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- Avant’s origination falling by 50% and further expense cutting. It is likely that the company is reaching for profitability as soon as possible in a capital crunch situation.
- Lending Club’s fund seeing 1st negative monthly return after 63 consecutive months of positive returns. The negative return is likely due to accounting practices leading to mark down of existing loans because of higher rates of the latest acquired loans.
- An interesting video from Val Katayev overviewing his experience of investing in P2p during the 2008 crisis, before and after.
- Orchard launches a free quarterly industry report.
- A critical article focused on the self-negative selection of online borrowers vs bank borrowers.
- Patch-of-Land new CEO gives a little insight into his plans.
- A very thorough article reviewing the alternative lending sources in India, from P2p , to aggregators. A nice review of many different companies with a lot of data, history and information. Worth a read. India seems to be where China and the US were 7 to 8 years ago.
- 2 articles reviewing RateSetter’s and Zopa’s provision funds, defaults and the apparent crisis approaching RateSetter’s provision fund. Great data tables. A very important read.
- Funding Circle exiting EU, after Brexit, after claiming it’s not due to Brexit. Watch what companies do, not what they say.
- Kreditech, a German tech provider for online lenders, signs up Nasper’s point of sales financing PayU Global.
- United States
- Avant Said to Slash Target for Online Lending, Reduce Staff, (Bloomberg Technology), Rated: AAA
- LendingClub Fund Has Its Version of June Swoon, (Wall Street Journal), Rated: AAA
- 10 Year Retrospective on MPL, (Press Release), Rated: AAA
- Introducing to Orchard’s Quarterly Industry Report – Q1 2016, (Orchard platform), Rated: A
- Crowdfunding has a serious scam problem, and it’s not getting better, (The Middle Ground), Rated: A
- What is Hard Money Lending? Borrowing Against Real Property, (Mayava Capital), Rated: B
- Patch of Land CEO Paul Deitch Talks Transition, Real Estate Marketplace, (Crowdfund Insider), Rated: A
- Appy Lending, (Business Today), Rated: AAA
- United Kingdom
- Ratesetter’s provision fund “is going to be pushed to the limit”, (Financial Times), Rated: AAA
- Digging into Contingency Fund Coverage, (Alt Fi News), Rated: AAA
- Knecht quits Funding Circle, (Alt Fi News), Rated: AAA
- Kreditech launches Online Point-of-Sales Financing: Beta Phase Integration with Naspers’ E-Payments Division, (Press Release), Rated: A
Avant Said to Slash Target for Online Lending, Reduce Staff, (Bloomberg Technology), Rated: AAA
Comment: Avant already had a layoff announcement in May : “Avant lays off nearly 60 as it scraps new product launches“. At the time we commented in our podcast that laying off 7% vs Prosper’s 28% seemed not enough and that it may lead to new layoffs. In my personal experience as a CEO, multiple layoffs are to be avoided at all costs as it will not allow the company to rebound and rebuild due to constant layoff fear in the workforce.
New loans may drop by half from a monthly rate of $200 million. The firm is offering severance to employees who voluntarily leave.
The Chicago-based firm expects originations will fall about 50 percent from a $200 million monthly rate, and plans to reduce the number of workers in line with that, one person with knowledge of the strategy said, without specifying how many people will leave. The people asked not to be named discussing internal decisions.
Founded by an entrepreneur who made a fortune in payday lending, Avant grew quickly and in September raised money from investors including private equity firm General Atlantic at a valuation of almost $2 billion.
The venture, which also has backing from Balyasny Asset Management and Tiger Global Management, specializes in unsecured loans to non-prime borrowers.
The closely held firm has more than 800 workers, according to its website. In December, it told a Crain’s publication it might add 600 people this year. The venture has arranged more than $3 billion of debt since it began operations three years ago.
LendingClub Fund Has Its Version of June Swoon, (Wall Street Journal), Rated: AAA
A fund managed by LendingClub Corp. that invests in the company’s online consumer loans expects to report its first-ever negative month, according to investor documents reviewed by The Wall Street Journal.
The unusual result shows how a confluence of negative trends is hitting performance for the unsecured personal loans held in LendingClub’s Broad Based Consumer Credit (Q) Fund. Performance for the roughly $800-million fund in June “is likely to be negative,” LendingClub CEO Scott Sanborn wrote in a letter to investors Tuesday.
Mr. Sanborn wrote in the letter to investors Tuesday that the June returns have been weighed down by a series of increases in borrower interest rates designed to entice new investments.
Although the higher rates will ultimately lead to higher yields for fund investors, under accounting rules LC Advisors must mark down the value of existing loans the fund holds that carry lower coupons.
“It is important to remember that these markdowns are not reflective of the expected cash flow performance of underlying loans held by the Fund,” Mr. Sanborn wrote.
In light of the issues, LendingClub said it was instituting a number of changes to LC Advisors’ operations, including appointing a governing board that replaces the old investment policy committee. Mr. Sanborn said in an interview this week that the company is considering a plan for LC Advisors over the next two months that will be in the best interest of investors that want to stay as well as those that want to leave.
Before June, the five-year-old fund had 63 consecutive months of positive returns.
The fund is the largest in-house portfolio run by LendingClub unit LC Advisors LLC and has been a steady performer, regularly returning about 0.5% a month or more.
In recent months, however, the fund has been under pressure as defaults have risen and LendingClub has taken steps to manage them. In March,the fund returned only 0.05%, following a 0.13% gain in December.
As of June 17, the credit fund had received $442 million in redemption requests or 58% of its overall assets. LendingClub placed restrictions on investor withdrawals and said it would consider a potential wind-down of the fund, The Wall Street Journal reported earlier this week.
10 Year Retrospective on MPL, (Press Release), Rated: AAA
“Val Katayev presents at the Orchard Partner Forum starting with his earliest experiences when in 2006 he funded one of the first P2P loans in US history. As one of the first lenders, the presentation covers the surprising aftermath of P2P Lending from the Great Recession and commentary on the next big frontier for Marketplace Lending”
Introducing to Orchard’s Quarterly Industry Report – Q1 2016, (Orchard platform), Rated: A
Orchard’s Quarterly Industry Report provides a data-rich glimpse into trends within consumer unsecured marketplace lending. Orchard receives regular data feed from originator data partners, who provide detailed information on new originators and the performance of their loan portfolios. Orchards standardizes, aggregates, and analyzes this data in order to provide valuable insight into volumes, trends and performance along various dimensions.
Crowdfunding has a serious scam problem, and it’s not getting better, (The Middle Ground), Rated: A
The trouble with banks is that they have a lot of requirements for giving you a loan.
P2P funding sites do have a screening process for businesses, but there’s a limit to what they can do. When a business goes to a P2P platform for a loan, it probably means said business can’t go to a bank (most banks require a business to have a two to three year track record to qualify for a loan). For example, DBS bank has a cross-referral agreement with P2P sites Funding Societies and MoolahSense though, so they will refer a business to these platforms if said business cannot qualify for a bank loan.
The point is, businesses that approach a P2P platform tend to be new and risky.
Some may also doubt the thoroughness of the screening process, given that loans can be approved in just three days.
But what’s the real default risk? It’s too early to tell, and so far defaults have been few.
Looking abroad however, one of the world’s most established P2P sites, theUK based Zopa, has seen a default rate of just 0.8 per cent.
What is hard money and how can it be used?
Hard money refers to capital available outside of traditional lending channels, such as banks and credit unions. A hard money loan is a loan secured by real estate.
This type of loan is often used by real estate investors to quickly acquire the capital needed to purchase, refinance or renovate a property. The investor can also even use the hard money loan as a bridge to secure more conventional financing, or to later sell the property in order to pay off accumulated debt.
Hard money is also unique for its relatively relaxed underwriting standards, quick turnarounds, and for considering the value and equity of a property rather than the creditworthiness of the borrower in the underwriting process. Hard money lenders are also not subject to the same regulations that apply to traditional financial institutions, so the proceeds can be used for a wider variety of purposes without any limitations.
What is a hard money lender and where do funds for hard money loans come from?
Usually, hard money lenders are mortgage brokers who act as intermediaries between borrowers and lenders.
Will a hard money lender provide funding for every type of property?
For example, most hard money lenders may not fund owner-occupied hard money loans for residential properties, since they are more regulated by the government and will require additional paperwork and requirements. Many hard money lenders will also not fund these properties since federal regulations require borrowers to meet a debt-to-income ratio for all loans made on owner-occupied residential properties.
“We will look at a deal involving a commercial property in Brooklyn, since there are not that many left in the area,” says Regina. “But that same property in Buffalo or Rochester? Probably not. It all depends on that particular market.”
Patch of Land CEO Paul Deitch Talks Transition, Real Estate Marketplace, (Crowdfund Insider), Rated: A
Patch of Land is one of the best known real estate crowdfunding platforms in the sector. Launched soon after the signing of the JOBS Act of 2012, Patch has leveraged Title II, or accredited crowdfunding, to provide unique access to real estate investments previously unattainable for the majority of investors.
During 2015, Patch was on a roll. Management raised an impressive $23.6 million in funding led by SF Capital and Prosper President Ron Suber. Leading the charge with many industry “firsts” such as a truly secured investment structure and prefunding offers, Patch announced in late 2015 their platform had returned $10 million to investors with no principle lost. In early 2016, Patch shared that an East coast fund had committed $250 million to invest via the Patch of Land platform. In March of 2016, Patch announced having topped $100 million in real estate investment while returning $25 million to investors. Everything appeared to be falling into place when rumblings of staff departures cropped up. In April 2016, Patch of Land announced Paul Deitch, previously a Managing Director of Oaktree Capital Group, was taking over as CEO replacing co-founder Jason Fritton. During a discussion at Lendit, Crowdfund Insider was told the change was driven, in part, by the company simply growing too fast.
We have made several personnel changes to reflect our new focus. Among those changes, the most impactful has been the enhancement of our origination strategy, headed by our new SVP of Production and a team of in-house an on-the-ground loan officers.
We will continue to focus on the single family residential space while expanding our presence across small balance commercial real estate. Currently, our average loan size for residential is around $415,000, while the commercial is north of $1.2M.
In residential lending, we recently launched a new product and are now offering “Mid-Term”, which addresses the $4 trillion single-family rental space. For RE entrepreneurs, this product offers flexible, lower cost financing for their cash-flowing, stabilized the property. With tenants in place, they receive 24 to 36-month financing from 7%.
While it is still difficult to predict, based on the 480% growth in real estate marketplace lending in 2015, we are quite confident as to the future of online real estate investing.
Appy Lending, (Business Today), Rated: AAA
Comment: Terrible title but really exhaustive article surveying alternative lending in India.
“Existing financial institutions cover at best 15-20 per cent of the urban population. There is a very large segment of individuals and small and medium businesses (SMBS) who are otherwise creditworthy, but don’t have access to credit because of current branch lead banking models with their high in-built cost structures,” says V.V.S.B. Shankar, the Founder & Director of one such disruptive Fintech company i-lend.
Legacy assessment models for issuing loans and slow adoption of technology has meant that banks in India, including private ones, tend to shy away from low value-high volume, need-based personal or business loans. It has meant that the alternative has been moneylenders with sky-high interest rates.
Banks and other lending institutionsin the country have mainly relied on the Credit Information Bureau (India) Ltd (CIBIL) score to determine an individual’s creditworthiness. CIBIL gives a numerical score to individuals, which represent their creditworthiness. It is based on past borrowing and repayment history, and majorly benefits those who already have a track record. But what about those who have just entered the workforce and don’t have a track record? Remember: a million people enter the workforce in India every month, majority of them in informal sectors.
Which is why new generation fintech companies are basing their assessment of creditworthiness on what different players call Social Loan Quotient, or social scoring. They look at psychometric data of a person’s social footprint to determine creditworthiness. Which means they look at your social presence on sites like Facebook, Google+, LinkedIn, Twitter and various other digital portals.
About 85 per cent of the process is usually over the app (the initial application details like name, contact number, scan of bank statement, Aadhaar card/voter ID card, and all other information as well as communication), but there is a 15 per cent last mile where physical signature on ECS mandate and in some cases post- dated cheques are sought.
A successful serial entrepreneur, Raman Kumar says he has put together Rs 125 crore for CASHe to lend since it began operations in April this year. While CASHe originates the loans, it is disbursed through One Capital that is registered as an NBFC with RBI. Currently, it has an Android app only.
Akshay Mehrotra, CEO and Cofounder of Early Salary, which has raised $1.5 million in seed funding from Transcorp Group, targets a similar demography. “We are aiming at those between 21 and 30 years old, who are in their first or second job.” The company, which started operations in October 2015, has originated a little over 1,000 loans. The size varies between Rs 10,000 and a maximum of Rs 100,000, with tenure ranging between a week and two months. The company charges 24-30 per cent as interest which, Mehrotra points out, is “lower than that of credit card rates”.
Keerthi Kumar Jain, who runs Vote4Cash, another app-based lender, says his company has disbursed 17,000 loans amounting to Rs 30 crore since November 2014. Vote4Cash provides loans between Rs 1,000 and Rs 50,000 for a period of anywhere between one and 90 days. Interest rate varies between 0.1 and 0.3 per cent per day for every Rs 100 borrowed. “Within 17 minutes of providing all data sought, our algorithm will tell if you are eligible to borrow and how much. About a third of applicants get through,” says Jain, who claims to have a gross NPA of just 1.3 per cent.
After the ‘success’ of Vote4Cash, Jain launched SMEBank.in, a similar venture for SMEs about four months ago. In that period, 178 SMEs have borrowed a cumulative Rs 1.7 crore with a ticket size of Rs 1.17 lakh.
Capital Float, started in October 2013, also lends to SMEs from Rs 25,000 to Rs 1 crore. The company today has a loan portfolio of Rs 400 crore, and has raised $42 million in funding from the likes of Sequoia Capital, SAIF Partners, Aspada and Creation Investments.
There are three different models in this app-based online lending. The first is venture-based ones like Capital Float and Early Salary. The second is peer-to-peer lenders (P2P) like Faircent, i-Lend and Vote4Cash. The third model is the digital DSA (direct sales agents) followed by the likes of IndiaLends and BankBazaar.
For instance P2P lender, Faircent, says it has 7,000 registered lenders on its site and 25,000 borrowers, whereas i-Lend says it has 2,000 registered lenders and 5,300 registered borrowers.
Firect selling agent (DSAs) like Gaurav Chopra’s app-based IndiaLends, is a loan aggregator, who works with 30 financial institutions like Tata Capital, Bajaj Capital, Fullerton, HDFC Bank, ICICI Bank and IndusInd. Unlike the old DSA who was essentially a middleman, Chopra claims to be more than a “lead generator”. “We assess the customer risk by looking at their online profile, bank statement scraping, etc. Unlike CIBIL, we provide a free credit report to anybody who applies to us. All our documentation is on the app. We then work with the RBI-registered lenders like NBFCs and banks. But unlike DSAs, we jointly own the customer. We are currently doing Rs 10 crore per month in loan origination.”
While a few like Capital Float and CASHe have registered NBFCs, others say that there are no regulatory requirements for this app-based online lending models. Shankar of i-Lend says, “RBI I think has till now deliberately opted for light touch regulation so as not to stifle innovation in the fintech lending space. Voluntary regulation like putting a cap on interest rates, doing KYC and following industry norms will lead to healthy growth for the sector.”
Ratesetter’s provision fund “is going to be pushed to the limit”, (Financial Times), Rated: AAA
On the face of it, 2014 was a great year for Ratesetter, a UK “peer-to-peer” lender backed by Neil Woodford’s investment fund and Artemis, the fund manager. Lending volumes grew by an impressive 180 per cent to almost £300m and the company was the first lender of its kind to receive a risk rating from a research agency — they were rated as risk-free as cash.
But defaults on loans originated that year are worse than expected and could wipe out the company’s loss provisions for 2014. The default rate so far is 2.81 per cent, compared with expectations of 2.07 per cent, and 78 per cent of the provisions for 2014 losses are now gone.
“Our projections are that this will come in below 100%,” said Rhydian Lewis, chief executive, referring to how much of the 2014 loss provisions would be used up. However, he added that he could not guarantee it: “As you know, you can’t be 100% sure.”
The buffer comes with another important caveat — if the provision fund is wiped out and “the negative position is not capable of being rectified through the ordinary course of business”, Ratesetter may call a resolution event that mutualises everyone’s investments and pays out on a pro-rata basis.
There is currently just over £17m in Ratesetter’s provision fund, according to its website, which is used to protect against losses from about £610m of outstanding loans. The company currently expects a loss rate of 2.3 per cent across its book, but losses of just 2.8 per cent would wipe out the entire buffer. Ratesetter’s margin of error is about 50 basis points (one basis point is 0.01 per cent).
In 2014, Ratesetter originated £293m of loans, £275m of which falls under the protection of the provision fund (the rest was sold to institutional loan buyers). £10.2m was set aside to cover losses and so far £7.8m of that has been used up, leaving £2.4m remaining, according to numbers from Ratesetter.
Around £64m of loans remain outstanding from 2014 and £61.7m of that is covered by the provision fund (i.e. owned by retail rather than institutional buyers). Put another way, there is currently £2.4m provisioned against £61.7m of loans. If losses on those remaining loans reach 3.9 per cent, the provisions for 2014 would be used up.
If that happens, said Ratesetter boss Rhydian Lewis, the losses would be covered by provisions made for loans originated in other years. He said the provision fund is there “to protect against losses and to, across cohorts, allow for surpluses and deficits, that’s the point.”
The question now is what happens in 2015 and 2016, particularly with the possibility of a recession after the Brexit vote. Lewis said “our credit performance and underwriting has improved and we are expecting 2015 to be better” and added that his “sense is that actually consumer credit is not getting worse at the moment”.
It’s worth also taking a look at this analysis by Sam Griffiths over at AltFi Data, who says Ratesetter’s expectation for similar default rates across 2014-2016 is “surprising when one considers the change in lending mix on the RateSetter platform over the last 36 months – proportionally more lending to business and more secured lending”.
Digging into Contingency Fund Coverage, (Alt Fi News), Rated: AAA
The first thing that strikes us when we look at RateSetter’s figures is the fact that the expected default rate for 2014, 2015 and 2016 lending cohorts is the same – 2.28%. This is particularly surprising when one considers the change in lending mix on the RateSetter platform over the last 36 months – proportionally more lending to business and more secured lending. How has RateSetterbeen able to create portfolios with exactly the same risk profile across the last three annual cohorts given this change in mix?
These expected default rates are dynamic and we note that this rate has increased of late having been at 2.21% for the 2014, 2015 and 2016 cohorts at the end of April 2016.
The level of actual defaults (or bad debt, as they appear to be one and the same here) is above the expected default rate for the 2014 cohort. From Figure 1, we can see that there is still 22.7% of the cohort outstanding. We can therefore expect the bad debt figure to climb further.
The probability of default on a loan begins to reduce once the loan has been outstanding beyond a certain period of time. This is illustrated by the chart in figure 2 which shows historical bad debt curves. On inspection it is clear that the gradient of the bad debt curve flattens significantly after 24 months. Determining the precise shape of this curve is more of an art than a science, however in our extrapolation of the cohort default rate for loans we have tried to fit our assumptions to these curves.
2014 origination cohort has 78.24% bad debt fund usage and 77.28% principal realised. The same figures for 2015 are 51.52% and 49.20% respectively. This means that if bad debts continue at the same rate, then both cohorts will take more from the provision fund than they contributed.
Having spoken to RateSetter today, they tell us that they are comfortable with the provision fund’s coverage and believe that more will be paid into the provision fund than is taken out to fund bad debts in each annual origination cohort. This for the below reasons:
- Reduction in probability of default for seasoned loans
- Income from recoveries and loans in arrangement coming back into the fund
- Continual payments into the provision fund by borrowers (as described below)
- “RateSetter actively manages the Provision Fund, by determining how much borrowers pay into it. If the Provision Fund was falling significantly in value, it’s likely that RateSetter would increase contributions into the Provision Fund. This is not reflected in the chart.
- Borrowers pay into the Provision Fund regularly, over the lifetime of the loans. This ongoing contribution into the Provision Fund is not reflected in the chart.”
Zopa has a reputation for conservative lending. It is the only UK platform that was around during the 2008/2009 credit crunch and whilst bad debt rates picked up in that period, gross lending rates also increased and investor returns suffered only marginally. Net returns, as shown in figure 5 below, remained healthily positive over the period. In fact, the low point, according to our Liberum AltFi Returns Index methodology, was just under 5%.
Zopa also operates a contingency fund – known as its Safeguard Fund – which protects investors choosing the classic or access products. Historically Zopa’s loan cohorts have undershot their expected default rates. However, in the past few years the actual default rate has tracked much closer to the expected default rate. This is likely due to adjustments in the credit model rather than any deterioration in credit or underwriting quality.
It is not possible to do an analysis on the utilisation of the Safeguard fund contributions by cohort as, unlike RateSetter, Zopa do not provide that information. Zopa do tell us that only 31p of every £1 put into the Safeguard fund has been used thus far. However, given the rapidly growing nature of the platform, this figure is fairly meaningless.
If Zopa’s Safeguard fund were to become depleted, the impact on the platform does not seem to be as profound as the impact on RateSetterin a similar situation. There is no resolution event, no orderly wind down, investors will just begin to take losses if the Safeguard fund is no longer able to pay out.
The bottom line is, whilst contingency funds appear to make for a very simple product offering to retail investors, the rate you invest at is in fact only the rate that you get when the fund is operational. As such, investors would be well served by understanding the true risk of the situation. This requires more thought and is potentially more confusing than the non contingency fund models operated by Funding Circle or ThinCats. A depletion of a contingency fund would be a serious setback for the UK industry, much more so than a similar rise in defaults at a non contingency fund platform. With actual bad debt increasingly tracking at, or above, anticipated levels, the protection provided by these funds may soon be tested.
Knecht quits Funding Circle, (Alt Fi News), Rated: AAA
Knecht has headed up Funding Circle’s operation in continental Europe since Zencap – the platform which he co-founded – was acquired by Funding Circle in October 2015. His name has recently been slashed from Funding Circle’s global leadership team webpage.
A Funding Circle representative tells AltFi that the UK’s decision to leave the European Union was not a factor in the split. Funding Circle had been a supporter of a Remain campaign, but had a well-thought out “contingency plan” in place in case of a Leave vote, according to a recent statement from UK MD James Meekings. The platform tells AltFi that the Brexit vote has “no impact” on its overall growth plans, and will not affect plans to grow out the European team or originations on the continent.
An article in Gründerszene would suggest that a conflict had arisen between Knecht and Funding Circle CEO Samir Desai over the allocation of resources. Since the acquisition of Zencap, the former Rocket Internet-backed platform has been going through a period of integration, involving a general restructuring of the business. Changes have been made to both the model and the management team. Funding Circle tells AltFi that Knecht’s departure was simply one part of the restructuring process.
Kreditech launches Online Point-of-Sales Financing: Beta Phase Integration with Naspers’ E-Payments Division, (Press Release), Rated: A
The consumer finance technology company Kreditech has announced its new business line, Online Point of Sales (POS) Finance, with its first client, PayU Global BV. PayU Global BV, a leading payment services provider and the e-payments division of Naspers Ltd., deploys Kreditech’s B2B2C solution. In the freshly launched beta phase with a selected merchant, PayU provides Kreditech`s installment products as a new alternative payment option.
Via its newly developed “credit as a service” API, Kreditech is planning further integration with clients from the online, payment and banking space.
Kreditech also offers a “credit as a service” model, allowing partners to integrate its credit products as payment method or funding source. Founded in 2012 and headquartered in Hamburg, Germany, Kreditech has processed almost three million loan applications through its subsidiaries. The company is led by CEO and Co-Founder Alexander Graubner-Müller and is financially backed by world-class investors including J.C. Flowers, Peter Thiel, and the World Bank’s IFC.