- Justice Department sides with the financial industry and encourages case sent back to the fed district court.
- Prosper increases personal loan rates, up to 1.42% for FICO below 700.
- Blue Elephant resumes buying Prosper loans after stopping last year.
- Fund controlled by Lending Club with $825 mil returns 2nd worse results in April 2016.
- New York regulators expand fintech probe beyond Lending Club.
- Auto Loan gaining popularity among Millennials.
- P2P and Marketplace Lending funds are the core of the bank threat.
- Great return analysis comparison between asset classes.
- Financial planner’s positive view of the p2p lending products.
Justice Department Sides With Financial Industry on Madden Case, (Lexology), Rated: AAA
Quick refresher—New York resident Saliha Madden was issued a credit card by Bank of America and later FIA Card Services, each national banks. Madden defaulted on her approximately $5,300 balance, and FIA wrote off the debt as uncollectible and sold the debt to Midland Funding. Midland sought payment from Madden and continued to charge the 27% interest rate that she was previously charged. Madden brought suit that charging such a rate was unlawful, as it exceeded New York’s civil usury cap of 16%, or 25% if Midland was licensed by the New York Department of Financial Services. In the original card agreement, both parties stipulated to Delaware law governing the agreement. Under Delaware law, the 27% interest rate is allowed. The question before the Court was whether the Second Circuit was correct in claiming that the preemption granted national banks over state law under the National Banking Act (NBA) applied to purchasers of loans originated but no longer held by banks. The case threatens the cardinal rule of usury that a loan contract that is valid when made can never be invalidated by any subsequent transaction (quoting the 1833 case of Nichols v. Fearson).
“The court of appeals’ decision is incorrect. Properly understood, a national bank’s Section 85 authority to charge interest up to the maximum permitted by its home State encompasses the power to convey to an assignee the right to enforce the interest-rate term of the agreement. That understanding is reinforced by 12 U.S.C. 24(Seventh), which identifies the power to sell loans as an additional power of national banks. The court of appeals appeared to conclude that, so long as application of New York usury law to petitioners’ collection activities would not entirely prevent national banks from selling consumer debt, state law is not preempted. That analysis reflects a misunderstanding of Section 85 and of this Court’s precedents.”
This is surprisingly definitive language siding with Midland and almost reflects incredulity by the SG directed towards the well-respected Second Circuit in a very public forum. It is clear, the SG concludes, that Midland, a nonbank collection company, may charge the same rate of interest that was charged by FIA. The SG determines that the Second Circuit erred in three respects:
- The Second Circuit failed to recognize that a national bank’s power to charge certain rates carries with it the power to assign to others the right to charge the same rates (per Section 85 of the NBA);
- The Second Circuit provided “misconceived” analysis that by limiting the activities of Midland, they were not limiting the activities of the national bank. The SG notes that imposition of this rule unduly restricts the bank from being able to sell loans; and
- The Second Circuit too narrowly draws the line of conflict preemption between the NBA and state law. “When a federal law explicitly grants a national bank an authorization, permission or power and does not explicitly state that the exercise of that power is subject to state law, state law is preempted to the extent that it restricts that power.” (SG citing the 1996 Barnett Bank of Marion Cnty v. Nelson case.)
Okay, so the SG recommends that the Court hear the case and fix the error, right?
No. The SG’s recommendation is that the Court turn down the case so that it may properly be played out in the district court, which is the federal trial court that first heard the case. The SG is mindful of the Court’s extremely demanding docket and limited capacity to decide every case. Therefore, because the SG believes that Midland will win on either the Delaware choice of law argument or the New York state law recognizing “valid when made,” the SG recommends the Court deny the petition for hearing the case. The problem with this result is that it leaves the “erroneous” Second Circuit opinion on NBA preemption, which has now been discredited. But that is not really Midland’s problem.
The SG also cites a few other reasons why this case is a poor forum for the Court to weigh in on preemption:
- There is no split among the circuits; the Second Circuit did not properly apply its own precedents (an argument Midland’s attorneys made in their brief).
- The parties were deficient in making the preemption argument and addressing whether the application of state usury law would interfere with the national bank’s exercise of powers; in other words, the lawyers for both sides did not present the correct analysis and the Second Circuit limited its ruling to the arguments presented.
- Midland will likely win anyway under Delaware choice of law or the application of New York law itself.
- No analysis has been made of how many states do not incorporate “valid when made,” and therefore the decision of the Court might be inapplicable in the presumed majority of states that recognize valid when made.
So where does that leave marketplace lenders?
As for Madden, the Court is likely to accept the recommendation of the SG and pass on hearing the case. The district court will now determine the choice of law and, if necessary, the state law issues.
It will be interesting to see whether loans from the Second Circuit that exceed state usury caps (so-called Madden loans) will make a comeback on the origination and investment side. In a recent joint study by Columbia and Fordham Universities, a decline in available credit was observed in Madden jurisdictions because of the uncertainty of being able to sell the loans and of investors being able to enforce them through their term. One of the Department of Treasury’s observations under its recent white paper was the lack of available credit to higher-risk consumers. It is possible that the ultimate resolution of Maddenin the district court results in the increase in available credit to the underserved consumer borrowing base to whom a loan at the state usury caps would not be economically feasible.
Prosper increases personal loan rates, (Bankrate), Rated: AAA
For the second time this year, marketplace lender Prosper is increasing interest rates on some of its personal loans. The rate increase announced Tuesday will impact borrowers who are seen as a bigger risk.
Rates will rise by 0.29 percentage points on average, according to Prosper’s announcement. But borrowers with good to excellent credit won’t be affected. Based on the company’s ratings, this would include borrowers with an average FICO credit score of at least 700.
New loans issued to borrowers with FICO scores below 700 will see an interest rate hike as high as 1.42 percentage points.
Blue Elephant to buy loans again from Prosper Marketplace after pause,(Reuters), Rated: AAA
Investment fund Blue Elephant Capital Management plans to start buying loans again from online lender Prosper Marketplace Inc after taking a pause for several months, an executive said on Wednesday.
Blue Elephant was one of the earliest investors to securitize loans from Prosper, but stopped buying loans from the lender last year due to concerns about its underwriting criteria and how profitable the loans would be.
“We’re going to start buying again from Prosper over the next couple of weeks,” Weinstein said. “It’s the tighter models and the higher rates that are really driving our decision.”
Prosper cut more than a quarter of its staff earlier this month. The platform’s loan volumes fell more than 10 percent in the first quarter of 2016 from the previous quarter.
LendingClub Fund Falters, (Wall Street Journal), Rated: AAA
A fund controlled by LendingClub Corp. that invests in the company’s online consumer loans suffered one of its worst monthly performances for April and disclosed it was buying riskier loans than originally intended, according to letters reviewed by The Wall Street Journal.
The performance—a return of 0.12%—was the second-smallest monthly gain in the fund’s five-year history. The portfolio, called Broad Based Consumer Credit (Q) Fund, has $825 million in assets under management and is run by LendingClub unit LC Advisors. This January, the fund, had its smallest monthly gain, 0.1%, far short of its average monthly performance of about 0.6%.
The correspondence with investors about April’s performance also shed light on a disclosure concern that LendingClub cited as part of a board review in a regulatory filing earlier this month. The review found the board wasn’t informed that one of its funds, part of its LC Advisors unit, was buying more five-year loans than planned.
“Although the portfolio composition of the fund was disclosed monthly to the investors of the fund, it was not disclosed to our board,” the May 16 filing said. The allocation of five-year loans “was out of tolerance,” the filing said.
In a letter to investors on Tuesday, LendingClub Chief Financial Officer Carrie Dolan said that valuation adjustments on existing loans, due to increases in interest rates charged for new loans to borrowers earlier this year, were driving the weaker performance.
LC Advisors is one of the largest holders of LendingClub loans. At the end of 2015, LC Advisors managed nearly $1.2 billion in assets across its six private funds and an additional $150 million in separately managed accounts.
LC Advisors told the investors in the Broad Based Consumer fund in March that it had “recently experienced higher-than-expected charge-offs in certain higher risk grades,” according to a separate letter reviewed by the Journal.
New York Regulator Expands Fintech Probe Beyond Lending Club, (Fortune), Rated: AAA
The New York Department of Financial Services (NYDFS) has not yet established which companies it may target, but information it receives in response to a May 17 subpoena sent to Lending Club, one of the largest online lending services, could shed light on broader industry practices that require scrutiny, said the person, who was not authorized to discuss the issue publicly.
Lending Club, which is not licensed in New York, has previously said it is able to charge rates above 16 percent because it funnels its business via WebBank in Utah, where there is no interest rate cap.
The ramped-up scrutiny could trigger headaches for other leading online lenders such as Prosper, the second-largest marketplace lender, and Ondeck, among others. Prosper, which declined to comment, does not have a New York license, according to its website. It is unclear where Ondeck is licensed, and a representative did not immediately return a call requesting comment.
You Worked Monday. Why Not Get Paid Monday?, (Bloomberg), Rated: A
PayActiv just won a Best of Show award at FinovateSpring 2016 for its use of technology to ease the “cash flow struggles of working families.” (A picture of its app appears below.) It is one of a raft of young financial technology companies with such names as FlexWage, Activehours, Clearbanc, and Even that were launched to fill a financial gap.1 Weekly and biweekly paychecks don’t fit the way many people work any more. In a sign of the times, ride services such as Lyft and Uber have rolled out Instant Pay and Express Pay services for their drivers.
“I don’t think the Consumer Financial Protection Bureau has put a broad eye on these companies yet because the numbers aren’t there yet,” said Sam Maule, digital practice lead for NTT Data Consulting. “The onus is on these companies to educate the regulators.”
Auto Loans are Gaining Popularity Among Millennials, (PR Newswire), Rated: AAA
“With unemployment among millennials improving, coupled with lower interest rates and low gas prices, the share of millennial auto loan requests is on the rise,” said Doug Lebda, founder and CEO of LendingTree. “Although the share of millennial auto loan requests is relatively lower in densely populated urban areas, the auto market appears to be enticing aging millennials.”
Despite the widely-held belief that millennials will become an increasingly smaller segment of the total car-buying population, the share of auto loan requests from millennials has been increasing in recent years. The share of millennial auto loan requests has climbed from roughly 27 percent in early 2013 to about 34 percent in 2016, suggesting a return of younger buyers to the car market.
Approximately 53.6% of millennial auto loan requests in the past 12 months were for new vehicles and 46.4% of requests were designated for the purchase of used vehicles.
Full data and city ranking available by visiting: https://www.lendingtree.com/press-room
Tal Yatsiv Named CEO of Backed Inc., (PR Newswire), Rated: A
Backed Inc., an online lending platform for personal loans, announced today that Tal Yatsiv has been named Chief Executive Officer.
Mr. Yatsiv, formerly in leadership positions as CEO of Aniboom and as a Vice President at J.P. Morgan, will lead the company’s market penetration strategy as it aims to become a prominent lender in the U.S. market and grow into a household name.
Backed has a unique differentiator that allows borrowers to add a co-signer (called a Backer) to their loan application to help them qualify for the loan or reduce their rate. Backed offers 1, 2, and 3-year unsecured personal loans for diverse purposes, ranging from $3,000-$25,000 and with APRs as low as 2.9%. Currently, Backed loans are available in New York, New Jersey, Arkansas, West Virginia, and Florida.
Here’s why banks have – and can keep – the upper hand over P2P lenders, (City A.M.), Rated: A
I asked a former chief investment officer of a huge bank a couple of years ago which bank would buy up P2P firms first. They replied: “no, which P2P firm will buy a bank?”
Deloitte’s report this week on marketplace lending (MPL) suggests they were wrong. It concludes that the success of P2P lenders is a “temporary phenomenon” which, “contrary to a number of commentators”, it sees as “unlikely to pose a threat to banks in the mass market”.
“It’s not the fully-loaded cost that’s most relevant… but the marginal cost. Banks already have the branches and marketing and services infrastructure set up to support the full suite of their products at large scale. Marketplace lenders… are paying through their noses and outspending each other to acquire customers.”
When rates rise and we go through another credit cycle, it’ll be even harder for platforms to match banks’ pricing and maintain a sustainable profit. “Right now, MPLs are underpricing banks simply by offering VC-funded free money to customers and investors.”
But not everyone sees things in the same way. “Banks can currently access money more cheaply than marketplace lenders and, in order to be truly competitive, this gap must reduce,” says Rhydian Lewis, co-founder and chief executive of RateSetter. He’s confident that marketplaces will grow and experience economies of scale, without the need for deposit-taking.
While Deloitte mentions that banks can borrow cheaply (from depositors), it doesn’t cover other major distinguishing features that give them a competitive advantage: like the fact they hold a credit balance with central banks, or that payments systems also enable them to get money cheap.
P2P and marketplace lending funds not platforms are the threat to banks, says Deloitte report, (Altfi), Rated: AAA
The rapidly growing demand for P2P and marketplace lending funds is the leading threat to banking’s traditional lending territory within the alternative finance space rather than the plethora of online platforms, according to a report by consultancy firm Deloitte.
“This [risk] is that market place lenders might provide easy access to a new, higher-yielding asset class for those deposit-holders whose low returns currently provide banks with their advantaged funding base. This advantage is the key to banks being able to sustain their position on the borrowing side of the market,” Tomlinson said.
There are now a small but quickly growing universe of investment trusts listed on the London market that fit in into the alternative credit label. These include the likes of the £868m P2P Global Investments, £381m VPC Specialty Lending, £157m Ranger Direct Lending, £147m Funding Circle SME Income, £100mm Honeycomb and £53.2m GLI Alternative Finance.
They are mostly portfolios of SME and consumer facing loans with broad geographic exposure, low duration and typically relatively small in size and offer attractive yields of 5-10 per cent.These generally can come in the shape of private placements of company debt, securitised loan funds and direct lending through channels such as market placer loan platforms.
Firstly the substantially higher headline yields on offer than many other fixed-income assets, adjusted for duration and default risks.Secondly for the perceived diversification benefits that these funds can bring, due to less correlation to other more core assets such as global equities.
“Chasing this opportunity, European fund managers have raised around $170bn over the past five years to invest specifically in private debt, with a marked acceleration since 2012,” he said.
“Both models are converging, with hedge funds seeking to expand their investor base through more retail offerings, and traditional asset managers increasingly offering specialised funds to compete for market share. The resulting ‘democratisation’ of alternative asset classes, including lending, appears set to drive a major boost in demand.”
Tomlinson said: “This data suggests that market place lenders’ annual risk-adjusted returns are competitive with equities. Specifically, while direct lending has underperformed the S&P 500 index over the past 20 years, it has not had any negative return years and has been much less volatile.”
Financial planners delving into the world of peer-to-peer lending, (Professional Planner), Rated: AAA
Daniel Foggo, the CEO of RateSetter, the only P2P lender available to Australian retail investors, says the average investor on his platform lends $11,000 and the average SMSF $57,000, but lenders put in by advisers typically invest around $100,000.
RateSetter began in the UK and is now the biggest P2P lender in Europe. It launched in Australia in 2012 and has facilitated $35 million of loans.
Lenders are exposed to the borrower’s default. Foggo says RateSetter’s borrowers are of high enough quality to get bank loans, but they are looking for cheaper rates. On average they are 39 years old, have an average income of $90,700 and around 70 per cent are men.
But RateSetter charges borrowers a fee that contributes to a ‘Provision Fund’, which compensates lenders for late payment or default. The fund currently has $1.66 million held against $31 million of loans.
Lenders take a risk that the Provision Fund might run out during times of high unemployment and high default. “You’re really taking a risk on our provisioning for bad loans through the cycle,” Foggo says.
So far all defaults have been funded.
“Advisers like the fact they are getting something that banks have funded for decades – consumer loans,” he says.
Another fund, Global Credit Investments, is also targeting planners, but in their case those advising high-net-worth clients.
GCI was launched by former Bain & Co consultant, Gavin Solsky, and Goldman Sachs veteran, Steven Sher, to provide a managed fund-style solution to accessing P2P loans in the US.
Solksy says a diversified P2P portfolio isn’t correlated with other asset classes and the sentiment that drives them. Performance “is unrelated to what’s happening in the investment market; it’s much more leveraged to unemployment.”
Solsky says in the past, planners have been more focussed on shares and property than fixed income investments.
“Planners need to get up to speed as technology continues to disintermediate financial services and banking,” he says. “They need to get their heads around what that means for new products and how that helps their clients.”
ASIC also warns that credit assessment is a highly skilled and complex process, and investors are relying on the platform to assess and rate a borrower, “not an external credit rating agency”. It says P2P loans are not deposits and the Government’s deposit guarantee doesn’t apply. Some funds do maintain funds that compensate investors if a borrower defaults, but ASIC says that if there are a large number of defaults, the fund is unlikely to be able to compensate all investors.
Author: George Popescu