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Tuesday January 17th 2017, Daily News Digest

conditional default rate over MOB

News Comments

United States

  • Misys launches P2P lending software for banks. GP:” The first obstacles for banks to build their own technology are time , money and experience. The next one is their own in-house politics and culture. This makes it hard. On the other side buying 3rd party technology is a proven path. In the US quite a few companies offer bank technology for marketplace lending but none offer a pure p2p solution for banks. I wonder how succesful they will be.”  AT: “If banks have their own solution, would it benefit them to partner with marketplace lenders or acquire them? This will depend on how valuable the software actually is to banks. If it ends up being a less expensive alternative for banks, then it could lead to more competition in the field from traditional financial institutions with big pockets. Alternative lenders will have to compete on agility and customer service. This could be the beginning of a new phase for P2P lending.”
  • Credit models and cashflow projections. AT: “More excellent analysis from PeerIQ.”
  • States tell feds to back off FinTech. GP:” I am glad to see pros and cons discussed. It can produce something positive or just gut the initiative of all its real value. Lets see what happens.” AT: “I smell a big fight coming over who should be the regulatory authority for the industry.”
  • Money360 funds $3.87M real estate acquisition loan.
  • SoFi changes locations. GP:” SoFi opens a larger and better NY office.”

United Kingdom

China

United States

Tech vendor Misys launches P2P lending software for banks (Reuters), Rated: AAA

Financial technology vendor Misys is launching software to enable banks to provide peer-to-peer lending to their customers as competition from young companies in the sector heats up.

The technology would enable retail and corporate banks to connect their customers looking for loans with individual or institutional investors digitally, the private London-based software company said on Tuesday.

Jollant said Misys was launching the product because it was already an established provider of financial lending software to many large global lenders. He added that the company was in discussions “with a number of interested banks in the U.S., Europe and India.”

Weekly Industry Update (Part 2): January 16, 2017 (PeerIQ Email), Rated: AAA

The price of a loan is the present value of projected loss-adjusted cashflow for the remaining balance of the loan, discounted by an appropriate rate reflecting the riskiness of the cashflows.
We outline this process in the following subsections:
  1. We apply loan-level credit models to project cashflows over the remaining balance of the loan.
  2. We estimate spread at origination – the incremental compensation an investor earns above the Treasury curve for bearing prepay and default risk.
  3. We incorporate additional market observables to adjust discount rates.

Credit Modeling & Cashflow Projections

The price of a loan depends on the principal repayment and interest rate collected over the loan life. Therefore, the first step in our valuation process is to project the pattern and timing of expected (not historical or realized) cashflows.
Unlike an underwriting model which may be concerned with estimating probability of default, we apply credit models that forecast cashflow (e.g., prepayments, delinquency, and default behavior) over the life of a loan given a loan’s borrower attributes, loan attributes, payment profile, and macro conditions.
conditional default rate over MOB
Estimating Spread at Origination
Marketplace lending loans, unlike other fixed income securities such as agency MBS or Treasuries, have both prepayment and default risk. Investors earn compensation for bearing these risks in the form of a spread above the Treasury curve.
In the marketplace lending space, investors typically buy newly originated loans from platforms at par in an arms-length transaction. At origination, we have the first observable “traded” value of the loan. The primary market provides price information for estimating spreads at origination. Credit spread at origination (“crSATO”) can be interpreted as the incremental return an investor earns for bearing default and prepayment risk for a newly issued loan over the Treasury curve.
We determine discount rates from a term structure of credit spreads by solving for the rate that equates projected cashflows with par value. (Further spread adjustments are applied for aged portfolios.)
credit spread at origination

States to Feds: Back Off on New Fintech Bank Plan (The Wall Street Journal), Rated: A

On Monday, Sens. Sherrod Brown (D., Ohio) and Jeff Merkley (D., Ore.) sent a letter to the OCC arguing that its proposal would “upset the current financial regulatory structure” and suggesting alternatives including collaboration with state regulators to aid fintech startups.

State regulators say their rules barring loans above certain interest rates, known as usury laws, are a bulwark against abusive lending practices. New York, for example, bans payday loans and makes lending at annual rates above 16% a civil offense. They plan to submit comment letters expressing their concerns.

Margaret Liu, deputy general counsel of the Conference of State Bank Supervisors, an association of state regulators, on Monday said she shared the senators’ concerns and warned the OCC’s planned expansion would “pre-empt state consumer-protection laws” and “stifle innovation by arbitrarily picking winners and losers.”

State regulators also are discussing some defensive measures, such as a mechanism to make it easier for companies to apply across multiple states for consumer-lending licenses.

Money360 Funds $ 3.87 Million Loan for Retail Center Acquisition (Marketwired), Rated: A

Money360, the leading commercial real estate marketplace lending platform, announced today that it has provided financing to a commercial property owner to purchase a fully leased retail center in Mobile, Alabama.

The $3,865,000, five-year loan is secured by the 1.61-acre, 16,710-square-foot Airport Boulevard Shops shopping center, which is 100% leased to four tenants: MovieStop, GameStop, FedEx Office and Panera Brea. The center was constructed in 2004 in the heart of Mobile’s dominant retail corridor, commonly referred to as the “Miracle Mile.”

Online lender SoFi makes its move to Meatpacking District (New York Post), Rated: B

Social Finance, the online lender better known as SoFi, is the newest tenant at 860 Washington St., the gleaming new office project in the Meatpacking District.

SoFi signed for 6,500 square feet. It will relocate from Union Square. Cushman & Wakefield repped the landlord; JLL repped the tenant.

United Kingdom

A Record Breaking Year for Seedrs: A Discussion with CEO Jeff Lynn (Crowdfund Insider), Rated: AAA

Seedrs delivered a record year of crowdfunding. In an end of the year recap, Seedrs quantified their accomplishments including:

  • £85 million invested in 159 different deals
  • 45,000 individual investments were made during 2016 from 65 different countries
  • FreeAgent, a company that raised £1.2 million Seedrs in 2015, IPOed on LSE’s AIM
  • Since platform launch 4 1/2 years ago, Seedrs has raised £190 million for 450 listed investment opportunities

Jeff Lynn: While Brexit was a disappointment at a personal and political level, it hasn’t hindered our business or our expansion. We opened new offices in Amsterdam and Berlin last year shortly after the referendum, and we haven’t seen any slowdown from entrepreneurs looking to raise or investors looking to invest into early stage equity.

Jeff Lynn: But if you’re an international business, or thinking about expanding internationally, we give you the opportunity to build an investor base across Europe and get all of the commercial and marketing advantages that come with that. And it’s the same principle for investors: if you want to find the most interesting deals across multiple countries, then we can offer you something that national platforms can’t.

Jeff Lynn: We have always been supporters of regulation in this space: we were the first regulated platform, and much of the UK regulatory regime is based on the model we designed. So broadly speaking, we welcome the ongoing regulatory review, and where there are improvements that can be made to the current system, we fully support them.

Jeff Lynn: For the industry more broadly, this will be the year in which institutional capital begins to play a meaningful role in equity crowdfunding.

None of this should come as a surprise: in many ways, equity crowdfunding has tracked the growth of peer-to-peer lending but is about four to five years behind it.

P2P Lender Landbay Granted ISA Manager Status By HMRC (Crowdfund Insider), Rated: A

Peer-to-peer lending platform Landbay announced on Monday it was granted ISA Manager Status by HMRC. This news comes less than a month after the lender received full authorization from the FCA for peer to peer lending.

The Landbay team stated that status will clear the way for the launch of their Innovative Finance ISA before the end of this tax year.

Wellesley Suspends Seedrs Campaign to Attract City Investors (Crowdfund Insider), Rated: A

Just a few weeks after launching its equity crowdfunding campaign on Seedrs, peer-to-peer lending platform Wellesley has reportedly decided to suspend the initiative as it seeks to attract city investors. As previously reportedWellesley sought to raise £1.5 million though the funding portal to continue operations.

Age of enlightenment (Credit Strategy), Rated: A

The business has also been described as the first peer-to-peer unicorn – Funding Circle – which is valued at $1bn.

The firm’s CRO Rahul Pakrashi revealed to Marcel Le Gouais how the business approaches relationship management with its micro SME customers.

MLG: Would you describe collections as sitting in first line here?

“Collections is very different from how banks manage it, because within the banks, there is a balance sheet to absorb any losses. For us, it’s most important that the borrower survives – because these are micro SMEs. The borrower might have only one supplier, so very small movements may make or break them. But if you work with them, understand them and support them, you can default them but have a view on how they can overcome their situation.”

MLG: How would you describe a typical customer?

“These types of firms don’t have many assets and they don’t have many borrowings. If you look at how they borrow from the banks, they don’t have classic SME loans, they don’t do things like hire purchase for example. Everyone has a current account but a lot of their borrowing is on credit cards.”

“So the closure rate is high but many of these are family-run businesses – perhaps just a husband and wife partnership. They basically do it to feed their families and they just want a stable income. They don’t necessarily have big expansion dreams; they don’t necessarily want to be the next Tesco.”

MLG: There’s a lot of cynical industry talk about defaults and loan loss coverage at peer-to-peer lenders, can you tell me about how that works here?

We are writing new business of about £100m each month in the UK and our default rate in the UK is six percent.

“The good thing is that in terms of coverage, investors are receiving net returns of about seven percent after all fees and losses. The loss rate is about two percent. But if you look at the gross yield, it’s about 10 percent minus one percent in fees, so nine percent.”

China

The authentication system of first P2P lending platform raises concerns (iWIN), Rated: A

The first online Debit and credit platform in Taiwan was established on March 24th, 2016. FSC and banks were deeply concerned about it. iWIN called for the people to pay attention to the identification authentication mechanism of the platform. Because the provider doesn’t prohibit minors from using the service, parents should pay attention to children’s financial condition, and ask children to protect their personal information.

Authors:

George Popescu
George Popescu
Allen Taylor
Allen Taylor

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