News

May 20st 2016, Daily News Digest

US

  • Lending Club and Prosper rates and loss over time, data from NSR platform.
  • Tally, offering automatic credit card payoffs, raised $15m.
  • Scott Sanborn answers the hard questions directly by email.
  • Are internal hedge funds the way to go for marketplace lenders ?

UK

  • Competition mounting in SME lending.

Germany

  • Fitch: SME lending looks riskier than bank lending due to bias in applications due to capital cost.

Australia

  • DirectMoney announced a return of 7.76% p.a. on its personal loan fund.

China

  • Shanghai revamped p2p information disclosure

India

  • i2ifunding raises an angel round.

United States

NSR Platform conducted a study of the loss rates for quarterly cohorts from 2009 to present, (Email), Rated: AAA

What the data tells us

In addition to all the grief Lending Club is going through, the media has also been bashing the purportedly surprising increase in credit defaults at both LC and Prosper. Makes for a nice headline, but where this conclusion comes from I don’t rightly know. It’s not what the data tells us.

We used NSR Platform to conduct a study of the loss rates for quarterly cohorts from 2009 to present. Our analysis examined the six-month loss figures across all loans originated by Lending Club and Prosper for each quarterly cohort. By comparing losses at a fixed age, we can quickly assess whether there is a material difference in performance during the early stages of portfolio maturation, when losses can lead to material detrimental effects to returns.Lending Club performance

Note that the “Loss Rate” in this analysis is the NSR-estimated projected loss based on a loan status analysis 6 months after origination. These aren’t the final loss numbers for the cohorts, but a snapshot at a given point in time.

Prosper performance

Note also that the “Average Rate” for Lending Club and Prosper are heavily influenced by the blend of loan grades originated for each platform for each cohort.

This test does not perfectly isolate underwriting, and can be impacted by many variables, including macro-economic impacts such as employment rates. However, it’s a reasonable way to quickly establish whether the results of Lending Club’s or Prosper’s underwriting has materially changed from one quarter to the next. And we conclude: it hasn’t. You can easily see that, contrary to media opinion, recent vintages are showing strong performance.

Tally raises $15 million for app to make credit cards less expensive, easier to manage, (Techcrunch), Rated: AAA

Users can scan all of their personal credit cards into Tally, go through a brief credit score check, then authorize the startup to pay those bills from a Tally-issued line of credit.

“Most adults in the U.S. have multiple personal credit cards,” Brown said, “with an average of 3.7 per person.” And at least 4 out of 10 of all U.S. households carry a balance on their credit cards, racking up late fees and paying interest.

The eight-employee startup helps customers avoid all those late fees and other charges, and offers them an APR that’s lower than the average APR of all their cards. If customers do not pay off their entire Tally balance, the company makes money on that lower APR, but again, they promise that amount will be lower than what customers would have had to pay their other banks.

Earlier, Cowboy Ventures led the company’s seed round of $2 million. San Francisco-based Tally Technologies raised $15 million in Series A venture funding to launch an app that promises to help people maintain good credit while avoiding fees, charges and other credit card affiliated pains. Shasta Ventures led the Series A and was joined by the company’s earlier backers — Cowboy Ventures and AITV. Silicon Valley Bank also invested.

Lending Club acting CEO Scott Sanborn answers your questions in an email, (Email), Rated: AAA

What’s happening with my assets? Nothing. Your investments are still yours. The performance of loans facilitated through the platform remains robust. We are servicing and processing borrower payments like we always have, and the interest and principal payments that borrowers make will continue to be passed on to you as they were before.

What’s the status of Lending Club’s business? We reported strong financial results for Q1 2016. We had solid originations, operating revenue, and adjusted EBITDA, despite a difficult economic environment. We facilitated $2.75 billion in loans and also reported a substantial amount of cash and securities – $868 million.

Where is Lending Club going from here? We’re intensely focused on restoring our investors’ confidence. We’ve talked to hundreds of our investors – spanning individuals to financial advisors to banks to large institutions – including some who are new to Lending Club. While some investors have paused, others have reiterated their interest. We remain committed to both our borrowers and investors, and are working day and night to prove to you that we deserve your trust.

I’m worried about Lending Club’s data – what are you doing to reassure me? On Monday, we took the first of many steps to restore investors’ confidence in our data. We shared the observations of an independent forensic data change analysis that looked at over 10 million test conditions on approximately 673,000 whole loans sold over the last eight quarters. Excluding the loans previously identified as having an issue, 99.99% of the loans the independent firm tested display either no changes or changes explained by the normal course of business. You can read the full details here.

Are you confident in Lending Club’s management? Yes. Our Executive Team has been working together for the past six years and has deep expertise in credit, operations, marketing, finance, human resources and technology. We’re also supported by one of the strongest Board of Directors in the industry. It includes Hans Morris (the former President of Visa and now our Executive Chairman), Larry Summers (former US Treasury Secretary), John Mack (former CEO of Morgan Stanley), Mary Meeker (a Partner at Kleiner Perkins Caufield & Byers) and other experienced executives.

What happens if Lending Club goes bankrupt? First and foremost, we are not going out of business. Lending Club has a strong business, a large balance sheet and we are here to stay. We have $868 million in cash and securities, which could cover our costs for a long time. Second, Lending Club has no claim to the payments you receive from borrowers, since each Note is tied to a loan, and loan payments are passed on to Note holders. Third, with a $10.2 billion loan portfolio that generated over $18 million in revenue in the first quarter of 2016 alone, we could profitably service the existing Lending Club platform as a standalone business, even if we didn’t facilitate a single new loan. Finally, and I am only mentioning this because some have asked, if all else failed we would transfer our loan servicing obligations to a third party backup servicer. We have a longstanding contract with a third party to service loans in the event Lending Club can’t, so that you’d continue to receive borrower payments (regardless of LendingClub Corporation’s status). See our prospectus for more detail.

Why the Department of Justice subpoena? The Department of Justice often issues subpoenas in response to public disclosures such as ours, especially in light of the department’s focus on financial services. The company is fully cooperating with the department’s investigation.

LendingClub and the Question of Internal Hedge Funds, (FINalternatives), Rated: AAA

This situation gives rise to a set of important questions that the asset class needs to consider addressing in the near term. Examples include the ability to use capital inflows to mask actual default rates, and false promises of instant liquidity. However, chief among them, in our view, is the lending platform internal hedge fund.

Consider these statements from a May 10 U.S. Department of Treasury report titled, “Opportunities and Challenges in Online Marketplace Lending”:

 “In an effort to diversify funding sources, some online marketplace lenders are forming internal hedge funds and registering affiliated entities as investment advisors to buy a company’s own loans or participate in securitizations.”

 “…they (platforms) rely on a variety of funding sources, including institutional investors, hedge funds, individual investors, venture capital, and depository institutions.”

One such internal lending platform hedge fund was launched in March by online lender Social Finance Inc. The fund was set up to buy its own loans as well as some from its competitors. As SoFi Chief Executive Mike Cagney told the Wall Street Journal, the new hedge fund, called SoFi Credit Opportunities Fund, has “a real chance to solve the balance-sheet problems facing the industry.”

Should lending platforms, their employees, and their board members be permitted to lend on their platforms directly or through hedge funds?

These internal funds may have a significant advantage over all other external funding sources. Lending platforms have access to internal data that is not readily available to external funding sources.

An even more troubling hypothetical scenario is the possibility that a data advantaged platform would create a loan purchase agreement with one or more lending platform internal hedge funds and, after receiving the borrower origination fee, “sell” the loan to one or more of its internal hedge funds.

In practice, if a single loan, from a single platform, were to be funded by a lending platform’s internal hedge fund using data that was not available to external funding sources, the result would be an erosion of trust and external funding could dry up.

Now is the time to address the tough questions. As noted by U.S. Supreme Court Justice Louis Brandeis, sunlight is said to be the best of disinfectants.

LendingClub Is Ruining It for the Rest of Fintech, (Bloomberg), Rated: A

Online loan companies have slowly built a ground game in Washington to match their growing presence in American finance.

The lobbyists’ message: Some companies abuse customers, others don’t. Some make loans to small businesses, and they should be subject to different rules than firms that lend to individuals. Some use their balance sheets to finance, while others arrange loans by matching borrowers and investors. Some should be called online lenders, others loan marketplaces.

The industry has to shift from playing offense to defense right now in Washington,” said Isaac Boltansky, an analyst at Compass Point Research & Trading. “They’re drawing the wrong kind of attention and it plays into the burgeoning fears in D.C. that this model is untested and therefore warrants additional scrutiny.”

Lendio’s Blake and Kabbage’s Petralia stressed that their companies make loans to small businesses, which they believe policymakers should treat differently from individuals.

The Treasury Department appears to disagree. In its report, the agency called for legislation that would subject online small-business lenders to consumer-protection laws. Democratic Senators including Sherrod Brown of Ohio, Jeff Merkley of Oregon and Jeanne Shaheen of New Hampshire have also raised persistent questions.

“The entire online lending space is at an inflection point,” said Brian Abrahams, who handles government relations at online loan startup Avant Inc. “The strong players will flourish and the challenges of weaker players will become more apparent.”

Alternative Thinking on Lending Club’s Crash, (FINalternatives), Rated: A

“That’s like saying because one car crashes, no one should take cars anymore.” That’s Anil Stocker, cofounder and CEO of MarketInvoice, talking about the ongoing crisis at peer-to-peer lending giant Lending Club and the possible impact on the industry.

That said, the SEC is paying close attention to the situation right now, two other New York regulators are stepping in, and Goldman Sachs and Jeffries have “paused” business with Lending Club (which isn’t surprising. As we all know, Goldman only engages in shady activities when there isn’t a public investigation going on and the SEC is oblivious to any form of deception.)

Stocker says no: “If this was about defaults, I may have had a different view of it.”

Stocker makes his case, here.

But before we go agreeing, it’s important to point out a piece written by a colleague named Shah Gilani. Last year, Shah warned about how these banks actually operate, and sounded the alarm far before the Lending Club scandal. Take a look.

Quantitative Portfolio Manager Jason Herman Joins Blue Elephant Capital Management, (Press release), Rated: B

Blue Elephant is a leading investor in the marketplace lending space. The firm has invested in hundreds of millions of prime consumer and small business loans over the last three years.

Prior to Blue Elephant, Jason was Head of Americas Investments at Marshall Wace, focused on the firm’s proprietary alpha capture system called TOPS (Trade Optimised Portfolio System). During his tenure as portfolio manager and Product Head of Americas, the TOPS fund returned 11.5% p.a. over a 2-year period and AUM rose from $550M to $2.2B. Jason has years of experience on the buy-side, having previously served as a fundamental analyst at Trisun Capital, a data-mining analyst at Xanga.com, and a research analyst at Kahana Computational Memory Lab.

Jason joined as Director of Quantitative Strategy to build out the Company’s quantitative credit models.

Morningstar Relocates NY Office to 4 World Trade Center, (PR News), Rated: B

The Chicago-based company quadrupled its space from its previous New York offices in Bryant Park to accommodate its East Coast base of clients and growing credit ratings business. Morningstar has a 10-year lease for 30,000 square feet on the 48th floor of 4 World Trade Center.

Morningstar currently has more than 60 employees in New York, the majority of whom work at Morningstar Credit Ratings, a subsidiary of Morningstar, Inc. and an emerging player in the Nationally Recognized Statistical Ratings Organization (NRSRO) industry. Morningstar Credit Ratings has 80 additional employees working in its previous headquarters in Horsham, Pennsylvania.

Since 2009, Morningstar Credit Ratings has evaluated and rated more than 240 new-issue structured finance transactions representing approximately $163 billion of securities issuance across commercial mortgage-, residential mortgage-, and asset-backed securities.

 

United Kingdom

From bridging to P2P: Interest will ‘make other funders re-examine their offerings’, (Bridging and Commercial), Rated: AAA

With the potential for cheaper funds and greater competition, an increasing number of bridging lenders are entering the peer-to-peer (P2P) market.

“For responsible bridging lenders who really understand the market it can no doubt be positive, provided that underwriting and risk evaluation standards are maintained,” explained Benson Hersch, Chief Executive of the Association of Short Term Lenders.

“There is little regulation in the sector and as it is a lower-cost way of getting funds it makes sense that more people will move into this market, but an element of caution is required.

“It is still a very new market and just one negative event could well damage the reputation of the whole sector.”.

Narinder Khattoare, Sales Director at Kuflink Bridging, said: “Basically, more choice means better terms and can only be good for the customer. Narinder admitted that P2P lenders had to make certain compromises.  “The key will be in the ability of lenders to provide an attractive return for investors from prudent lending. “Obviously guarantees are not possible, which is why we have taken the step of taking on the first 20% of any loan we put on to our platform.”

 

LendIt Partners With P2P Finance Association to Host Europe’s Largest Online Lending Conference, (Business Wire), Rated: A

LendIt, the world’s largest online lending conference, today announced the launch of LendIt Europe 2016, its third annual European conference, to be held October 10-11, 2016 in London. LendIt is partnering with the UK P2P Finance Association, Europe’s premier lending association, for the second year to deliver what is expected to be its largest conference to date, with more than 1,000 attendees expected.

 

Germany

Fitch: Alternative SME Lending Looks Riskier Than Bank Lending, (Reuters), Rated: AAA

Default rates of some German assets may indicate that performance of European SME debt financed by non-bank entities could be significantly worse than traditional bank loans, Fitch Ratings says.

New lenders have entered the SME funding market since the financial crisis, such as the Mittelstand bond market established in 2010 in Germany for larger SMEs, and the growth of marketplace lending in the UK for smaller SMEs.

The performance history for marketplace lending in the UK is too short to compare credit quality with UK bank loans (see “Fitch: Lack of Data Would Cap UK Marketplace Lending ABS Ratings”).

But the six-year history of the Mittelstand bond market suggests higher default rates than those in SME portfolios originated by German high street banks. We do not rate Mittelstand bonds, but BondGuide data implies a current annualised default rate of 2.1% for Mittelstand bonds rated by other agencies (73% of bonds issued since 2010). By contrast, data from the main German banks active in SME lending that Fitch uses in its German SME securitisation analysis shows the annualised default rate since 2010 averages 1.3%.

A lack of risk retention by alternative lenders may affect performance. Marketplace platforms do provide risk analysis but they are not required to retain exposure to the borrower.

Before the financial crisis, we rated three securitisations of portfolios of “Schuldschein” instruments to German SMEs, which were originated specifically to be securitised. Their performance has been worse than for a typical German bank SME portfolio, with an average annual default rate of 2.8%.

Rates of interest on alternative SME loans are typically much higher than those on traditional SME bank loans.

Even in the peripheral eurozone, bank rates have decreased to between 2% and 4% for one- to five-year maturities, according to ECB data, compared with more than 7% typically on loans (or mini-bonds) issued via marketplace platforms. SMEs may look for alternative funding for any number of reasons.

But if they are willing to pay more for funding from an alternative source compared to the high street, it may be because they were unable to obtain bank funding. The implication is that banks view such SMEs as riskier and expect more volatile performance.

 

Australia

DirectMoney shows there’s life in marketplace lending, (Finder), Rated: AAA

In a statement yesterday, DirectMoney announced a return of 7.76% p.a. on its personal loan fund after its first full year of operation. As the only listed marketplace lender in Australia, the performance is a good sign for the Australian market.

Earlier this week, DirectMoney issued a statement to shareholders announcing the surge in demand for its marketplace loans had left them unable to fully fund its loan book.

China

New rules to bolster trust in China’s peer-to-peer lending platforms, (South China Morning Post), Rated: AAA

Shanghai has revamped its peer-to-peer platforms information disclosure requirements as the sector is trying to win back investors with more transparency after high-profile frauds impacted public trust on the booming yet under-regulated industry.

Market watchers said the requirements, issued by the Association of Shanghai Internet Financial Industry, could set a benchmark for the sector that is trying to shed public doubt and embark on a regulated, sustainable growth model.

The organisation said yesterday that member online lending platforms will need to disclose detailed information on shareholders, senior management, staff, 90-day overdue products rate, financing parties, investors, and business partners such as guarantee companies and insurers, in a revamped 49-item, five category information disclosure list.

Members are required to disclose the information monthly.

“In the future, the wdzj.com association may rate such platforms based on their information disclosure in better guiding investors,” Shi said. “The sector, hit by fraud, needs to win back trust from investors.”

India

i2ifunding, One of India’s Leading Peer-to-Peer Lending Platform Raises Angel Funding, (PR Newswire), Rated: A

i2ifunding connects verified borrowers looking for unsecured personal loans with lenders looking for high return investment options. ” Founded in 2015, we have now more than 1200 registered users on platform. There has been no default on our platform till date,” added Neha Aggarwal who heads the risk management division.

Company plans to utilize the fund towards technology expansion and also towards increasing its presence geographically.Manisha Bansal who heads strategy said, “We currently have investors from all across the country; however borrowers are limited to Delhi NCR, Mumbai and Bangalore. Our target is to expand to at least top 20 cities of India in next one year.”

Vaibhav Pandey, the CEO of the company. “This investment could not have come at a better time as RBI has talked about 2Cr capital requirement for P2P players in the concept paper recently released for regulating P2P lending platforms in India and this funding would mean that we would be able to clear this requirement easily.”

Author: George Popescu

George Popescu

About the author

George Popescu

Serial entrepreneur.

George sold and exited his most successful company, Boston Technologies (BT) group, in 2014. BT was a technology, market maker, high-frequency trading and inter-broker broker-dealer in the FX Spot, precious metals and CFDs space company. George was the Founder and CEO and he boot-strapped from $0 to a $20+ million in revenue without any equity investment. BT has been #1 fastest growing company in Boston in 2011 according to the Boston Business Journal and the only company being in top 10 fastest in 2012-13 as it was #5 in 2012. BT has been on the Inc. 500/5000 list of fastest growing companies in the US for 4 years in a row ( #143, #373, #897 and #1270). After the company sale in July 2014 until February 2015 George was Head-of-Strategy for Currency Mountain ( www.currencymountain.com ), a USD 100 million+ holding company focused on retail and medium institutional currencies, precious metals, stocks, fixed income and commodities businesses.

• Over the last 10 years, George founded 10 companies in online lending, craft beer brewery, exotic sports car rental space, hedge funds, peer-reviewed scientific journal ( Journal of Cellular and Molecular medicine…) and more. George advised 30+ early stage start-ups in different fields. George was also a mentor at MIT’s Venture Mentoring Services and Techstar Fintech in NY.

• Previously George obtained 3 Master's Degrees: a Master's of Science from MIT working on 3D printing, a Master’s in Electrical Engineering and Computer Science from Supelec, France and a Master's in Nanosciences from Paris XI University. Previously he worked as a visiting scientist at MIT in Bio-engineering for 2 years. George had 3 undergrad majors: Maths, Physics and Chemistry. His scientific career led to about 10 publications and patents.

• On the business side, Boston Business Journal has named me in the top 40 under 40 in 2012 in recognition of his business achievements.

• George is originally from Romania and grew up in Paris, France.

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