News

May 17th 2016, Daily News Digest

US

  • Lending Club’s 10-Q form provides a lot of information. A change of business model?
  • Lending Club new CEO’s, Scott Sanborn, letter to investors.
  • BTIG : recent drop in Lending Club shares not justified.
  • Lending Club receives DOJ criminal subpoena.
  • And the details on Renaud Laplanche’s last days at Lending Club.
  • Mortgage whole loan trading platform reached $500m volume mark.

UK

  • A detailed article on difficulties of European securitization.
  • GLI acquiring Sancus and BMS.

Singapore

  • OCBD bank launches venture debt product.

 

United States

Lending Club form 10-Q, ( Lending Club), Rated: AAA

Comment: a very long form with a lot of details. 

From the form :

“Review of related party transactions: […]  In addition, in March 2016 the risk committee approved an investment by the Company in Cirrix Capital, L.P. without all committee members being aware of the prior investments by the former CEO and the board member.

According to its website, the people on Lending Club’s risk committee are Dan Ciporin of Canaan Partners, Hans Morris, the newly appointed executive chairman, Larry Summers and Simon Williams, a former HSBC banker — all of whom also sit on the board.

Elsewhere in the filing, we discover that Lending Club has abandoned the pure marketplace model, and thereby discrediting the idea of lending via the matching of borrowers and lenders on a technology-driven platform.

Last week, we discussed how the investment in Cirrix — regardless of Laplanche and Mack’s interests — broke the company’s promise to its equity investors that it wasn’t in the business of taking credit risk. Now, with investors fleeing the company, Lending Club has doubled down and said it will use more of its own capital to fund loans, becoming, in part, the sort of balance sheet lender it was founded to disrupt:

“a number of investors that account for, in the aggregate, a significant amount of investment capital on the platform, have paused their investments in loans through the platform in the last five business days[…]

In order to obtain additional investor capital to our platform, we may need to enter into various arrangements with new or existing investors and we are actively exploring several possibilities.

These structures may enable us or third-parties to purchase loans through the platform. Such actions may have a material impact on our business and results of operations and may be costly or dilutive to existing stockholders.”

The filing also says Lending Club is upping its obligations to debt investors and widening the circumstances under which it will buyback loans from investors, again taking on more credit risk.

The first consequence is that the debacle could really challenge the fundamental premise of peer-to-peer or marketplace lending, depending on what you view that premise to be.

Previously, if you held stock in the company, you were making a bet on Lending Club’s ability to keep churning out loans each quarter and to avoid the sort of legal, regulatory and ethical elephant traps that the banks have fallen into. Now you’re also making a bet on Lending Club’s ability to underwrite those loans — that’s not necessarily a deal-breaker, but it’s certainly a different deal to the one sold at its float in 2014.

More disclosures: 

“The board review also noted that our former CEO and our Chief Financial Officer (CFO) had pledged some of their Company shares to secure personal loans from a third-party financial institution, which was not disclosed to the board during subsequent deliberations, prior to the discussion referred to below. In January 2016, the reduction in the Company’s share price forced them to refinance. In order to avoid selling shares, the former CEO requested temporary financing, secured by real estate, from an entity related to a director of the Company. Separately, the former CEO then offered to lend an amount to the CFO to also permit her to refinance her loan. These temporary financing arrangements were discussed with the members of the Audit Committee. The officers obtained new financing from unrelated third parties within three weeks to pay off their temporary financing arrangements. In the opinion of the Company these lending arrangements were executed on normal market terms and, because the Company had no financial involvement in them, did not require approval under the Company’s policy on related-party transactions.”

LendingClub (LC) Releases Letter to Investors, (Street Insider), Rated: AAA

In March, Lending Club detected changes in the application dates of 361 loans sold to a single investor and addressed the issue within 48 hours.

A Big Four accounting firm was retained to do forensic data change analysis and covered approximately 673,000 whole loans sold to investors over the last 8 quarters.

Excluding the previously identified 361 loans, 99.99%1 of the remaining loans display either no changes or changes explained by the normal course of business.

Lending Club is also making the following enhancements:

• Enhancing the testing of data changes prior to deployment based on the risk of the change
• Reviewing change requests for key data attributes, prior to implementation, by the Internal Audit Team
• Validating that change requests for key data attributes have been properly executed
• Expanding the number of data fields that are logged for changes
• Monitoring logs for key changes
• Refreshing training/communication on data change management processes
• Enhancing the end-to-end testing framework
• Completing a consulting engagement on data change management with a Big Four accounting firm; implementing appropriate best practices
• Retraining employees on code of conduct and ethics and the whistleblower hotline
• Reinforcing a high compliance culture as explicit objectives in the employee performance review process

Recent Drop in Lending Club (LC) May Not be Justified; Core Business Remains Intact – BTIG, (Street Insider), Rated: AAA

We think the assertion from some in the media that the incidents prove that the company is just like traditional banks insofar as such banks were guilty of shady practices prior to the financial crisis is misplaced;

No investor in LC’s loans has lost any money as a result of the incidents disclosed on May 9.

We also believe the value proposition offered by LC’s core business — to generalize, taking consumers out of 19% APR credit cards and putting them into 12% term loans — remains very much intact.

Lending Club, Already Troubled, Receives Justice Dept. Subpoena, (New York Times), Rated: AAA

The company disclosed the grand jury subpoena in a regulatory filing, saying it intended to cooperate with the federal investigation.

The disclosure of a criminal subpoena, which the company received last Monday — the day it announced Mr. Laplanche’s departure — is another big blow to Lending Club.

Inside the Final Days of LendingClub CEO Renaud Laplanche, (Wall Street Journal), Rated: AAA

In a statement to The Wall Street Journal, Mr. Laplanche said: “I recognize that events occurred on my watch where we failed to meet our high standards. While there are disagreements as to the characterization of facts, I accept that the Board acted in good faith and did what it believed was right for the Company.”

On Monday May 16th, LendingClub disclosed in a securities filing that it received a grand-jury subpoena from the Justice Department on May 9, the day the company announced Mr. Laplanche’s departure. In the filing, LendingClub said its internal review found the company had “control deficiencies.”

LendingClub’s board includes former Treasury Secretary Lawrence Summers, former Morgan Stanley Chairman John Mack and former Visa Inc. President Hans Morris. Mr. Morris is LendingClub’s executive chairman.

Earlier this year, the firm selected Goldman Sachs Group Inc. and Jefferies LLC to put a securitization deal in motion.

The problems occurred shortly thereafter. In March, a LendingClub engineer namedAndreas Oesterer informed Mr. Laplanche that he falsified dates on $3 million of loans that were bought by Jefferies as part of the deal, according to people familiar with the matter.

Mr. Oesterer said he acted in response to a request from Matt Wierman, a senior vice president at LendingClub, the people said. Mr. Wierman told others at the firm he was misunderstood, one of the people said. It isn’t clear what Mr. Wierman meant by that.

Upon hearing Mr. Oesterer’s story, Mr. Laplanche discussed it with the company’s compliance chief, Tim Bogan, who had heard about the episode from another employee and was looking into it, according to a person familiar with the matter.

Mr. Bogan launched an investigation, which uncovered that other loans sold to Jefferies contained errors, according to people familiar with the matter. He reported his initial findings to the board, the people said.

Specifically, between late March and April 8, LendingClub sold to Jefferies $22 million in loans that contained a previous version of disclosures for a section of the borrower agreement known as the “power of attorney,” according to people familiar with the matter. In that section, the lender essentially takes some authority to act on the borrower’s behalf.

Jefferies had sought to update the “power of attorney” language in the loan document and make it more prominent. LendingClub agreed to do so starting around March 23.

But the firm still sold Jefferies $22 million in loans where the disclosures didn’t meet the New York firm’s demands, technically violating terms of the deal with Jefferies. Jefferies ultimately didn’t have to hold on to the loans it didn’t want, because LendingClub bought those back by mid-April and found another buyer, but the move disturbed LendingClub’s board, according to people familiar with the matter.

Mr. Laplanche knew the loans didn’t match Jefferies’s criteria before other board members did, but it is unclear exactly when he found out, according to people familiar with the matter.

As the company’s investigations proceeded, Mr. Laplanche showed no signs of worrying about his job, according to people close to the firm. At the annual LendIt conference in April, Mr. Laplanche was keynote speaker for the fourth year in a row.

On April 26, four days after receiving the “disruptive innovation” award, LendingClub said in a securities filing that it had invested $10 million in a holding company of funds that bought LendingClub loans.

Unbeknown to the board when it approved the investment, Mr. Laplanche had a personal interest of 2% of that same holding company, according to people familiar with the matter. It isn’t clear why he didn’t tell the board.

A week later, Mr. Laplanche met with the board, who told him swift action was needed to fix the issues uncovered in the law firm’s review of the Jefferies deal. The law firm didn’t respond to a request for comment.

Mr. Laplanche heard that the board wanted to fire three executives involved with the securitization: Mr. Wierman, Jeff Bogan and Adelina Grozdanova. Mr. Laplanche pushed back against forcing Mr. Bogan and Ms. Grozdanova out, according to people familiar with the matter. The executives didn’t respond to requests for comment.

Each was integral to LendingClub’s plans to pursue securitizations. Days before the board meeting, Ms. Grozdanova appeared at an investor event at a New York hotel with representatives from Jefferies, pitching fund managers on buying into the soon-to-be-completed bond deal.

Jeff Bogan, who isn’t related to the compliance officer with the same last name, oversaw the company’s efforts to sell loans to investors. The Jefferies deal was to be the first of several, but plans for all the deals are now stalled.

Between Tuesday and Thursday in the first week of May, LendingClub’s board was presented with evidence that Mr. Laplanche knew many of the details of the $22 million loan sale and wasn’t upfront with directors about what he knew, according to a person familiar with the matter.

That convinced directors that more drastic action was needed. On May 5, Mr. Morris, the former Visa president and a LendingClub director since 2013, was named board chairman, taking the responsibilities from Mr. Laplanche, this person said. The move wasn’t announced publicly at the time.

On Friday, Mr. Laplanche was called into a meeting with Jeff Crowe, who had been a director of LendingClub since his venture-capital firm, Norwest Venture Partners, invested in the company in August 2007. The two were joined in the office by a lawyer from Arnold & Porter. Mr. Morris dialed in by phone, according to people briefed on the session.

Mr. Laplanche was given the 24-hour ultimatum. After about 10 minutes, the meeting adjourned. Mr. Laplanche left for the day and over the weekend sent out a note to friends announcing he had opened a new personal email address, according to people familiar with the matter.

The other three LendingClub executives were also fired, the company said on May 9. Mr. Oesterer is believed to still be working at LendingClub.

The board expected investors to react negatively to the news, but few directors were prepared for the 35% share-price drop the day Mr. Laplanche’s departure was announced, according to people familiar with the matter. The slide subtracted nearly $950 million in market value from LendingClub, now valued at about $1.5 billion.

“This is a major hiccup,” said Gilles Gade, chief executive of Cross River Bank, a Teaneck, N.J., bank that partners with online lenders and is a backup bank for issuing LendingClub loans. When “a breach of trust” occurs as the largest player in an industry, “it’s going to have an effect.”

Resitrader mortgage whole loan trading platform passes $500 million mark, (CU Insights), Rated: AAA

Resitrader’s secure whole loan platform enables loan originators, banks, servicers, brokers and financial advisors to more easily and quickly buy and sell whole loans.  Multiple buyers and sellers can offer, bid and transact simultaneously. Resitrader’s platform automates many activities currently supported through spreadsheets and makes it simple for buyers and sellers to communicate in real time, notify each other of loan pools they wish to trade, exchange loan data, documents and pricing information, and settle transactions easily. As a result, trading speed has been reduced from several hours to a few minutes.

What separates Resitrader from earlier efforts is its ability to facilitate transactions combined with accurate pricing.

Ardy said loan buyers are particularly interested in “color,” which is the price at which similar loans are being purchased. Previously, this information was only available by “word of mouth,” Ardy said, but Resitrader provides buyers with “color” reports on each loan. Resitrader provides the most accurate loan pricing available because each loan is priced individually based on its own detailed and exact information..

A formal, organized secondary market also stands to expand the primary market itself by providing liquidity that will encourage lenders to create new loan products, and serving as an electronic conduit to loan securitizers. “Eventually, the benefits of a large and vibrant whole loan marketplace will benefit everyone in the industry, professionals and consumers alike,” said Chris Saitta, Resitrader’s chairman.

Fitch: Confidence in US Marketplace Lending ABS Takes a Hit, (Reuters), Rated: A

Investor confidence in US marketplace lending ABS tumbled last week on events surrounding the industry’s largest player, Fitch Ratings says. Fitch rates two marketplace ABS deals backed by loans originated through Prosper. Their performance, to date, has been within expectations and we do not expect recent events to affect the ratings of these deals.

In our view, marketplace ABS may be able to overcome recent headline risk if they can demonstrate predictable asset performance, navigate increased regulatory pressure and maintain appropriate control frameworks to support their growth. However, marketplace lenders face an uphill battle in winning back investor confidence.

Marketplace Lender LendingUSA Announces Three New Executive Hires, (Crowdfund Insider), Rated: B

LendingUSA, a marketplace lender and provider of consumer point-of-need financing, announced on Monday it has appointed three new hires to its executive team. This news comes just a few months after the website named Mike Testa, former president of CareCredit, as its new president.

Camilo-ConchaTerry Silance and Carlos Herrera will both assume the role of vice president of business development while Michael Hill, former Senior Account Manager at LendingClub Patient Solutions, has been appointed LendingUSA’s senior relationship manager.

Saundra Schrock Joins Elevate’s Board of Directors, (Press Release), Rated: B

Currently a Managing Partner at Equanimity Leadership Solutions, LLC, a consulting firm that trains leaders on effective management communications strategies, Ms. Schrock brings to Elevate more than 35 years of experience in consumer financial services.  Prior to her current position, she spent over twenty years at JPMorgan Chase where she successfully managed over 3,000 bank branches and 30,000 employees, as well as their Consumer Lending Division.

The company is privately held and is backed by respected Silicon Valley venture capital firms including Sequoia Capital and Technology Crossover Ventures.

 

United Kingdom

Structuring a marketplace lending platform securitisation in Europe, (International Law Office), Rated: A

Comment: A very exhaustive article about securitization requirements in Europe for marketplace lenders.

Marketplace lending platform securitisations in Europe are an exciting new development. However, the way forward is not free from obstacles, particularly in relation to regulatory compliance both in origination and ownership of the loans and in relation to risk retention and disclosure requirements.

A pan-European securitisation must involve a platform operator which sources loans on a pan-European basis, or alternatively pan-European pools containing loans which have been aggregated from different platforms. This latter approach may be necessary to achieve a sufficiently large portfolio in order to make a securitisation cost effective, but is likely to introduce additional complexity in describing the credit and servicing procedures of each platform.

The underlying originator of the loans must also comply with differing regulatory requirements across Europe which drive some of the differences in origination structures and some of the requirements under securitisation regulations which may make this more challenging. Some of these issues are examined below.

One immediate legal problem with securitising loans originated through marketplace lending platforms is that in many jurisdictions, the lender must have regulatory permission to lend. The platform itself may have required other permissions, including to operate a marketplace lending platform or to service the loans after origination.

If marketplace lending platform securitisations are to be offered in the European wholesale markets or funded privately by European banks, alternative investment funds or insurers they will need to be structured to include qualifying risk retention.

The platform (or another third party) should act as servicer of the loans for the securitisation SPV.

Originators and sponsors in respect of any securitisations must have regard to the requirements for disclosure to investors under Article 409 of the Capital Requirements Regulation (and similar equivalent provisions) to the extent that such securitisations are to be offered in the European wholesale markets or funded privately by European banks, alternative investment funds or insurers.

GLI Finance : Proposed acquisition of interests & notice of EGM, (4-traders), Rated: A

Proposed acquisition of interests in Sancus Gibraltar and BMS and simplification of the GLI group structure (the Proposals).

The Proposals do not require the approval of Shareholders. However, the Board would like to offer Shareholders the opportunity to consider what the Board believes is an important step in the development of the GLI’s business.

The purpose of the Acquisitions is to increase the Company’s stake in the Sancus and BMS sub-groups and consolidate them under a new ‘Sancus BMS’ brand, in order to create one unified lending business, operating in 5 jurisdictions; Jersey, Guernsey, Gibraltar, UK and Ireland.

Following completion, the combined Sancus BMS Group is expected to make pre-tax profit of approximately £2.5 million in 2016, rising to approximately £4 million in 2017 when loan books are fully deployed, the businesses are fully integrated and increasing levels of commercial, operating and financial synergies are realised.

The acquisition of Sancus will be financed via a bond and share issuence by GLI for a total amount of £23.5 million.

The acquisition of BMS will be financed via shares issuance and cash payment of £482,950 for a total of £5.175 million (subject to adjustment).

The Company also intends to make available further Bonds to Eligible Investorsin an initial amount of up to £4 million

EU referendum: none of the UK’s most successful tech firms support Brexit, (Independent), Rated: B

The tech companies against the UK’s exit from the EU include Zoopla, Just Eat, Ve, TransferWise and Funding Circle.

Singapore

OCBC optimistic about growing loans to SMEs, (Business Times), Rated: AAA

This also comes as the bank has noticed a discernible shift in attitudes of small and medium-sized enterprises (SMEs) in dealing with the manpower crunch – which has been rolled into the broader purpose in Singapore of boosting productivity through technology rather than cheap labour imported from overseas.

With the government largely not relenting on quotas on foreign labour, the SMEs are looking at ways to boost workforce efficiency. This shift in attitude, said OCBC’s head of emerging business Eric Ong, has meant SMEs have become more keen to tap on government-led schemes.

Among the latest schemes to be rolled out is one known as the venture debt programme, which was officially introduced in January this year. This scheme, first announced in Budget 2015, applies to companies with accelerated growth – businesses that offer innovative, unique products, with high revenue growth potential.

Spring Singapore will provide 50 per cent risk-sharing to financial institutions for such loans, which go up to S$5 million each, and is meant for working capital, or financing assets, projects or mergers and acquisitions. The government agency said it aims to dole out about 100 venture debt loans, totalling close to S$500 million, between now to March 2018.

To target SME clients more effectively, OCBC has changed its two business banking branches – one in Ubi, and the other in Bukit Batok – to focus on advice on government schemes. This was after the bank observed that SMEs were walking in to seek advice on schemes such as the microloan programme, said Mr Ong.

Mr Ong is sceptical on the growth of p2p lending in Singapore. For one thing, p2p lending took off in the US and UK where there was credit crunch, he said. “In the Singapore context, most banks are still lending,” said Mr Ong. Lending rates at p2p sites are also much higher than that of banks. “I’m not too sure there is that growth potential,” he said.

 

New Zealand

Harmoney Appoints David Flacks As Chair of the Board; Announces New Director, (Crowdfund Insider), Rated: A

On Monday, New Zealand’s peer-to-peer lending platform Harmoney announced that it has appointed current director David Flacks as its chair of the board and Stuart McLean will join the board as a director.

This news comes just a few months after Harmoney revealed an Australia invite-only launch was happening so it could work out any bugs before a public release.

The website raised an additional $8.8 million via a new share offering to P2P Global Investments and Stone Ridge Ventures.  Total cash on hand now stands at $30 million and will help with the Aussie launch.

Roberts noted Harmoney may raise more money in the near future as it has “massive aspirations” for the online lender. He also did not rule out an IPO but believes they need to “grow and get better first.”

 

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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