News

April 18th 2016, Daily News Digest

  • Moody’s seems to have made a mistake in Prosper’s overpriced securitization.
  • BlackRock backs P2P with £12.7m investment.
  • The issues around complying with Lending Acts in the US.
  • Are retail bonds a solution for capital sources for p2p ?
  • Fintech providers have a much better image than banks for various reasons.
  • PayDay inventor, Charles Hallinan, indicted.
  • Amex quietly building a $1bil/year SME lending business by going small loans.
  • How Reg A+ is ideal for marketplace lending funding.

 

Making sense of the lending industry’s rapid changes, ( Tech Crunch), Rated: AAA

“A horse is here to stay, but the automobile is only a novelty — a fad.” This was what the president of Michigan Savings Bank said to Henry Ford’s lawyer, Horace Rackham, in 1903, discouraging him to invest $5,000 in the new car company.

Reading the news makes one feel that the situation around P2P lending reminds us of the subprime crisis in the U.S. in 2008 — but if you look at the facts, you can see that is simply not the case.

If the overall situation with delinquency is stable, can there be something wrong only with the loans that are the security in CHAI securitization?

The chart  (the source chart is here) suggests that the delinquency on most securitizations are at their planned level, and the spread between the actual cumulative loss value and trigger value at which the cash flows received on loans begin to be withdrawn from the holders of junior classes of bonds in favor of the holders of the senior classes remains unchanged (except for a few securitizations).

Prosper’s securitizations, which include CCOLT, as well as CHAI PM1, CHAI PM2 and CHAI PM3, all demonstrate a predictable and stable performance. The only securitization that fails to go as planned is the one undertaken by Jeffries for CircleBack Lending (marked in red in the lower left corner of the chart), but CircleBack issue loans to borrowers with lower FICO scores.

Moody’s explains that this is due to the increase of expectations from 8.5 percent to 12 percent in respect of the level of defaults on the portfolio of loans that serve as underlying for bonds.Why did Moody’s assign the rating based on the default rate of 8.5 percent if the platform itself considered that the level of defaults will be higher? MonJa believes that Moody’s simply made a mistake in their initial assessment; this seems very convincing if we analyze the data presented in the charts above.

Why did Moody’s assign the rating based on the default rate of 8.5 percent if the platform itself considered that the level of defaults will be higher? MonJa believes that Moody’s simply made a mistake in their initial assessment; this seems very convincing if we analyze the data presented in the charts above.

There is no collapse, and no signs of deterioration of loan quality or increasing loan delinquency, and I think those who will understand the mechanisms of operation of alternative lending and the real risks involved — instead of just relying on the data presented in the press — will get an opportunity to achieve superior returns on their investment.

Fintech and alternative lending are now in a situation similar to that of the automobile industry at the beginning of the 20th century.

BlackRock backs P2P with £12.7m investment, (Financial Times), Rated: AAA

BlackRock was the third-biggest holder of UK loan platform Funding Circle’s investment trust, buying £12.7m of shares in December, according to Bloomberg data.  The asset manager confirmed it holds the shares in its BlackRock Income Strategies trust.

The investment builds on an existing relationship with the lender. BlackRock has held an equity stake in Funding Circle since April 2015, when it took part in a funding round that raised £100m led by Russia’s DST Global.

It joins Invesco Perpetual, Aviva, M&G Investments, Legal and General, Newton Investment Management, Woodford Investment Management and Brooks Macdonald — all of which hold positions in one of the three major investment trusts offering exposure to the niche.

The Funding Circle investment trust, which launched in December 2015, is the fourth-largest product to offer exposure to peer-to-peer and alternative finance products.

MW Eaglewood, a hedge fund, and US private equity house Victory Park Capital floated investment trusts on the London Stock Exchange in 2015, both raising £200m at listing.

Following Invesco Perpetual, with a £43m position, the Railway Pension Trustee scheme is the second-largest shareholder of the Funding Circle trust.

Securing a credit rating is expected to open up the sector to a broader range of investors such as pension funds and insurers

Can Fair Lending Keep Up with Fintech?, (American Banker), Rated: AAA

As financial regulators consider how to fit the burgeoning marketplace lending industry into the existing regulatory structure, banks and consumer advocacy groups are beginning to question how community reinvestment and anti-redlining statutes might be applied, if at all.

Ed Mierzwinski, the Consumer Program Director for U.S. Public Research Interest Group said “These new methods, they’re designed to avoid existing laws. They are established in ways that they hope to avoid not only the [Community Reinvestment Act], they think they can avoid the [Fair Credit Reporting Act] and the [Equal Credit Opportunity Act] as well. They are looking to bypass the existing regulatory structure.”

Financial institutions must comply with a bewildering range of such laws, including the Fair Housing Act (1968) and the Equal Credit Opportunity Act (1974), the Consumer Credit Reporting Act (1968) and the Fair Credit Reporting Act (1970).

But bankers fear that some marketplace lenders — if not exactly breaking the rules — are at least bending them.

“Buyers can redline even if originators can’t,”

“That’s been an interesting new issue that’s been raised: Is that OK? In the marketplace model, originators are only funding the loans that the buyers want, and buyers often don’t want loans that they believe are in ‘bad’ ZIP codes.”

The Supreme Court last month asked the solicitor general’s office to weigh in on whether it should hear an appeal of a case concerning whether state usury laws apply when a loan is sold across state lines.

A solar bond with a difference, (Alt Fi Investor), Rated: AAA

In recent weeks mainstream asset managers emerged within the alternative finance space. Octopus has launched its own peer to peer lending platform.

One of their biggest competitors Downing, beat them to the alternative finance space back in March with the launch of DowningCrowd, led by Julia Groves, ex head of the UKCFA and Trillion Fund. The website is www.downingcrowd.co.uk. The platform’s inaugural product was a one-year solar bond which managed to raise of £3.2m.

Details on Bond

1 year, 6.25% fixed rate bond
Interest: Fixed 6.25% including ‘early bird bonus’ in first 14 days, 5.75% thereafter
Instrument: Secured Bond
Term: 1 year
Available: mid-March 2016
Interest paid: 6-monthly
Capital repaid: end of term
Security: Debenture, holding first charge against Kenninghall Solar Farm, Norfolk
Total raise: £3.2 million
Investment amount range: £100 to £100,000
Loan to value: Estimated at 44%

Downing is a respected asset manager with a good track record. Despite the provenance of the issuer and the decent rate, this bond needs to be treated as a potentially higher risk idea for the more adventurous, more sophisticated investor only.

CAPGEMINI & EFMA’S WORLD BANKING REPORT

People are more likely to refer their fintech provider (55%) to a friend than their primary bank (38%).It’s because fintechs provide a better user experience.82% of customers said that a primary value proposition of these products is that they are easy to use, 81% said faster service, and 80% said good customer experiences.

46% of banks plan to collaborate with fintechs, but only 13% believe their core systems can handle the technical demands of partnerships.

Latin America is the region with largest share of bank customers likely to leave in the next 6-months.

67% of customers in North America have complete trust and confidence in their bank — the highest of any region.

Turkey (83%), Portugal (81%), Argentina (80%), Mexico (78%) and India (77%) have the highest fintech adoption rates.

Growing pains: Peer to peer lending hits puberty, (Financial Review), Rated: A

Comment: Article covering the Australian market and talking about SocietyOne mostly.

Various presenters to LendIt last week reported a shift in funding away from hedge funds towards more endowment funds and banks, as marketplace lending is recognised as an established fixed-income asset class.

As three of the big banks prepare to report interim profits during the first week of May, the threat of disintermediation of profitable banking business remains a concern.

On the investor side, SocietyOne is planning on bringing retail investors onto the platform this year, which is currently only available to sophisticated investors. Its loans are also being funded by eight credit unions. Since January 2013, investors have experienced an effective annualised rate of return of about 8.5 per cent and about 70 per cent of investors have chosen to re-invest their principal and interest repayments back onto the platform.

Indicted Payday-Loan Pioneer Has Fingers in Fintech Companies, (Bloomberg Technology), Rated: A

Charles Hallinan was indicted last week. He is known in the payday-loan industry for pioneering the tactics some lenders use to circumvent state laws banning the costly advances. Hallinan, who has pleaded not guilty, is also an investor in Clarity Services Inc., a credit-reporting firm that says it has data on more than half of all subprime borrowers in the U.S.

Hallinan, 75, got into payday lending in the 1990s after selling a landfill company for about $120 million. A graduate of the Wharton School of the University of Pennsylvania, he was among the first to offer payday loans via phone and fax. He became an early adopter of online applications.

The first innovation was to pay a bank in Delaware, where rates aren’t restricted, to act as a front for his operation, prosecutors say. County Bank in Rehoboth Beach would say it originated the loans and that Hallinan’s companies only provided services. When regulators put a stop to that, Hallinan struck sham deals with American Indian tribes, according to the indictment. The tribes said they owned his payday-lending companies and asserted sovereign immunity to stop investigations.

Prosecutors say those dodges are illegal and Hallinan was part of a criminal conspiracy that generated more than $688 million in revenue from 2008 to 2013. County Bank wasn’t charged in the indictment and its CEO didn’t return a phone call seeking comment.

A person close to CircleBack, who asked not to be identified because the matter is private, said Hallinan was a seed investor in the company, though he had no role in operations.

To expand, Everest borrowed money last year from Atalaya Capital Management, a New York-based private equity firm that manages $1.9 billion. Adam Nadborny, Atalaya’s general counsel, said in a telephone interview that Hallinan owns a minority stake in Everest and declined to discuss the allegations against him.

Hallinan, as a director of Clarity, signed the consent agreement last year when the Consumer Financial Protection Bureau fined the company $8 million for allegedly obtaining tens of thousands of credit reports illegally. Clarity neither admitted nor denied the agency’s findings.

Ranney, Clarity’s CEO, said Hallinan provided startup capital for the company and now owns 14 percent of its shares, not “approximately one-third” as the indictment says.

Big Banks Turn to Smaller Loans for Bigger Profits, (The Motley Fool), Rated: AAA

Tucked deep in its latest investor day presentation, American Express revealed that its fast-growing merchant finance line is rapidly growing to become a billion-dollar business.

Amex Merchant Financing Loans Outstanding

American Express’ offering is highly competitive, issuing loans as small as $5,000 to businesses with revenue as low as $50,000 per year. The terms call for repayment over one or two years, with interest rates that range from 6% to 14%.

Amex’s rates pale in comparison to the eye-popping 36.9% yield OnDeck reportedly earned on its loans at the end of 2015.

Getting bigger by going smaller
American Express has quietly built this business by going down market.

In 2014, the company required its finance customers to have accepted Amex cards for more than 2 years, and have more than $50,000 in total debit and credit card sales. Today, American Express requires only that a business have existed for two years, and generate at least $50,000 in total annual revenue.

Big banks have a huge advantage on smaller players, even OnDeck — millions of qualified customers, cheap deposits, and plenty of underwriting experience. The writing is on the wall for smaller financiers: the big banks have come out to play.

Winning @ Lending Club, (Wain Street), Rated: A

By including information concerning the economic vitality of a borrower’s locality as a decisioning criteria, investors can improve the performance of their Lending Club loan portfolio.  Overlaying local economic vitality data provides additional insights about borrower creditworthiness that is not captured by traditional credit scoring models.

For platforms, this framework offers an additional means for benchmarking and tuning underwriting. We can append local economic vitality metrics for benchmarking and also license the data for incorporating into a credit scoring model.

For individual investors, we are looking into collaboration for developing an online service.

Deck: Marketplace Lending Using Reg A+, ( Crowdfunding Insider), Rated: AAA

Brian Korn, a well-known attorney in the alternative finance space, delivered a presentation on Reg A+. While outlining the requirements under the exemption, the gist of the deck was that Reg A+ is perfect for marketplace lending.

While all of the marketplace lending platforms accept institutional money only some accept retail investors. As marketplace lending platforms seek to diversify their sources of capital using Reg A+ may be a viable option.

The presentation : https://www.scribd.com/doc/309544853/LendIT-Reg-a-Korn

Western Independent Bankers Selects Bizfi as Premier Alternative Finance Provider, (Business Wire), Rated: A

Western Independent Bankers (WIB), a trade association which markets to over 600 community and regional banks, announced today that it will partner with Bizfi, a financial technology company that provides a wide range of financing options for small businesses, as the exclusive Premier Solution Provider for alternative finance.

This partnership provides the small business clients of WIB’s member banks and bank service providers access to Bizfi’s alternative financing platform.

Bizfi combines aggregation, funding and a participation marketplace on a single platform for small businesses. Founded in 2005, Bizfi and its family of companies have provided in excess of $1.5 billion in financing to more than 28,000 small businesses in a wide variety of industries across the United States.

Banking on peer-to-peer lending, ( The Financial Express), Rated: A

Comment: Article covering the Indian market.

What must be done before embarking on this venture?

First, the P2P player or platform has to be registered. This is so because besides being a platform supplier, the company has to also provide the credit scores and take the responsibility of filtering the borrowers.

Second, we need to develop scores for each person that is borrowing in the market.

Third, the potential savers have to be registered with the platform with KYC norms just like deposit-holders of a bank.

Fourth, a question that needs asking pertains to interest rates.

Fifth, if these loans are to make sense, then they should be made tradeable.

Last, it needs to be cleared whether there is a need for a cap on the amount that can be borrowed, given mid-size units could also access this market even as banks may like to step in as suppliers of funds.

Ron Suber of Prosper: It’s About Building a Business that Lasts., (Crowdfund Insider), Rated: A

“Those who do not believe in what we are doing … bringing investments online, are going to be stuck with lots of stores … borrowing and lending are going online and it is going to be different.”

Suber affirmed that marketplace lending is no longer an alternative investment. It is no longer an alternative fixed income. It is an established fixed income asset class – with a growing number of investors joining in.

Prosper wants consumers who engage with them not to do so once a month but five or six times a week.

Suber sees his company becoming a trusted global brand. But one that is used for much more than just term loans.

Online Lenders Hunt For Fresh Capital, (PYMNTS), Rated: A

The online lending marketplace has been hitting some speed bumps as of late. The key problems, according to Reuters, are the skittishness of hedge funds and, of course, market volatility.

David Snitkof, who cofounded marketplace loan data and analytics company Orchard, said: “There was plenty of fast money in the industry [last year]. But a lot of those funds have faced redemptions in other asset classes.”

In terms of market volatility, equity markets have not been kind to the stocks, cutting several of them in half. And market volatility has boosted the cost of credit facilities that have typically backed the retail loans themselves. On Wall Street, according to the newswire, the rates charged to the online lending firms have been boosted from 3 percent to 5 percent.

More institutional investors pumping money into crowd, ( Real Estate Weekly), Rated: A

The Richards Kibbe & Orbe LLP and Wharton FinTech 2016 Survey of U.S. Marketplace Lending finds that half of all institutional investors surveyed have made some form of investment in marketplace lending, up from less than 30% just one year ago.

More than 40 percent of compliance professionals said they were not familiar with regulatory framework.

Here’s why Swedish payments unicorn Klarna isn’t afraid of taking on Apple, Google, and Amazon, (Business Insider), Rated: A

Amazon is pushing its “Pay with Amazon” button for online retailers, a direct competitor to Klarna. Meanwhile, Google, Apple, and Samsung (not Silicon Valley but of the same scale) are all launching payment products on phones that allow people to automatically pay with cards pre-loaded onto a phone when browsing the web on their mobile — another threat to Klarna.

“Back in the railway era, railway companies end up controlling everything — logistics, housing, hotels, steel mills. They did everything. What ends up happening over time, however, is it’s hard to be competitive in everything. You can compete with other companies, but you can never compete with the whole market.”

“That is really why I am skeptical of large companies ability — independent of the fact that it’s Apple or Google or Amazon or whoever — I am skeptical of their ability to compete with the whole market. Amazon had their own phone recently. Now it’s gone.”

Chinese Lender’s Woes Expose Its Global Tentacles, (Wall Street Journal), Rated: A

Droves of teary-eyed investors from around China have descended on Shanghai Kuailu Investment Group’s swanky offices over the past week to demand their money back after the firm halted redemptions on wealth-management products for the roughly 250,000 clients of the firm and three affiliates.

The Shanghai firm invested in at least 20 feature films, including the coming release of “The Bombing” starring Bruce Willis, according to the company. Client money holds a slice of a $9 billion deal to privatize New York Stock Exchange-listed Chinese Internet-security company Qihoo 360 Technology Co., firm marketing documents show.

“No cash flow. That’s the issue,” said Xu Qi, who estimated assets cover about 90% of what is owed to investors, but that most of it is tied up in investments or projects that can’t be quickly converted to cash.

Many of Kuailu’s investment products promise high returns and redemption after a few months, according to company contracts reviewed by the Journal, but investors said few understood that the company’s success hinged on long-term projects. The mismatch made Kuailu’s business model fundamentally flawed, said Mr. Xu.

Mr. Xu, who said he has no financial stake in Kuailu, said the group was careless in valuing assets and likely skirted fund-registration rules meant to protect investors from fraud. He said the nationwide sales network under several different brands—the headquarters of Jinlu and Dangtian are a floor apart—was designed to make the firm look smaller than it is.

Funding Feud: P2P Loan vs. Credit Card Financing, (Business), Rated: A

It is often assumed that using credit cards in your business is more expensive then a peer-to-peer loan. Many small businesses are turning to P2P lenders for funding for lower interest rates.

We took a look at the average loan rate from Lending Club for all 2015 loans for borrowers with a FICO credit score from 699 to 704.

The National Association of Federal Credit Unions in cooperation with SNL and Datatrac took a survey of 168,929 financial institutions across the United States and found the following rates.

Our findings suggest that P2P lenders do not have lower interest rates then traditional banks or CU credit cards. Keep in mind that credit cards do not have origination fees. Lending Club charges up to 6.99 percent. With an origination fees that high credit cards are definitely the better option. If a borrower is willing to implement a payment strategy with their credit cards it is to their advantage.

However, this is easier said then done. I can see how only paying the monthly minimum payment can be appealing when cash flow begins to get tight. If the borrower does not stay disciplined in their repayment strategy, credit cards will get expensive.

How to BEAT George Osborne’s new landlord tax and invest in buy-to-let, (Express), Rated: A

A buyer hoping to secure a stable rent income from a £200,000 home will now be hit with a tax bill of £7,500 for the upfront investment, compared to £1,500 under previous rules.

But investors can still bet their cash on buy-to-let without being stung by the new charge, according to providers of peer-to-peer (P2P) property companies.

“Investing in property with LendInvest cuts out many of the negatives of being a landlord.

“You don’t have to worry about Stamp Duty, Capital Gains Tax, or gaps in tenancies. And you’ll never get a call from a tenant in the middle of the night about a broken down boiler.

“Instead you do get to enjoy a great, consistent return, and can diversify across a range of different properties much more cheaply than if you wanted to build your own traditional property portfolio.”

FSCS reveals how it will consider P2P claims, ( FT Adviser), Rated: A

To be eligible for FSCS compensation on peer-to-peer advice, investors must have received the recommendation to buy the investment on or after 6 April 2016.

The advice firm must have been authorised by the appropriate regulator to do so at that time, the investor must have lost money as a result of the advice they were given, and the firm (or its principals) no longer has sufficient assets to meet claims for compensation.

My Finbee P2P Lending Portfolio after 8 Months, (P2p Banking), Rated: B

Finbee finances small unsecured consumer loans.  Typical interest rates for investors are in the range of 20% to 32%. The platform is still very young, but recently loan volume picked up and Finbee crossed the milestone of 1M Euro loans financed since launch.

I expect that mid-term interest rates will sink as investor demand is rising. For small loans the weighted average rate at auction close is already occasionally dropping in the low teens or even below that.

Author: George Popescu

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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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