Archive for 2017
deBanked Begins 2017 With Thickest Magazine Issue Ever
February 8, 2017
Forty-eight pages. That’s how thick deBanked’s January/February 2017 edition is. As the wider industry heads to the LendIt Conference in NYC next month, we decided it was only fitting to feature the city that never sleeps on the cover.
This issue delves into Equity crowdfunding, the story behind the LendIt Conference, and what it’s like to actually be a merchant getting a business loan from one of today’s fintech lenders. There’s more of course, so if you’re not already subscribed, you’ll want to make sure to do that now so that you receive this and future issues FREE.
deBanked’s chief editor Sean Murray is a LendIt awards finalist for best journalist coverage. And while there are already 30 pre-selected judges who will decide the outcome, we would like to thank everyone that has supported us and made our publication possible.
In the meantime friends, stay fresh, stay fintech, stay deBanked. The future of finance depends on it.
We’ll see you at the Javits Center for LendIt on March 6th and 7th. If you join the Small Business Lending track, you’ll actually be able to grab a copy of this issue at the conference.
What Shakeout? Breakout Capital Secures $25 Million Credit Facility
February 8, 2017
Put a tally up on the board for small business lenders in 2017. McClean, VA-based Breakout Capital, which just announced a move into a larger office last week, has also secured a $25 million credit facility with Drift Capital Partners. Drift is an alternative asset management company.
Breakout is young by today’s industry standards, founded only two years ago by former investment banker Carl Fairbank, who is the company’s CEO. And don’t count them out just because they’re not in New York or San Francisco. Washington DC’s Virginia suburbs have become somewhat of a hotspot for fintech lenders. OnDeck, Fundation, StreetShares and QuarterSpot all have offices there, Fairbank points out. “And Capital One is right up the street,” he adds while explaining that the community has a strong talent pool that is familiar with creative lending. Breakout has already grown to about 20 employees and they’re still growing, he says.
Fairbank considers Breakout to be a more upmarket lender, whose repertoire includes serving the near-prime, mid-prime customer. CAN Capital and Dealstruck had focused on this area and both companies stopped funding new business in 2016. As I point this out, I ask if that suggests that segment is perhaps too difficult to make work.
“Candidly, that’s the part of the market that I feel the best about,” he says matter of factly. The company tries to product-fit deals based on the borrower, and will even make monthly-payment based loans. “I think the subprime side with the stacking and the debt settlement companies is a very very difficult place to play right now,” he says, adding that they have worked with subprime borrowers using their original bridge program but that they’ve kind of pulled back from doing those. As with all programs regardless, their goal is to graduate merchants into better or less costly products later on. We have helped merchants move on to get SBA loans, he maintains.
That all sounds very hands on, and part of it is, Fairbank confirms while asserting that technology does indeed do a lot of the legwork. “There’s absolutely a human element to underwriting these deals,” he says. He also agrees with much of what RapidAdvance chairman Jeremy Brown wrote in a deBanked op-ed titled, The New Normal. Both Breakout and RapidAdvance refer to themselves as technology-enabled lenders, an acknowledgement that tech is a component of the company, not the entire company itself.
“I think we will see the beginning of the demise of fully automated, no manual touch funding,” Brown wrote in his article.
Brown also predicted that the legal system will ultimately impose order on some industry practices like stacking or that a state like New York could take a public policy interest in products he believes have legal flaws. As he was writing that, Governor Cuomo’s office published a budget proposal that redefined what it means to make a loan in the state. And it leaves much to be desired, some sources contend. Two attorneys at Hudson Cook, LLP, for example, published an analysis that demonstrates how its wording is ambiguous and far-reaching.
“What they really need to do is take the time to think through the implications and basically do a full study of the market to ensure that what they’re pushing forward is going to have the desired consequences,” Breakout’s Fairbank offers on the matter.
This doesn’t mean he’s anti-regulation. The company already holds itself to high standards and customer suitability and is a founding member of the Coalition for Responsible Business Finance.
“I personally do believe that there’s bad forms of lending or cash advances in the market and I’m sure that’s what Cuomo thinks as well but at the same time, it’s getting pushed very quickly and they really really ought to step back and do the research to understand the broader implications and to understand what exactly they’re trying to accomplish,” he maintains.
His pragmatism extends to the OCC’s proposed limited fintech charter, which he finds intriguing, assuming it gets buttoned up. “I believe it’s a concept worth pursuing,” he says, explaining that regulators will need to get comfortable with unsecured lending.
In the meantime, he’s optimistic about Breakout’s prospects. “In a time when institutional appetite for alternative finance companies has dried up, we believe our ability to raise a credit facility in this market speaks volumes about what we have already accomplished, our position as a leading player in the space, and our prospects for strong, but measured, growth,” Fairbank is quoted as saying in a company announcement. The company was also invited and joined the Task Force for the PLUM Initiative, a collaboration between the U.S. Small Business Administration (SBA) and the Milken Institute to more effectively provide capital to minority-owned businesses throughout the United States. The Task Force consists of a very select group of industry leaders, who are in positions to improve access to capital in underserved markets, according to the announcement.
While other companies are making adjustments or in his opinion, continuing to make questionable underwriting decisions, Fairbank thinks his formula for success works. “I think that we do look at deals differently than most folks because I intentionally built the core of my underwriting team with folks who are not from this space so they take a more traditional approach and mix it with some of the greatest aspects of alternative finance.”
Analysis: New York’s Lender/Broker Licensing Proposal
February 7, 2017
New York Governor Andrew Cuomo’s proposed budget includes a legislative proposal to “allow the Department of Financial Services (“DFS”) to better regulate the business practices of online lenders.”1 This legislation, which would amend Section 340 of the Banking Law, could have a dramatic impact on lending and brokering loans to New York businesses, as such lenders would have to obtain licenses to engage in business-purpose lending and could only charge rates and fees expressly permitted under New York law.2 It may impact the secondary market for merchant cash advances. If passed, the licensing requirements will take effect January 1, 2018.
The proposed law would amend NY Banking Law § 340 to require anyone “engaging in the business of making loans” of $50,000 or less for business or commercial purposes to obtain a license. The term “engaging in the business of making loans” means a person who solicits loans and, in connection with the solicitation, makes loans; purchases or otherwise acquires from others loans or other forms of financing; or arranges or facilitates the funding of loans to businesses located or doing business in New York.
Although the proposed law would require a license only for a person who “solicits” loans and makes, purchases or arranges loans, the DFS takes the position that the licensing law (as currently enacted) applies broadly and that “out-of-State entities making loans to New York consumers . . . are required to obtain a license from the Banking Department.”3 As a result, there is probably no exemption from licensing for a person who does not “solicit” loans in New York.
The potential impact of the legislation is significant.
Potential Impact on Lenders:
Licensing Required and Most Fees Prohibited. New York law already requires a lender to obtain a license to make a business or commercial loan to individuals (sole proprietors) of $50,000 or less if the interest rate on the loan exceeds 16% per year, inclusive of fees. The proposed law would require any person who makes a loan of $50,000 or less to any type of business entity and at any interest rate to obtain a license. And a licensed lender is governed by New York lending law that regulates refunds of interest upon prepayment;4 and significantly limits most fees that a lender can charge to a borrower, including prohibiting charging a borrower for broker fees or commissions and origination fees.5
Essentially, the DFS will regulate lenders who originate loans to businesses of $50,000 or less in the same manner as consumer loans of less than $25,000. The proposed law would exempt a lender that makes isolated or occasional loans to businesses located or doing business in New York.
Potential Effect on Choice-of-Law. The proposed law could lead courts to reject contractual choice-of-law provisions that select the law of another state when lending to New York businesses. With new licensing requirements and limits on loans to businesses, a court could reasonably find that New York has a fundamental public policy of protecting businesses from certain loans, and decline to enforce a choice-of-law clause designating the law of the other state as the law that governs a business-purpose loan agreement.
For example, the holding of Klein v. On Deck6 might have come out differently if New York licensed and regulated business loans at the time the court decided it. In the Klein case, a business borrower sued On Deck claiming that its loan was usurious under New York law. The loan contract included the following choice-of-law provision:
“[O]ur relationship including this Agreement and any claim, dispute or controversy (whether in contract, tort, or otherwise) at any time arising from or relating to this Agreement is governed by, and this Agreement will be construed in accordance with, applicable federal law and (to the extent not preempted by federal law) Virginia law without regard to internal principles of conflict of laws. The legality, enforceability and interpretation of this Agreement and the amounts contracted for, charged and reserved under this Agreement will be governed by such laws. Borrower understands and agrees that (i) Lender is located in Virginia, (ii) Lender makes all credit decisions from Lender's office in Virginia, (iii) the Loan is made in Virginia (that is, no binding contract will be formed until Lender receives and accepts Borrower's signed Agreement in Virginia) and (iv) Borrower's payments are not accepted until received by Lender in Virginia.”
The court concluded that this contract language showed that the parties intended Virginia law to apply. However, the court also considered whether the application of Virginia law offended New York public policy. The court compared Virginia law governing business loans against New York law governing business loans, and decided that the two states had relatively similar approaches. As a result, the court found that upholding the Virginia choice-of-law contract provision did not offend New York public policy.
The loan amount in the Klein case was above the $50,000 threshold for regulated loans in the proposed New York law, so this exact case would not have been affected. However, the court’s analysis in the Klein case would have been the same for loans of $50,000 or less. Accordingly, the new law could cause a New York court to reject a contractual choice-of-law provision.
Effect on Bank-Originated Loans. This proposed law apparently would not directly affect loans made by banks that are not subject to licensing under the statute.7 But, the law would require non-banks that offer business-purpose lending platforms that partner with FDIC-insured banks to obtain a license to “solicit” loans. And, it is possible, that the DFS could later, by regulation or examination, prohibit such licensees from soliciting loans at rates higher than permitted under New York law.
Potential Impact on Merchant Cash Advance Companies:
The proposed law imposes a license requirement if a person “purchases or otherwise acquires from others loans or other forms of financing.” New York law does not define the term “other forms of financing.” However, the DFS may consider merchant cash advance transactions to be a regulated transaction for which licensing is required.
As written, only purchasing or acquiring other forms of financing, such as a merchant cash advance, might require a license. As a result, the proposed law only has the potential for affecting the sale and syndication of merchant cash advances. It is unclear whether buying only a portion of a merchant cash advance, or “participation” could require a license, or if only purchasing the entire obligation could require a license.
Potential Impact on Brokers:
Because the new law would require a license to “arrange or facilitate” a business loan of $50,000 or less, ISOs and loan brokers would need a license. As mentioned above, a licensed lender is prohibited from charging broker fees or commissions. It is not clear at the moment whether an ISO or loan broker could contract directly with the borrower for a commission.8
1 See https://www.budget.ny.gov/pubs/executive/eBudget1718/fy18artVIIbills/TEDArticleVII.pdf, page 243. Although not discussed in this article, the proposal would also impose new licensing requirements on certain consumer lenders.
2 A licensed lender may impose a rate in excess of the 16% civil usury limit in New York, but is still subject to the 25% criminal usury limit. See, New York Banking Law § 351(1) and New York Penal Law § 190.40.
3 See http://www.dfs.ny.gov/legal/interpret/lo991206.htm The term “solicitation” of a loan includes any solicitation, request or inducement to enter into a loan made by means of or through a direct mailing, television or radio announcement or advertisement, advertisement in a newspaper, magazine, leaflet or pamphlet distributed within this state, or visual display within New York, whether or not such solicitation, request or inducement constitutes an offer to enter into a contract. NY Banking Law § 355.
4 NY Banking Law § 351(5).
5 NY Banking Law § 351(6).
6 Klein v. On Deck Capital, Inc., 2015 N.Y. Misc. LEXIS 2231 (June 24, 2015).
7 See NY Banking Law § 14-a; 3 NY ADC 4; NY Gen. Oblig. Law § 5-501.
8 See NY Gen. Oblig. Law § 5-531 that limits fees that brokers can charge on non-mortgage loans to not more than 50 cents per $100 loaned.
Katherine C. Fisher is a partner in the Hanover, MD office of Hudson Cook, LLP. Kate can be reached at 410-782-2356 or by email at kfisher@hudco.com.
SoFi Plays It Safe With Super Bowl Ad – And Kind of Wants to Be Your Bank
February 6, 2017“Here’s to conquering more together in 2017,” SoFi’s Super Bowl ad asserts. The company wants to help you own a home, start a family and see the world. They essentially want to be your bank for life, and now that their acquisition of Zenbanx allows them to offer checking accounts, they pretty much can be. It was no surprise then that their infamous tagline “Don’t Bank” was nowhere to be found in their Super Bowl ad. Watch below:
The ad they ran last year received criticism for labeling people as either great or not great. Maybe it wasn’t the best approach, but it was a very SoFi thing to do at the time.
This year, the only thing missing from their feel-good we-want-to-be-with-you-through-all-your-life-milestones ad is a voice coming on at the end to say “There are some things money can’t buy, for everything else, there’s MasterCard.”
Perhaps SoFi will consider changing their slogan from Don’t Bank to Bank With Us. It’s only a matter of time.
OnDeck’s COO Announces Resignation Prior to Q4 Earnings
February 3, 2017OnDeck COO James Hobson notified the company on Friday that he is resigning to “pursue another opportunity.” According to the 8-K filed with the SEC, it will become effective on March 15, 2017.
Hobson started at OnDeck in 2011 and became the COO in 2012.
The announcement comes weeks before OnDeck is expected to disclose their Q4 and full-year 2016 report. In Q3, the company had shifted to keeping more loans on their own balance sheet, while increasing their reliance on third party brokers for business. They had also reported a GAAP net loss of $16.6 million for the quarter, bringing the 2016 Q1 – Q3 total losses to $47.1 million.
Google Banned Five Million Payday Loan Ads Last Year
February 3, 2017
After Google suspiciously decided to permanently ban payday lending ads from their search results last year, they had to disable more than 5 million payday loan ads, Google’s Sean Spencer wrote in a blog post. They also “took action on 8,000 sites promoting payday loans,” he said.
For years, Google had no problem with payday lending or the advertising revenue it generated for them. In fact, in November 2013, an affiliate company, Google Ventures, even invested in a payday lending company named LendUp. But the harmony was short-lived. Eventually, Google’s search team would ban LendUp and every other payday lender from running ads on their platform after what appears to be government pressure.
- In May 2016, Google announced they would be banning payday loan ads.
- In July, that ban started to go into effect.
- In September, the CFPB announced it had taken action against LendUp, citing deceptive practices and internet ad campaigns that violated federal laws.
Google now reports having banned more than 5 million payday loan ads from that time. Other categories were worse, however. Google also had to ban 17 million ads that promoted illegal gambling and 68 million that offered bad healthcare products such as illegal pharmaceuticals.
Some ads still sneak through or try to sneak through. “Bad actors know that ads for certain products—like weight-loss supplements or payday loans—aren’t allowed by Google’s policies, so they try to trick our systems into letting them through,” Google’s Spencer wrote. “Last year, we took down almost 7 million bad ads for intentionally attempting to trick our detection systems.”
LendUp, the company Google Ventures invested in, is still in business.
Prosper Marketplace Appoints Usama Ashraf Chief Financial Officer
February 1, 2017
SAN FRANCISCO–(BUSINESS WIRE)–Prosper Marketplace announced today it has appointed Usama Ashraf as Chief Financial Officer. As CFO, Ashraf will oversee the company’s capital markets function, as well as all of the company’s finance activities. As head of the Capital Markets team, he will be responsible for expanding the company’s funding sources by bringing new investors onto the Prosper lending platform.
Ashraf brings more than 18 years of experience spanning corporate finance and global capital markets, including funding, securitization, financial reporting, planning, investor relations, balance sheet management, strategy, and mergers and acquisitions. He has held senior leadership positions at prominent financial services companies, most recently as Deputy Chief Financial Officer and Treasurer at Annaly Capital Management and Corporate Treasurer at USAA. Ashraf will start his new position at Prosper Marketplace on February 27.
“We’re thrilled to have someone with Usama’s experience and track record in finance and global capital markets join our team,” said David Kimball, CEO, Prosper Marketplace. “Usama will be instrumental in bringing new institutional investors onto the Prosper platform, including banks, as we continue to grow the platform in 2017.”
“I’ve watched the online lending industry with keen interest over the past year, and I have been impressed with Prosper’s resiliency and commitment to innovation,” said Ashraf. “I am a strong believer in Prosper’s mission to advance financial well-being, and I look forward to working closely with David and the Prosper team to take the business to the next level.”
Prior to joining USAA, Ashraf spent 13 years in the Treasury and Corporate M&A departments of CIT Group, most recently serving as Deputy Treasurer with responsibility for the firm’s Treasury activities in the U.S. Previously, he worked in the Investment Banking Division of Salomon Smith Barney/Citigroup focused on M&A. Ashraf received a BS in Economics with concentrations in Finance and Accounting from The Wharton School of the University of Pennsylvania.
About Prosper
Prosper’s mission is to advance financial well-being. The company’s online lending platform connects people who want to borrow money with individuals and institutions that want to invest in consumer credit. Borrowers get access to affordable fixed-rate, fixed-term personal loans, and investors have the opportunity to earn attractive returns via the platform’s data-driven underwriting model. To date, Prosper has originated over $8 billion in personal loans for debt consolidation and large purchases such as home improvement projects, medical expenses and special occasions. The award-winning Prosper Daily app offers essential tools to help people manage their financial wellness every day.
Prosper launched in 2006 and is headquartered in San Francisco. The lending platform is owned by Prosper Funding LLC, and Prosper Daily is owned by BillGuard Inc., both subsidiaries of Prosper Marketplace. Visit www.prosper.com and follow @Prosperloans on Twitter to learn more.
Contacts
Prosper Marketplace
Sarah Cain, 415-593-5474
scain@prosper.com
Former CIO of the CFPB and FinTech Entrepreneur Joins FinMkt’s Advisory Board
January 31, 2017New York City-based FinMkt, a leading provider of marketplace technology solutions for the financial services industry, today announced the addition of Tim Duncan, a seasoned financial technology entrepreneur and innovative leader, to its Advisory Board. Tim brings an impressive roster of experience, including serving on the executive launch team for the U.S. Consumer Financial Protection Bureau as its Head of Technology and CIO. Tim will advise FinMkt’s management team on strategy and product development
Tim’s expertise and experience combine technology, finance, and law. In the late 1990s, he founded a startup that pioneered the use of the Internet to deliver market data, research, and news to senior executives, analysts, and investment managers, and later sold the company to Thomson Reuters. He then served as President of Thomson Interactive, where he was responsible for leading the digital transformation of the $5 billion global data and information company and spearheaded the initial design and development of ThomsonOne, a digital platform that generated hundreds of millions in revenue.
Tim then served as a government and public policy advisor, working closely with then Governor of Massachusetts, Mitt Romney. He also founded and led the American Business Leaders for Financial Reform in support of the Dodd–Frank Act and worked closely with Elizabeth Warren on strategic outreach and communication to the business community. Tim participated in the review, drafting, and negotiation sessions on the text of Dodd–Frank legislation and was present when President Obama signed the Dodd–Frank Act into law.
Tim was recruited by Elizabeth Warren, then Special Assistant to the President of the United States, to join the executive team tasked with launching the CFPB on time and on budget. As Head of Technology and CIO, Tim led technology strategy, planning, and implementation for this inaugural federal agency in the digital age with a budget of $500 million. Under his leadership, the agency implemented an agile, lean process to document, budget, approve, and prioritize technology projects and also became the first federal agency to utilize scalable commercial cloud services while increasing staff from 50 to 500 in an 18-month period.
Tim’s most recent endeavor has been as recipient of a Ford Foundation grant to develop and launch a national social impact project enabling low- and moderate-income families to practice better financial decision-making toward homeownership.
Commenting on Tim’s impressive record as an entrepreneur, technologist, and innovative leader, FinMkt CEO Luan Cox stated: “ We are thrilled to have Tim join the team. His deep passion and experience for fintech and the online lending space will help FinMkt continue our rapid growth .“
About FinMkt
With offices in New York City and Hyderabad, FinMkt provides best-in-class, customizable online marketplace technology for the global financial services industry. We help organizations rapidly deploy marketplace solutions in a timely, cost-efficient manner while ensuring the highest quality technology and client support. From customer acquisition to product matching to tracking and reporting, our secure, patent-pending technology solutions are the gold standard of the financial marketplace ecosystem. FinMkt’s industry-leading platform and applications drive innovation, accelerate processes, and expand opportunities for growth in the financial services arena. For more information, please visit us at http://finmkt.io/ or email us at info@finmkt.io.
