- Today’s interesting news: volumes in unsecured personal loans dive in Q2 2016; Lending Club hires additional capital team members; an interesting description of the student loan market problems; and an interesting point on why SME lenders who charge the most get the most visibility and apparent success.
- Orchard : consumer unsecured quarterly origination declined by 24.4% in Q2 vs Q1. A few important notes: consumer unsecured is just a piece of the market. SME, Student, and Real Estate need to be taken into account for a full picture. I would like to see those numbers as well. Second point: the volume reduction started in Q1. And most important: original unsecured originators are now focusing on profitability. I am personally more comfortable with the market as it is now than as it was 1 year ago.
- A lengthy article on Yirendai pointing out the main risk of fraud. But for those comfortable with the fraud risk Yirendai numbers could mean their stock is still cheap. The other interesting part is how 83.5% of their loan book is their lowest grade. I find that unsettling.
- Good news : Lending Club continues to build a great team by naming a new head of retail investors, hired from BlackRock, and a head of the institutional group , hired from Morgan Stanley. Focusing on diversified capital, hiring 3 new high-profile team members in their capital group ( we include their recent hire of Patrick Dunne as Chief Capital Officer).
- Lend Academy is responding to the Bloomberg article claiming that borrowers taking the 2nd loan from Lending Club shows Lending Club’s poor underwriting. Lend Academy, with NSR data, shows that repeat borrowers at Prosper (for which they have data because Prosper highlights multiple loan borrowers) are lower risk than single-loan borrowers. They conclude that Lending Club’s underwriting is very solid, which I also agree with.
- A reminder of Lending Club’s borrower typical profile : Average annual revenue of $76,135 ; Average FICO of 699; Average debt-to-income ratio of 18.32%. Good numbers to keep in mind.
- About the student loan market: 1.1 million students defaulted on Department of Education’s loans while almost every borrower is eligible for a new repayment plan. However, these plans are not put in place due to inefficient government processes. And the borrowers appeal to the CFPB to defend them against the Department of Education. While entertaining, I believe this confirms the great business opportunity for SoFi, Common Bond and more…
- A very interesting article on SME payday lenders. The higher their rates, the more they can spend on marketing, the faster they grow, the better they look and the more they can feed the machine. A unique circle which is probably not in the borrower’s interest.
- United States
- Orchard: Loan Originations Tank in Q2 as Online Lending Seeks Traction, (Crowdfund Insider), Rated: AAA
- Yirendai: Buy On The Dip, (Seeking Alpha), Rated: A
- Lending Club Hires former BlackRock & Morgan Stanley Executives, (Crowdfund Insider), Rated: AAA
- Not Shady At All: Perspective on Repeat Borrowers at Lending Club, (Lend Academy), Rated:AAA
- Lending Club Personal Loans: 2016 Review, (Newsok), Rated: A
- The Government Can’t Agree With Itself on Policing Student Loan Companies, (Bloomberg), Rated: A
- Online SME payday lenders are alive and well, (The Age), Rated: A
Orchard: Loan Originations Tank in Q2 as Online Lending Seeks Traction, (Crowdfund Insider), Rated: AAA
Source : Crowdfund Insider
Consumer unsecured quarterly originations declined by 34.3% versus Q1 of this year.
Comparing Q2 with the same period in 2015, loan originations dipped by 15.5%.
Many platforms have raised rates to draw investors back. Orchard states that interest rates jumped by 96 basis points during Q2.
Orchard also shares that 2014 vintage charge-offs have increased more steeply than in recent years. While some of this is attributed to deteriorating loan performance, Orchard states that most of it is due to the continued growth of subprime loan origination platforms.
Orchard is right in stating an uptick in growth may be around the corner. Lending Club recently reported that many institutional investors are returning. It was leaked several weeks back that Prosper had inked a deal that would provide several billion dollars of funding. Online lending is not going away. It is just having some growing pains.
Yirendai: Buy On The Dip, (Seeking Alpha), Rated: A
- Chinese peer lending market highly fragmented, but Yirendai leveraging its brand and best practices to great effect.
- Management closely monitors delinquency rates and takes appropriate action.
- Potential red flags include a heavy reliance on “D grade” borrowers and higher delinquency rates in online loans versus offline.
- Investors in Chinese P2P loans lost over $1.2 billion due NOT to loans going bad, as one would suspect, but instead to fraud.
- Robust revenue and income growth coupled with a low PE indicate room for future valuation expansion.
For the second quarter, the company facilitated $682.9 million of loans, representing 118% year-over-year growth. Net revenues soared 140% to $110.4 million versus the same quarter last year. Net income of $39.2 million was a 226% increase while the company’s cash balance stood at $200 million.
Interestingly enough, 58% of loans facilitated were acquired from online channels while 39.2% came through its mobile application.
Management also raised full-year revenue forecast up ~12% ($451 million to $466 million) and EBITDA up ~20% ($120 million to $128 million).
Compare the above growth and positive business trends to the current forward PE of 12, and it seems even after the rally, the company could be severely undervalued.
In the most recent quarter, Yirendai set aside $47.8 million in its risk reserve fund, representing 7% of loans facilitated. The company saw the overall delinquency rate for loans 15 to 89 days past due improve to 1.7% from 1.8%, a sign of stability.
A potential red flag pops up when looking at loan categories, as 83% of the company’s product profile were grade D buyers.
Grade A clocked in at 5.5% of loans, B at 3.8%, and C at 7.6% in the second quarter. The company defines D rated lenders as exhibiting “mostly stable purchasing patterns” or a “salaried worker with a credit card” deemed to be creditworthy.
Another potential red flag to be on the eye out for is the delinquency rate differential between online and offline loans.
Lending Club Hires former BlackRock & Morgan Stanley Executives, (Crowdfund Insider), Rated: AAA
Lending Club has appointed Valerie Kay, formerly an MD with Morgan Stanley, to Head of the Institutional Group.
Raman Suri, previously an MD with BlackRock, joins as Head of the Retail Investor Group.
It is obvious Lending Club is directing resources to solidify their funding channels – something that makes a lot of sense. The duo will report to Patrick Dunne, Chief Capital Officer, who joined Lending Club in July after a 25-year career at BlackRock and other investment firms.
Scott Sanborn, Lending Club CEO, said the key strength of Lending Club is the diversity of their capital – an area they have been working hard at improving.
Not Shady At All: Perspective on Repeat Borrowers at Lending Club, (Lend Academy), Rated:AAA
Comment: Our readers may remember this article in Bloomberg. Lend Academy is responding to that article.
There are two key takeaways in the article.
First, it discusses the loans taken out by Renaud Laplanche and his friends and family back in 2009 that was done supposedly to inflate origination numbers which has been widely reported. This was a significant misstep in my opinion, so I have little issue with any of the points made about this.
Second, the article discusses the fact that Lending Club doesn’t report when borrowers take out a second loan. Now, before we go any further I should say that I have been urging Lending Club to disclose this kind of information since I first met with Renaud Laplanche and Scott Sanborn back in 2011. But the fact is the article misconstrues so much here that I felt like a response was needed.
Here is the major issue I have with this article. The Bloomberg reporters imply that Lending Club has lax underwriting standards because the same person has taken out two different loans at different rates:
A borrower takes out a loan and Lending Club analyzes their financial situation at that moment and provides an interest rate (assuming they are approved). If this same borrower takes out a second loan Lending Club analyzes this person’s new financial situation and makes a decision based on that. It is quite possible that a person’s financial situation has changed – the first loan could have been used to pay down higher interest credit card debt for example. This could even be the case for a borrower that was taking out two loans within a month of each other which was another example given in the article.
Now, we should point out that Lending Club has rules on taking out a second loan. Typically, borrowers have to wait 6, 9 or 12 months in order to take out a second loan depending on a number of credit factors. Prior to 2013 there was an exception to this – for borrowers who did not get their loan fully funded. They could re-list the portion of the loan that was not fully funded within this minimum window. But there has not been a loan go unfunded at Lending Club since 2013 so that is a moot point today.
Having said all this, I believe Lending Club should be providing details on repeat borrowers. Why? Because repeat borrowers actually perform BETTER than borrowers who take out just one loan.
This table provides ROI information on the borrowers based on number of prior Prosper loans. What is interesting is that borrowers with two prior loans perform better than borrowers with one prior loan and they both perform better than new borrowers.
I first wrote about this phenomenon back in 2011 and to this day I still maintain repeat borrowers as one of my selection criteria when investing in loans on Prosper. This is the main reason I lobbied hard for this inclusion at Lending Club.
Lending Club has many challenges, of that we are all aware. But weak underwriting is not one of them.
Lending Club Personal Loans: 2016 Review, (Newsok), Rated: A
Lending Club is a good fit for those who:
- Have a good credit score. The average Lending Club borrower has a score of 699, according to the company. Its minimum credit score is 600.
- Carry long credit histories. Borrowers average more than 16 years of credit history.
- Earn high incomes. The average annual income of a Lending Club borrower is $76,135.
- Have a low debt-to-income ratio. The average borrower has a ratio of 18.32% (excluding mortgage).
- Don’t need money immediately. Lending Club’s matching and verification process can take up to a week, which is longer than most other online lenders.
The Government Can’t Agree With Itself on Policing Student Loan Companies, (Bloomberg), Rated: A
An American defaulted on a student loan direct from the U.S. Department of Education every 28 seconds over the past year. Nearly all of those more than 1.1 million defaults were avoidable, because almost every borrower is eligible for a repayment plan based on affordability.
Something in the repayment system is clearly broken, and so last month federal education officials moved to scrap it—slowly.
Another part of the federal government agrees that something needs to change but disagrees about the multiyear timetable. The Consumer Financial Protection Bureaulast week told those same collections contractors that the transition needs to happen now. It was a move the industry took as a threat.
In a stinging new report (PDF), the consumer bureau’s top student loan official said the nation’s most vulnerable borrowers often face unnecessary hassles enrolling in these repayment plans. Loan servicers often take several weeks, sometimes months, to process applications that should be reviewed within 15 days. Applications are rejected without explanation, sometimes unfairly. Paperwork is frequently lost. And in a cruel twist, the Department of Education’s loan contractors occasionally deny borrowers’ applications because their circumstances change during the months it takes to process the paperwork.
The CFPB has effectively become borrowers’ main advocate in their battle against the Department of Education unit responsible for student loans and the department’s contractors.
Online SME payday lenders are alive and well, (The Age), Rated: A
As an example, a NSW-based wholesaler took a $20,000 loan for a period of eight months and agreed to pay it back at $161 per day for 171 days. The total amount repaid including fees was $27,531, representing an annual rate of 115 per cent.
Perversely, the lenders charging the highest rates are able to grow their businesses the fastest. By charging higher rates, these lenders can afford to:
· spend more on advertising
· pay higher brokerage and commissions
· offer wholesale investors and lenders better returns
· take on riskier loans.
Lenders that have achieved rapid growth are seen as more credible, which attracts partners, investors, introducers, media as well as borrowers. Meanwhile those that charge more reasonable rates face the prospect of being left behind.
Meanwhile those that charge more reasonable rates face the prospect of being left behind.
Borrowers would have more confidence regarding the total cost of borrowing if:
· all the fees and charges imposed were presented on an Annualised Percentage Rate (APR) basis. APRs are not without limitations but they do enable borrowers to make apples with apples comparisons;
· lenders were required to use consistent terminology and plain language in all agreements.
It is telling that Google, whose corporate motto is “Don’t be evil”, is becoming a quasi industry regulator. It is doing its bit to safeguard Australian consumers by banning advertisements from personal payday lenders for loans in excess of 60 days. In the USA Google has banned advertisements for personal loans with APRs higher than 35 per cent.