16 large-market figure hitting 5.6x (and, remember, that’s a mean, not a median).
It has been more than three years since the Federal Reserve and FDIC issued leveraged loan guidance to banks, suggesting that any debt-to-EBITDA ratios in excess of 6x (for most industries) is too high. Or, put another way, both lenders and private equity firms are regularly ignoring the Fed’s guidance — and appear to be easily getting away with it (likely because no individual deal is likely to present a systemic risk, and loan syndication makes the “baskets” more like a sieve).
AmEx’s venture, Working Capital Terms, will approve loans in minutes for existing small-business cardholders, who can use the money to pay vendors. Debts may range from $1,000 to $750,000 with fees of 0.5 percent for a 30-day loan to 1.5 percent for a 90-day loan. AmEx will deposit funds directly into vendors’ accounts in as soon as two days.
AmEx has been looking for new streams of revenue to rejuvenate earnings after deciding last year to part ways with its biggest co-brand partner, Costco Wholesale Corp. In addition to its new in-house loan product, the card issuer offers longer-term small-business loans — ranging from $35,000 to $2 million — through its partnership with Lendio, another online marketplace.
“AmEx can do this because they have good credit knowledge,” said Karen Mills, former head of the Small Business Administration, who’s now a paid adviser for Working Capital Terms. “This will challenge the online competitors, whether or not they respond.” Amex declined to disclose their target for Working Capital Terms’ loan volume.
Working Capital Terms represents “a new type of product for American Express that could eliminate the need for the very expensive, unsustainable products from Square and other online lenders,” said Gil Luria, an analyst at Wedbush Securities Inc.
AmEx isn’t the only big lender pushing into the fray. Wells Fargo & Co., the third-biggest U.S. bank by assets, said in May it was starting a program to offer small businesses online loans in as soon as one day. Larger rival JPMorgan Chase & Co. is collaboratingwith On Deck to speed up the process of providing loans to some of the bank’s 4 million small-business customers.
AmEx shares fell 2.7 percent to $59.08 at 2:46 p.m. in New York. On Deck tumbled 6.9 percent to $4.89, while Square declined 3.6 percent to $8.94. Representatives from On Deck and Square declined to comment.
‘What happens when I die’ is a concern occasionaly voiced by investors. Investments in p2p lending will be inherited like any other assets.
Luke O’Mahoney of Ratesetter explained: ‘If an investor dies, we work with the next of kin to establish how they would like the account to be dealt with. Generally they would either use our Sellout function (effectively liquidating their investment) or they would allow the account to run down over time – of course we assist the next of kin or executor with this process’.
Only Assetz Capital mentioned that they have a process to do regular checks on dormant accounts that are in funds to ensure that lenders are aware of those funds.
Personally I wonder, if it would be good practise for marketplaces to contact those investors that have not logged in for a very long period (2 years?) and ask them to update/verifying their data. Failure to do so could then trigger a letter with the same request via postal mail.
Avant, an online lender, has offered the option for buyouts to all 760 of the company’s employees. It was not clear how many Avant employees would accept the offer. The news is a painful reminder that online lending is still struggling to regain its footing following indications of a slowing economy and the unexpected departure of former Lending Club CEO Renaud Laplanche – a now tarnished industry icon.
Blackmoon, a Russian financial technology startup that screens and prices loans issued by others to sell on to investors in a marketplace, is opening a U.S. office to expand in the world’s biggest market for non-bank lending.
Blackmoon is partly counting on an expansion into the U.S. from its new New York base to reach a goal of $1 billion in cumulative loans by the end of next year.
To achieve that, the company will target all kinds of unsecured credit in the largest market for alternative lending: consumer, small-business, student and car loans. Blackmoon currently works with several dozen European online lenders, from Finland to the Czech Republic.
Blackmoon functions as an intermediary between institutional debt investors and lenders — both alternative providers and traditional banks — allowing them to scale their business without additional leverage, while mitigating the risks of default.
Moscow-based Target Asset Management agreed in February to form a $100 millionfund to invest in Blackmoon’s loans.
Mark Carney, Governor of the Bank of England, yesterday took steps to reduce capital buffers for UK banks. The Financial Policy Committee (FPC) has reduced the UK countercyclical buffer rate from 0.5% of the banks’ UK exposures to 0%, with immediate effect. The FPC began to supplement regulatory capital buffers with the UK countercyclical buffer in March of this year, and had intended to increase the buffer to 1% in due course. But now the countercyclical buffer is expected to remain at 0% until at least June 2017.
This reduction is expected to free up £5.7bn in bank lending. The banking sector, in aggregate, targets a leverage ratio of 4%. This means that the £5.7bn in spare capital will allow the banks up to an extra £150bn in lending to UK households and businesses.
While the FPC’s actions would appear to be good news for UK borrowers, they may well herald a more competitive stretch for alternative lending platforms.
Comment: this is old news, but a good reminder for people who did not read last week’s Lending Times.
Savers were lured into Funding Knight with promises of returns of up to 8 per cent for lending their cash to small businesses. Last week, the peer-to-peer firm was rescued by investment firm GLI Finance, whose bosses said customers’ money was safe and that they could withdraw it whenever they liked.
Star fund-manager Neil Woodford is mulling the launch of a new equity income fund that will aim to deliver a higher yield than is currently offered by his hugely popular £8.6bn CF Woodford Equity Income fund. A 4.5 per cent target yield has been widely reported. Higher yielding equity income portfolios offering an ‘enhanced income’ mostly use call options alongside normal income stocks to boost income pay-outs.
Woodford is bullish on P2P/marketplace lending and has invested in the two specialist investment trusts P2P Global Investments and VPC Speciality Lending – which offer attractive yields of 6 per cent and over for his income fund. He also owns an unquoted positon in P2P platform RateSetter.
The manager currently has 0.96 per cent of his fund’s assets in the P2P Global Investments trust and 0.64 per cent in VPC Speciality Lending trust. These are, respectively, his 28th and 39th largest holdings. In total he has 109 holdings.
His existing fund is currently hitting a yield of 3.7 per cent. P2P GI and VPC Speciality Lending’s yields are currently a whopping 7.4 per cent and 9.7 per cent, respectively. However, that is partly a function of thier near 20 per cent discounts at present.
Business in the low-carbon, clean technology (cleantech), and sustainability sectors looking for finance can take advantage of a new digital tool launched this week.
Created by Shell Springboard, the Access to Finance Navigator is an interactive database where eco-friendly entrepreneurs can search for funding opportunities and filter funding sources by their location, stage of development, financial requirements, and the user’s business sector.
So far, the database features 84 low-carbon funding sources – said to represent a total value of £157m – from government organisations, angel investors and syndicates, crowdfunding platforms and venture capital (VC) funds.
Sources listed include Funding Circle (crowdfunding), Advantage Business Circle (angel), EcoMachines Ventures (VC), Horizon 2020 (government grants), and funding competitions ran by Innovate UK.
LendIt and AMTD Group Co-Host the First Global Fintech Investment Summit in Hong Kong, (Press Release), Rated: B
AMTD Group Company Limited (“AMTD Group”, “the Group”) is a non-bank financial services group based in Hong Kong offering a wide spectrum of capital markets, asset management, insurance brokerage and risk management solutions to clients across Asia.
LendIt is the largest conference series dedicated to connecting the global fintech community.
LendIt China and AMTD Group will co-host the first Global Fintech Investment Summit in Hong Kong (“Global Fintech HK Summit” or the “summit”) on July 13.
More than 80 leading Asian investors and over 35 international fintech companies are expected to attend the ground-breaking summit.
The French marketplace lending industry is still in its infancy. Due to a very strict regulatory structure there is only one online consumer lender operating in France, Younited Credit (formerly Pret d’Union) and small business lending platforms have only begun operating in the last 18 months. In late 2014 the French government made it legal to make loans to small businesses without a banking license. This has led to a large number of new platforms, they say the count is around 50, to launch since then.
The French government is also actively involved in the industry through an entity called BPI – setup with similar goals to the British Business Bank. It wants to stimulate lending to small businesses. BPI will take small equity positions in fintech companies, it will invest on platforms and it will make interest free loans to qualifying companies.
Younited is still relatively small compared to the US or UK platforms – they are currently issuing around €17 million in new loans every month in France. With 130 employees they are easily the largest platform in France and one of the largest in Continental Europe.
Earlier this year Younited opened an office in Rome in their first international expansion. One of the great benefits of being part of the European Union is that they can “passport” their banking license to other countries which is what they have done in Italy.
Younited is focused on prime borrowers in both France and Italy offering competitive interest rates to banks. They offer four funds for investors with historical returns ranging from 2.2% for their lowest risk borrowers up to 5.1% for the highest risk fund.
The first online small business lender to launch in France was Unilend – they issued their first loan in November of 2013 a full year before the regulation changed to allow small business lending. The reason is that their loans are setup differently – as a direct contract between the borrower and the investors. They are actually an IOU instead of an actual loan.
Unilend has issued €20 million in loans to date and are currently issuing around €1 million a month. Loan terms range from 3 months to 60 months with interest rates of 4% to 10%. They run a Dutch auction, which allows investors to bid down the rates to a minimum set by Unilend. They have a large investor base of over 10,000 active investors with an average return of 5.25%. They average 700 investors per loan.
BPI has invested in Unilend as an equity holder – they do not own loans. Like every small business platform we met with the loans issued by Unilend are unsecured with no personal guarantees in place. The average loan size is €75,000 with the typical small business doing revenue below €2 million.
One of the curious things about France is that many of these loans are done in partnerships with banks. The small business might be seeking €500,000 in funding but the bank will only issue €400,000. So, they will seek the other €100,000 from a platform like Unilend.
Lendix is a relatively new small business platform, having issued their first loan in April 2015 but they are already one of the leading platforms in France. They currently originate €4 million a month, making them the largest small business lender.
The co-founders of Lendix have all invested their own personal money in the fund which has grown to €29 million in size and is currently yielding 6.5%. They are about to launch a second fund which will be in the €50-70 million range.
As for the loans the average size is €200,000 with a maximum amount of €2 million. The loan terms range from 18 months to 5 years although they have just added short term loan options down to 3 months. They currently have zero defaults although there was one case of fraud where they were able to get the money back.
Finexkap has taken a completely different approach to financing French small businesses. They are providing working capital via receivables financing. But the regulators do not allow invoice financing outside of banks unless it is done in a securitization.
They did €15 million in originations in 2015 and are on track to do €100 million in 2016. Because this is invoice finance the loans are very short in duration. So, even though they have only been issuing loans for a couple of years they have already had 9 turns of their loan book. Of the more than 5,000 transactions they have done they have only had losses on one transaction. So they are developing a solid track record.
The company with the most memorable domain name is Credit.fr. They are part of the new breed of platforms focused on small business loans. They are growing fast and have just crossed €1 million in loans per month issued.
They are open to individual and institutional investors and they have 5,000 registered investors on their platform today. Like Lendix they are also creating a debt fund that they expect to launch in September and that should help them reach scale much faster. The target return for this fund will be around 5% after fees.
Credit.fr has a solid borrower funnel with leads coming from digital, partnerships with companies like Younited and others and also business brokers. The average loan size is €60,000. They feel that their competitive advantage is their risk management where they have an experienced team in place.
Lendopolis is one of the more unique platforms in France. It is actually part of theKissKissBankBank (yes, that is the official name) group of companies that consists of three divisions:
KissKissBankBank – a donation-based crowdfunding site created in a similar vein to Kickstarter focused on primarily cultural and artistic projects. They have financed 15,000 projects since being founded in 2009.
Hellomerci.com – based on the Kiva model of microfinance. These are small loans (less than €10,000) at 0% interest rates loaned out to very small companies.
Lendopolis – launched in 2014 as a more typical p2p small business lender. They have loaned €7 million over 100 loans in their first 18 months.
Like many platforms here Lendosphere also launched soon after the regulations came into effect in late 2014. They are the first platform to be 100% focused on sustainable development projects.
To date they have loaned €6.7 million across 33 projects – either wind turbines or solar panels. The loans are typically 2-5 years at interest rates of 4-8%. They have 3,500 registered investors funding these projects. While it is still a young loan book Lendosphere has had zero defaults and delinquencies.
Most platforms are focused on small business where there has been a lot of entrepreneurial activity in the last 18 months. The French government recognizes that small businesses need more choices when it comes to access to capital so they have helped to create a regulatory environment that enables new approaches to this challenge.
A court in east China’s Zhejiang Province has sentenced a man to life behind bars for running a fake peer-to-peer lending scheme that conned over 88 million yuan (about 13 million U.S. dollars) from 1,200 investors.
Cai Jincong illegally raised more than 200 million yuan through Zhejiang Yinfang Investment and Management Co., where Cai fabricated investment products promising over 20 percent in annualized returns, the court said on Tuesday.
Cai, who was under a lot of debt, founded the P2P lending platform in October 2013. It offered returns on investment of up to 50 percent.
The funds were used to service Cai’s own debt and fund the operation of the P2P platform. Cai turned himself to police on January 20, 2015.