Daily News Digest Featured News

June 29th 2016, Daily News Digest

News Comments

United States

  • Note: this section has been modified and contains our text commentary without links. Links to the articles can be found in our new News Summary section below .
  • BizFi , NY-based SME lender, and aggregator founded in 2005 raises $20M on top of the $65M raised in Dec 2015. It is good to see that good companies continue to find good capital.
  • An in-depth explanation of the state of Maden vs Midland case and the implications of the Supreme Court’s decision not to hear the case. A fairly long article summary which is worth a read to know the facts. I expect Madden vs Midland will be blamed for all kind of stock price moves or lack-of-funding which may or may not be justified.
  • Most important , Lending Club’s CEO goes on record that LC uses own capital to fund only around 2% of loans. Lending Club to take a $3mil charge due to adjustments to the valuation of fund assets. LC Advisor’s fund facing redemption of 58% of assets which led as expected to restrictions . On the good news side, we now have clarity on Scott Sanborn’s position as permanent CEO , as we reported yesterday.  Lending Club expects to resume growth and profitability in 2017. As many CEOs do, Renaud Laplanche asked his family to take 32 Lending Club loans in Dec 2009 to push the origination volume over a critical milestone.
  • In Solar P2P lending, an interesting Kroll Rating Agency though on the effect of net metering rules possible change due to the immense (136%) growth in PV systems capacity in the last 2 years.

United Kingdom

  • The main Brexit challenges to Fintechs : how to offer services in the EU, how to get enough talented employees, and how to face a funding gap in the uncertainty. Perhaps the US has most to gain from London’s loss of attractiveness to finance companies once London can not easily cover the EU markets anymore.
  • GLI finance rescues FundingKnight, a P2P SME lender, out of administration.

Germany

  • A very interesting poll showing German p2p investors, once familiar with the space, seek better yields abroad as long as platforms have an English interface.

China

  • China has 19 million micro and small enterprises 78% of which have difficulties receiving bank loans. This market pressure will continue to fuel non-bank lenders. Inappropriate regulation may force this market to become underground and therefore for rates to rise but it is unlikely for the market to disappear completely.

 

United States

Metropolitan Equity Partners Increases Investment in Bizfi, (Business Wire), Rated: AAA

Metropolitan Equity Partners (“Metropolitan”) announced it has invested $20M in Bizfi (www.bizfi.com). BizFi combines aggregation, funding and a marketplace for small businesses. This investment represents an increase from the $65M financing of the Company in December.

This round of financing will enable Bizfi to:

Expand its suite of funding programs, increasing its ability to fund America’s small business capital needs.
Increase the speed at which funding applicants access direct financing from Bizfi.
Develop and implement a national marketing campaign designed to increase the awareness of the Bizfi brand and platform within the small to medium-sized business community.

Bizfi and its proprietary marketplace and funding technologies have provided in excess of $1.7 billion in financing to more than 30,000 small businesses across the United States since 2005.

SCOTUS Declines Hearing Madden: Are Industry Repercussions Limited?, (JDSupra Business Advisor), Rated: AAA

In a disappointing move, the Supreme Court today denied the petition by Midland Funding to hear the case Madden v. Midland Funding.

But could the inaction by the Supreme Court be much ado about nothing?

The denial leaves in place the decision of the U.S. Court of Appeals for the Second Circuit that the National Bank Act (NBA) does not provide a shield against state law usury claims even though the loan, as originated by a national bank, was not usurious.

The Supreme Court, by not hearing the case, allows the precedent of the appeals court to stand. But it does not stand for a wider approval or precedent in any other circuit other than the Second Circuit (New York, Connecticut, and Vermont).

That said, within at least the Second Circuit, the denial of certiorari strikes a small but significant blow at the longstanding “valid when made” doctrine, under which courts have long concluded that a non-usurious loan remains non-usurious even if assigned or sold to another.

In some respects, this is a positive for marketplace lending platforms that might have faced the prospect of an eight-member Supreme Court accepting the case and siding with Madden.

By denying certiorari, the Court has localized the damage caused. Platforms will begin to mitigate the effects of Madden, but in the short term, credit availability in the affected areas to the affected borrowers will be relatively scarce. In fact, a recent study by professors at Columbia, Fordham and Stanford Universities has shown that the Madde case has had a chilling effect on credit availability.1

It is also important to remember that the preemption argument is only one part of a three-part argument by Midland Funding. The case is now remanded to the District Court to decide the two remaining claims relating to whether the “valid when made” doctrine applies under state law. As described above, “valid when made” means if the loan was valid when made, it does not matter in whose hands it is sold or assigned, as the borrower is still bound by the contract.

The other big unanswered question is how the court will apply two competing state laws: valid when made vs. usury. The judge will play a critical role here.

Impact

The refusal to hear the case will cause non-bank assignees to avoid purchasing certain loans made in the three states affected by the Second Circuit ruling to the extent that the loans would not have been valid if originated by such assignees. It will also cause national banks that originate loans largely to sell them to reposition their operations and strategies. Worse yet, those entities that have already purchased loans under the assumption that they would be valid in the affected states (and that may no longer be valid) may seek to undo these sales on the basis that the banks breached representations and warranties.

In short

  • Non-bank purchasers cannot buy loans from banks operating under the NBA in the Second Circuit that exceeds applicable state usury caps. In New York, the largest state of the Second Circuit, the usury cap is 16% without a state lending license and 25% with a license.
    • Such loans may be deemed uncollectible.
    • This is a major problem for securitization of Second Circuit loans, as many securitization trusts purchase loan assets from national banks.
    • The Court is passing up the opportunity to opine on whether the power to sell loans is a fundamental power under the NBA linked to the power to originate loans. This was a key argument by Midland and the amicus petitions filed by the Structured Finance Industry Group, the Clearing House Association, the American Bankers Association and ACA International, and their brief cosponsors.
  • Small business and real estate lending platforms that do not purchase loans from originating banks are not directly impacted by the decision.
  • Platforms have already started reshaping their legal relationships with banks to be factually distinct from the facts in Madden. This may mean keeping more loans on bank balance sheets, appointing the bank as the master servicer, adding “skin in the game” by banks investing in loans or deferring compensation to banks until the borrower performs on the loan for some or all of the term.
  • We are keeping an eye on the Bethune v. LendingClub, WebBank et al. case and its implications on the “true lender” doctrine. Unlike Madden, which deals with the power of a bank to sell its assets, the plaintiffs in true lender cases have the view that there never really was a bank involved. This case will also be a test of the platforms’ mandatory arbitration clauses contained in every consumer loan agreement.

LendingClub says estimates about .0 mln in charges in quarter ended June 30, 2016, (Reuters), Rated: AAA

Estimates that it will recognize approximately $3.0 million in charges in quarter ended June 30, 2016

Adjustments made to the valuation of fund assets affected the direction, specific returns reported in monthly statements sent to limited partners.  Will reimburse limited partners who, during the life of any fund, entered, exited funds and who were adversely impacted by these adjustments.  Reimbursement expected to cost about $800,000, covering period from start of funds ( earliest of which was March 2011) to May 31, 2016

At May 31, 2016, funds had aggregate total assets of $1.1 billion

LendingClub to Cut 12% of Its Workforce, as Loan Volumes Fall, (Wall Street Journal), Rated: AAA

Mr. Sanborn told shareholders during the company’s annual meeting Tuesday that several investment funds have resumed their loan purchases since early May and that the company was using its own capital to fund only around 2% of loans.

Online lender LendingClub Corp. unveiled new responses to a slump in its business Tuesday, restricting investors from exiting from one of its funds and announcing job cuts totaling 12% of its workforce.

Separately, LendingClub said it had made its acting chief executive, Scott Sanborn, the permanent CEO. That, along with news that outside investors were still funding the vast majority of LendingClub loans, helped push shares up 7.2% after declines Friday and Monday.

LendingClub said it expects second-quarter loan volume to be around one-third less than the $2.75 billion it reported for the first three months of 2016. The company said shareholders and analysts shouldn’t expect revenue and profit to resume growth until the first half of 2017 as it looks to spend more on employee retention and incentives for investment funds to ramp up their loan purchases.

The task could be formidable. Investors in LendingClub’s Broad Based Consumer Credit (Q) Fund have requested redemptions of $442 million as of June 17, or 58% of the fund’s assets, according to the Tuesday letter reviewed by the Journal.

LendingClub’s fund-management unit said it will impose restrictions on those redemptions as permitted under its limited-partnership agreement and explore a potential wind-down of the fund.

Meanwhile, the company said a review of its business practices found that in LendingClub’s early days Mr. Laplanche and family members borrowed around $722,800 in what the company characterized as an attempt to inflate monthly loan volume. LendingClub generated $25,000 in revenue off these 32 loans, which were taken out in December 2009, the company said. All but three were repaid in full by February 2010.

The Credit Implications of Changes to Net Metering Rules, (Kroll Bond Rating Agency), Rated: A

The installed capacity of solar PV systems has increased over 136% in the last two years alone, having risen to 4,931 MW in March 2016 according to the latest statistics from the U.S. Energy Information Administration. The rapid growth in distributed solar installations has created significant operational challenges for electricity distribution networks. In most markets, utilities purchase the excess electricity at retail rates, but there has been some discussion that this approach should change as non-solar customers are subsidizing the infrastructure supporting the electrical system.

Kroll Bond Rating Agency (KBRA) released research today reviewing the recent changes in net metering policies across the United States. The report discusses the negative impact these changes may have on the underlying value proposition of installing residential, grid-connected solar photovoltaic (PV) systems.

Former AdTech Google/Yahoo/Facebook Exec joins Fundbox, (Press Release), Rated: B

Fundbox has hired Prashant Fuloria, an AdTech exec from Google, Facebook and Yahoo/Flurry as Chief Product Officer. There is an interesting angle here around how a FinTech company (with a huge emphasis on the ‘tech’) is tapping an AdTech executive from the Tech giants.

Fuloria helped build Google and Facebook’s global payment platforms and helped drive Yahoo’s advertising business. The company also announced today, three other new executives which will further bolster the management of the Khosla Ventures, Spark Capital, Jeff Bezos and Vikram Pandit backed FinTech leader.

Fundbox is a platform for small and medium-sized businesses to manage and optimize cash flow.

 

United Kingdom

Brexit – what can we conclude for digital finance and fintech, (GrowVC), Rated: A

At this point, it is impossible to make any detailed analysis, when we have no information what the relationship of the EU and the UK will be in the future. We don’t even know the negotiation targets of the UK or the EU. In principle, we can say it can be anything from the models Norway and Switzerland have with the EU to the global WTO model.

Grow Advisors, a Grow VC Group company, made a Brexit analysis for fintech in April and it analyzed that for fintech companies the key issues would be,

  1. how to offer services in the EU,
  2. get enough talented employees, if free movement is removed, and
  3. especially the impact of those two previous things for fintech startups when they have fewer resources to handle regulation and work visas.

The end of free movement would also mean that for European entrepreneurs it is more difficult to move to London and they could prefer other places, including also the US, when it is not anymore easier to come to the UK.

Rescue Deal For Peer-To-Peer Lending Platform, (Insider Media Limited), Rated: AAA

A Hampshire-based online peer-to-peer lending platform has been acquired out of administration by specialist finance provider GLI Finance.

Greg Palfrey and Steve Adshead of Smith & Williamson were appointed as administrators to Funding Knight Holdings (FKH), the holding company for FundingKnight.

A cash sum of £750,000 has been paid and, as part of the terms of the deal, GLI has also committed to providing FundingKnight with at least £1m of further capital to finance its ongoing operations.

“By acquiring the business at a low entry price, we will help secure the continued employment of the FundingKnight team and provide reassurance to the investors in FundingKnight loans and FundingKnight’s SME client base that have existing loans or are seeking to borrow.

Small businesses face funding gap after Brexit vote, (The Telegraph), Rated: AAA

Small companies are delaying investment decisions and losing some funding opportunities in the uncertainty triggered by UK’s vote to leave the European Union, according to business lenders.

Further progress on Funding Circle’s £100m deal with the European Investment Bank, which was unveiled last week, is now almost certainly off the table, admitted James Meekings, who co-founded the peer-to-peer lender.

“That was a start to create a multi-billion pound program for getting more funds into UK business. The program is at risk. If I’m honest, it’s very unlikely to happen now. Who knows? From our situation we obviously want it to happen,” he told the Business Select Committee.

Mr Meekings said the British Business Bank, which has invested about £60m in Funding Circle, should step in to fill the gap for small business borrowing.

UK Entrepreneurs Fear Brexit Backlash, (Forbes), Rated: A

While negotiations over the terms of the exit have not even begun, entrepreneurs are deeply worried about the impact that the Brexit vote will have on how they fund their businesses – as well as the potential for major skills shortages. Meanwhile, major European cities say they regard the UK’s out vote as an opportunity to steal London’s crown as the leading start-ups hub on this side of the Atlantic.

Investment capital for start-up and growing companies may be an early casualty of the Brexit vote, particularly with major British banks suffering substantial losses of stock market value in the days following the referendum – such setbacks are likely to lead to greater caution, including more conservative lending policies.

“Post Brexit, the biggest worry for start-ups will be catching the eye of investors. The success of the UK’s tech sector attracted nearly half a billion pounds of VC funding last year – but the referendum has changed the landscape overnight,” warns Colin Pyle, co-founder of the e-commerce coffee pod start-up CRU Kafe.

Meanwhile, Germany in particular, sees the Brexit vote as a golden opportunity to attract more start-up companies and investors to Berlin.

Germany

German Investors Look Beyond Borders when Using P2P Lending, (p2p-banking), Rated: A

A poll conducted by P2P-Kredite.com among seasoned German speaking investors found, that many prefer p2p lending platforms outside the country they live in. After getting accustomed to the p2p lending concept and liking it, they are on a hunt for higher yields. Further supporting factors are the offered English language interface (a language most understand well), the easy transfer of funds within the Eurozone by SEPA payments and more features offered, e.g. most foreign platforms offer a secondary market, while currently none of the German marketplaces do.

Poll by P2P-Kredite.com, conducted in June 2016. 60 respondents. Each respondent could name up to 6 platforms. Note that Funding Circle refers to the German platform of Funding Circle, not Funding Circle UK
Poll by P2P-Kredite.com, conducted in June 2016. 60 respondents. Each respondent could name up to 6 platforms. Note that Funding Circle refers to the German platform of Funding Circle, not Funding Circle UK
China

China’s P2P lending sector faces risk control challenges, (China Daily), Rated: B

Information technologies and innovation are not only reshaping the landscape of manufacturing but changing the roadmap of the virtual financial sector.

China has 19 million micro and small enterprises, 78 percent of which are facing difficulties receiving bank loans, according to a report released by Harvard Business Review andCreditEase Corp, a Chinese P2P lending, and wealth management company.

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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