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Thursday December 22 2016, Daily News Digest

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United States

Notice of PMI7 / TransUnion Migration (Prosper Email), Rated: AAA

Dear Investor,

We are writing to notify you that effective today new borrower applications are being scored on our PMI7 credit model, leveraging TransUnion credit attributes for underwriting.  The primary considerations for the bureau migration are:

  1. TU is the only bureau that delivers historical time-series data in real-time and this information provided meaningful incremental predictive power relative to a snapshot of the current credit bureau alone.

4 big ways America’s student loan industry could change in 2017 (Business Insider), Rated: AAA

There are 44.2 million Americans with student debt, and 4.7 million of them are in default. Americans, particularly millennials, are delaying major life events like buying houses, starting families, and even saving for retirement. Instead of propelling them forward, the debt connected to higher learning is holding many people back.

Expansion of income-based repayment has been the central tenant of President-elect Trump’s student debt plan. As outlined, his plan would expand the existing program by capping repayment at 12.5 percent of discretionary income and forgiving any remaining balance after 15 years.

The GAO has not yet issued guidance on what the Trump administration’s proposal would cost, but suffice to say it would cost more than today’s system.

Over the course of the campaign, President-elect Trump spoke of having the federal government exit from the business of student loans entirely in favor of full privatization. It’s difficult, but not impossible, to foresee such a pullback. That said, there’s a good likelihood of at least one aspect of the program being cut: Graduate PLUS.

An increasingly popular idea on both sides of the aisle is to have colleges, which are able to operate largely thanks to student loan funding, share in the risk of those loans.

Employers are playing an increasing role in reducing their employees’ debt burden and using this aid as a way to win and retain employees. In a survey conducted in February, nearly 90 percent of job seekers with student debt said they think companies should offer student loan repayment as part of their benefits package. Companies like mine, SoFi, offer this service to employers as an administered benefit, just like a 401(k). In fact, we offer direct contributions to our own employees, up to $200 monthly.

Is Risk Retention In The Future Of Marketplace Lending? (Mondaq), Rated: AAA

As marketplace lending continues its dramatic growth and regulators consider how best to protect consumers without limiting financial innovation, the U.S. Treasury has openly expressed an interest in whether marketplace lenders should be subject to some form of “risk retention.” Under new regulations that go into effect later this month, most issuers of asset-backed securities (ABS) will be required to retain a percentage economic interest in the collateral they securitize.

Some believe that applying similar rules to marketplace lenders would ensure that lenders originate high-quality loans, but marketplace lenders uniformly disagree, arguing they are sufficiently motivated to implement stringent underwriting standards and that such rules would hinder innovation.

Although the new risk retention rules likely apply to marketplace lenders that securitize loans and act as a sponsor, it remains unsettled whether similar rules should apply to marketplace lenders in the non-securitization context. Some believe they should.

Marketplace lenders, in contrast, oppose the application of risk retention rules in the non-securitization context. Moreover, online lenders contend that risk retention rules are unnecessary since most investors in marketplace loans are institutional and therefore have the ability to protect themselves through due diligence and representations and warranties.

The subprime mortgage crisis, however, does not necessarily demonstrate the need for risk retention in marketplace lending.

Given federal regulators’ increasing interest in financial technology companies generally, greater regulatory oversight of marketplace lenders seems all but inevitable, and industry participants are bracing themselves for potential changes in the way they do business.

An ‘Uncommon’ Investing Idea for the New Year (Uncommon Wisdom Daily), Rated: A

These days, investors are increasingly venturing outside the stock and bond markets to juice up their returns. This means turning to “alternatives” like precious metals, real estate, trust deeds, promissory notes, limited liability companies and crowdfunding investments, among others. (You can even own them in an IRA!)

It’s called marketplace, direct, online or person-to-person (P2P) lending.

The innovative thing about P2P lending is people can lend and borrow money without ever going to a bank.

Transparency Market Research reports the P2P market was $26 billion in 2015. (Over 60% of which came from the world’s largest P2P lending platform, Lending Club.)

Charles Moldow, a renowned venture capitalist and P2P investor, thinks this market could hit $1 trillion by 2025.

As Ron Suber (Prosper’s CEO) told me last year …

“At some future moment, you will be asked at the point of sale: How do you want to pay for this: cash, credit card, check, PayPal ormarketplace lending? It’s coming.”

Here’s How P2P Investing Works

The main reason I’m recommending P2P investing is outsized yield.

P2P outsized yield

Plus, there are several additional reasons — beyond higher yields — why P2P investing should resonate with mom & pop investors …

  • Higher yields. P2P investing provides a unique opportunity to earn higher yields relative to other asset classes.
  • Low volatility. Prime consumer credit has existed for decades — with a proven track record for consistent returns.
  • Uncorrelated. P2P investing doesn’t follow the traditional ups-and-downs of the market.
  • Safety. According to Lending Club, since 2008, 99% of investors who owned 100-plus notes of relatively equal size have seen positive returns. 81% of those investors have earned 5%-plus over that time.
  • Simplicity. Why try to handpick individual loans?

adjusted net annualized return

How to Evaluate Investment Opportunities in CRE Marketplace Lending (NREI Online), Rated: A

It’s no secret that investors are always looking for the best return on their investments. In an effort to achieve that goal, investors have been turning in increasing numbers to peer-to-peer and marketplace lending platforms to achieve a greater return on their fixed-income investments than more traditional vehicles such as U.S. Treasury bonds and CDs. This search for higher yield has led to great growth in the marketplace lending arena. In fact, according to a recent report by American Banker, the industry grew by nearly 700 percent over the past four years.

Given the current economic climate, while many investors are still looking for higher yield, they are also careful to weigh risks associated with their fixed-income investments, seeking out transactions that will serve as a foundation for their financial stability in the future. As a result, investors are beginning to shift their focus from the unsecured debt platforms to those that offer opportunities in secured debt, such as commercial real estate.

The first step to evaluating a marketplace lending platform is to seek out technology processes that help, not hinder, the investment process.

Also, find out whether the investments are backed by collateral, and if that collateral is an income-producing property.

Finally, some platforms also offer low-cost, professionally-managed funds that provide a lower risk because your investment is pooled with others and applied to a unique portfolio of viable transactions.

The key to successful marketplace lending investment, especially in the commercial real estate realm, is knowing when and where to apply the technology, and when and where human judgment and expertise are required.

DV01: Peering into peer-to-peer loans (Forbes India), Rated: A

Rahbar’s all-nighter gave him an insight that would serve him well nearly a decade later. His two-year-old New York City firm, DV01, offers analytics and reporting software for the burgeoning peer-to-peer market, giving investors the ability to track the performance of thousands of loans in a few clicks. Named after a formula traders use to calculate their exposure to interest rate changes, DV01 also automates the laborious financial gymnastics that are needed to model loan performance, and it is on its way to becoming a fixture in the industry’s biggest deals as firms like Lending Club, Prosper and SoFi issue securities to finance their loan pools.

Peer-to-peer lenders originally connected borrowers directly with individual investors, but rising loan demand forced them to turn to Wall Street-style securitisation—the packaging of thousands of individual loans into tradeable securities. Three years ago, Lending Club was the first to market with such a securitisation, and Prosper, SoFi and OnDeck Capital quickly followed. As of the end of September, roughly $11 billion of these loans, according to PeerIQ, has been bundled into securities since 2015.

Rahbar’s startup currently tracks the loans of Lending Club and eight other originators and counts 55 institutions as clients. All told it has logged in some $34 billion in loans. DV01 is backed by $7.5 million in capital from Leucadia National (Jefferies’s parent), Pivot Investment Partners and a fund controlled by George Soros.

IPO Dreams: Fintech Turmoil Is Disrupting SoFi (LC, ONDK) (Investopedia), Rated: A

So it may be no surprise that startup Social Finance Inc. (SoFi), which boasted last year that it was profitable and planned an IPO in spring of 2016, has announced its postponing pubic offering plans — again. SoFi has been one of the poster children of fintech’s potential with a value of $4 billion.

There’s no doubt that SoFi’s prospects for an IPO have been hurt by broader problems in the online lending market, illustrated by Lending Club and On Deck Capital.

How machine learning can redefine lending (Bobs Guide), Rated: A

Technology has played a significant role in the rapid evolution of the lending industry. One such technology, machine learning, is beginning to create new avenues in the lending market.

Though machine learning is not a novel concept, the influx of big data and data mining has given it a shot in the arm by integrating it in our day to day lives. Machine learning today is being implemented in various industries, from financial services, healthcare and retail to transportation, and multiple domains like accounting, audit, marketing and sales. Gartner identified it as a top ten strategic technology trend in 2016, with advances occurring rapidly.

Machine learning enables predictive modelling in credit scoring. Credit scoring is an important process in loan management. While the traditional credit score uses basic statistical tools to arrive at the result, machine learning involves data mining at a large scale by aggregating data through wider channels like Yelp scores, social media activity, and real-time shipping trends. This consecutively delivers a more accurate and meticulous portrait of creditworthiness.

Machine learning can also help in streamlining the lending process, eliminating errors and expediting the loan application approval process.

Machine learning can also help in predicting bad loans and in on-going monitoring of loans.

Schwab RIAs: Accept and adopt digital platforms, or lose your competitive edge (Financial Planning), Rated: A

Schwab surprised the industry with the recent launch of a hybrid robo adviser offering, since it had already two operational digital platforms with over $10 billion in AUM — Schwab Intelligent Portfolios and Schwab Institutional Intelligent Portfolios.

Heburn: First of all, we’re not scared of it. We didn’t look at it as this coming gloom and doom of robotic investment management that’s going to put us out of business. We really looked at it as an opportunity to reach a whole different segment of clientele efficiently in a way [where] we could eventually make money.

Kessler: We don’t consider Betterment or Wealthfront competitors actually. They’re playing in an entirely different field of service than we are. We’re giving a dedicated adviser and a personal relationship.

AI Could Take Over Routine Financial Advice Tasks (Finanial Advisor IQ), Rated: B

Financial advice firms need to embrace artificial intelligence to replace mundane tasks carried out by humans so they can remain competitive, according to a new report from natural language recognition software provider Narrative Science.

Thirty-two percent of companies across the financial services industry are already using AI for predictive analytics, voice recognition and response and recommendations, according to a survey of more than 100 executives in the industry conducted by the National Business Research Institute and Narrative Science this spring.

AI is also coming to the fore when it comes to controlling spending. Apps such as Moven and Simple already deliver personalized automated recommendations based on machine-learned spending and earning habits of their users, according to the report, although it could be a matter of time before such programs reach the financial advice market.

United Kingdom

RateSetter Sells £2.1 Million of Non-Performing Debt to 1st Credit (Crowdfund Insider), Rated: AAA

RateSetter, a leading UK peer to peer lending platform, has completed the sale of £2.1 million of non-performing debt. RateSetter sold the assets t 1st Credit, a debt purchaser.  Exact terms of the transaction were not revealed but RateSetter said it was the first transaction of its kind for a UK peer to peer lending platform.

The non-performing loans were written between 2010 and 2015. RateSetter said it believed there was a low chance for them to collect on the assets. RateSetter said that typically in these situations they have not been able to contact the borrower for a long period of time, or where it has not been possible to put in place a debt management plan with the borrower.

Here’s why 2017 will be a turning point for the UK marketplace lending industry (Business Insider), Rated: AAA

The UK’s marketplace lending sector is one of the world’s oldest and largest, but it may be reaching a tipping point whereby growth starts to slow and market dynamics start to change.

  • Last week, the UK regulator published the results of a review of the marketplace lending industry and raised several concerns, including customer misinformation and unduly risky strategies. As a result, it has proposed new regulations for the sector and plans to crack down on transgressors.
  • The market is oversaturated.
  • Smaller platforms are already struggling to make their business models work. UK lending platforms Funding Knight and Legion Trade Finance both ran out of capital earlier this year. Funding Knight was forced to sell itself to an investment firm, and Legion Trade Finance ceased operations. We believe this is the start of a trend we will see a lot more of in 2017, with smaller players either disappearing completely or being acquired by larger firms.

We’ve entered the most profound era of change for financial services companies since the 1970s brought us index mutual funds, discount brokers and ATMs.

As you can see, this very fluid environment is creating winners and losers before your eyes…and it’s also creating the potential for new cost savings or growth opportunities for both you and your company.

new MPL loans UK

 

Zopa Named Winner at AltFi Awards & F5 Awards (Crowdfund Insider), Rated: A

Zopa announced on Tuesday it was named a winner at both the AltFi Awards and F5 Awards. The peer-to-peer lender revealed it took home a number of prizes at AltFi and was dubbed Best P2P Lending Platform at the F5 awards.

One to One: Filip Karadaghi, chief executive, Landlordinvest (Mortgage Strategy), Rated: A

We are quite late to the party and many P2P lending platforms have been operating under interim permission with time to develop their business, so we will have to learn from them and use that knowledge to develop our own value proposition quickly.

I believe that the future for P2P buy-to-let and bridging is very bright.

According to the latest crowdfunding report from Nesta, which publishes the leading research report in the P2P industry, real estate loans is the fastest growing sector in P2P.

The future of fintech (Credit Strategy), Rated: B

Speaking at Credit Strategy’s inaugural F5 conference this month, at the London Hilton Bankside, Stefan Franzke, chief executive of Berlin Partner for business and technology, was complimentary about the importance of London as a business centre.

He described the initial impact Brexit had on fintech firms recalling how he received hundreds of messages from businesses contemplating leaving the UK.

However, Franzke said he believes London will still be the financial centre like it is today in 10 years.

He discussed how the peer-to-peer lending market is working to target SMEs and how some banks are even looking at acquiring or creating their own platforms.

European Union

Online Lending Platform Credimi Signs Agreements with Four Primary Investment Funds (Crowdfund Insider), Rated: AAA

Four primary investment funds have signed agreements with Credimi, an Italy-based online lending platform. The funds have subscribed the entire portfolio of (performing) commercial credits originated by the invoice financing platform in the first year. Credimi is the first fintech company authorized by Bank of Italy to the public financing activity, according to art. 106 of Testo Unico Bancario, entailing extremely rigorous control and governance requirements.

The four partners are Anima Sgr, Anthilia Capital Partners Sgr, BG Fund Management Luxembourg S.A. and Tikehau Capital.

Unlike other similar products in Europe, the Credimi model foresees the subscription of the loans portfolio even before Credimi originates the commercial credits (Credimi focuses exclusively on the acquisition of performing receivables). This, alongside the proprietary risk analysis technology and Credimi’s capability to carry out public financing activity, allows to instantly finance SMEs’ invoices.

Authors:

George Popescu
George Popescu
Allen Taylor
Allen Taylor

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