Articles by deBanked Staff
Direct Lending Investments Charged With Fraud by the SEC
March 25, 2019
Update: DLI has agreed to the appointment of a receiver to marshal and preserve the assets of Direct Lending and the funds. The SEC has also published a press release on the matter.
One of the biggest online lending hedge funds has been accused of fraud by the SEC. On Friday, the SEC sued Direct Lending Investments (DLI) with perpetrating a multi-year fraud that misrepresented the value of loans in a segment of its portfolio.
A DLI employee told the SEC that CEO Brendan Ross helped engineer loans to be valued at par when they should’ve been valued at zero. Emails between Ross and the online loan platform suggest that this was intentional, the SEC argued. The effect of this was that between 2014 and 2017, DLI overstated the valuation of one of its loan portfolio positions by approximately $53 million and misrepresented the fund’s performance by about 2-3% annually.
The SEC seeks a preliminary injunction and appointment of a permanent receiver; permanent injunctions; disgorgement with prejudgment interest, and civil penalties.
You can download the full SEC complaint here.
Below: DLI’s stated monthly returns 2013-2016
A 2017 DLI investor presentation touted “double-digit returns with no down months since inception” and a portfolio that has “exhibited little volatility.”
New Jersey Bill Seeks to Eliminate Quick Easy Access to Small Business Loans
March 21, 2019
The speed at which a small business owner can access capital to grow and create jobs in New Jersey is too dangerous and must be stopped. This is the takeaway from a bill (S3617) proposed by New Jersey State Senator Nellie Pou that calls for a minimum 3-day waiting period between when contract terms are disclosed to an applicant and when they can actually go through with getting a business loan or merchant cash advance. If the transaction does not fund within 10 days of the terms being disclosed, it implies that the waiting process must start over if the applicant wishes to still go forward.
The motivation behind the bill is to presumably force small business owners to think about the terms for awhile. It would apply where the payment frequency is greater than bi-weekly or the maturity is less than two years. There’s other little caveats too. If it passed, funding small businesses same-day or next-day would effectively become illegal.
In addition, the bill calls for detailed contract disclosures, proof that the funds will be used to economically benefit the small business applicant, lenders to set up their own complaint departments, licensing, bonding requirements for brokers & lenders, a minimum net worth for a broker of $100,000, background checks, written examinations, and ethics classes as part of continuing required education.
Pou’s bill, which at this point has not had the opportunity to get traction yet, is separate from another bill, S2262, which in addition to disclosures, calls for merchant cash advances to be defined as loans in the state. S2262 passed the Senate in February and is now under consideration in the Assembly.
Direct Lending Fund CEO Resigns, Investigation
March 20, 2019
Direct Lending Fund CEO Brendan Ross, has resigned, according to Bloomberg News and numerous individuals identifying themselves as investors on an industry blog. The fund not only lost nearly 25% of its portfolio in a single sour investment, but it’s reported that they may have overvalued its investments in QuarterSpot’s small business loan platform.
The fund was reputed as one of the largest funds in the online lending industry and one that “historically earned investors unlevered double digit returns” by investing in online loan marketplaces.
Were there signs of problems?
In a tell-all book published by DealStruck founder Ethan Senturia in late 2017, Senturia describes how Ross’s fund had been overly dependent on his company’s success. “I am like, literally staring over the edge. My life is over,” Senturia quotes Ross as saying in Unwound when he became aware of DealStruck’s downward spiral*. Despite this characterization, Ross’s fund continued to grow relatively unscathed.
Meanwhile, James R. (“Jim”) Hedges, IV wrote an op-ed in Mid-2017 on Lend Academy of a mystery fund he refused to identify that had a Bernie Madoff-feel to it. In the comments, users point out that the monthly returns matched the ones on Direct Lending’s investor letters.
“When I first saw these returns, I instinctively thought of Madoff,” Hedges wrote. “The narrow band of returns is, in my experience, highly unusual and inconsistent with the returns of investments being marked-to-market. To be clear, I am not saying that this fund is a fraud. I am stating that the performance they’ve reported is, in my experience, unlikely indicative of a valuation methodology that accurately reflects the month-to-month performance of the underlying assets.”
*DealStruck announced a restructuring in December 2018
Business Loan Brokers Indicted
March 16, 2019
Five business loan brokers were named in a federal indictment in Ohio for defrauding a 69-year-old business owner out of his money and cars. In addition to being asked for hundreds of thousands of dollars in upfront fees to apply for the loan, the victim signed over the title of 55 vehicles to a broker to serve as the collateral. The vehicles included a Ford Mustang, several dump trucks, several tractors, several restored classic vehicles, a Freightliner motor home, and trailers.
In reality, there was no loan.
Text messages quoted in the indictment indicated that one of the defendants traveled from New York to Youngstown, Ohio by Greyhound Bus to begin driving the vehicles back to New York one-by-one, but their scheme faced challenges when they could not afford the gas to drive all of the cars. By the end, the victim was cooperating with the police and one of the defendants was lured back to Ohio in September to pick up a payment where he was then arrested.
deBanked discovered a message board post that appears to be published by one of the defendants months after the alleged crime. In it, she attempts to recruit other brokers to send her business with promises of high commissions, same day approvals, free leads, and a policy of no backdooring.
Acquisition Costs Compared for GreenSky, Square, PayPal, OnDeck, Lending Club, and Prosper
March 5, 2019
Greensky, a consumer lending company, wants investors to know how low its acquisition costs are relative to the competition. The chart above, which appeared in their year-end earnings report, showed how much lower their sales & marketing expense ratio is versus Square and PayPal.
deBanked examined three additional fintech lending companies and ranked them as follows:
| Company Name | 2018 Sales & Marketing Ratio | 2017 |
| GreenSky | 5% | 5% |
| PayPal | 8% | 9% |
| OnDeck | 11% | 15% |
| Square | 12% | 11% |
| Lending Club | 39% | 40% |
| Prosper Marketplace | 76%* | 72% |
*indicates an estimate
The closeness between Square and OnDeck is notable in that Square markets its payment services first and then offers loans (and other products) as an add-on, while OnDeck only offers loans. Despite that, sales & marketing as a percentage of revenue are still virtually the same for each of them. Square is outspending OnDeck on marketing by more than 10:1, however, and is on pace to surpass OnDeck’s annual loan volume.
Prosper, meanwhile, is doing just as poorly as its wacky ratio looks. The company is losing tens of millions of dollars a year with no end in sight.
Affirm Partners with Walmart for Payments
February 28, 2019
Walmart customers can now pay for items using credit from Affirm, the online consumer lender announced yesterday. Walmart customers can find out how much they qualify for online and then make online or in-store purchases with in three, six or twelve monthly installments. A credit decision is made in real time and does not affect the customer’s credit score, according to Affirm.
“Walmart serves millions and has become a leader in the retail landscape with its commitment to help shoppers ‘save money and live better,’ which closely mirrors our own mission to ‘improve lives’ with our products,” said Max Levchin, founder and CEO at Affirm, as well as a founder of PayPal. “I’m looking forward to introducing Walmart customers to a modern and innovative way to buy the things they need.”
Affirm is now available as a payment option on Walmart purchases ranging from $150 to $2,000. This is not Walmart’s first foray into financing. In fact, in July of last year, Walmart entered into an exclusive partnership with Capital One to issue a Walmart credit card. But Elizabeth Allin, Vice President of Communications at Affirm, said that this partnership is the first point-of-sale loan product partnership for Walmart.
“They’ve really embraced e-commerce and the evolution of digital and mobile,” Allin said of Walmart, which has been the biggest retailer in the world for years.
Now 57 years old, the retail giant is pursuing partnerships with financial organizations to facilitate access to customer credit. But back in 2006, Walmart set its sights on bringing these lending operations in house, by becoming bank. Using a controversial statute, it attempted to get a charter to become an ILC bank. Met with strong opposition from banks and other opponents, Walmart backed down.
Square Capital On Pace to Overtake OnDeck in Small Business Lending
February 28, 2019
OnDeck’s annual loan origination volume has more than doubled since 2014, from $1.2 billion to $2.5 billion, allowing them to retain the top spot in deBanked’s small business funder rankings. But Square Capital, the small business lending division of Square, has grown by 16x since 2014. In the course of 5 years, they’ve gone from being a footnote compared to OnDeck to a fierce rival that is rapidly closing the gap in loan volume.
Square’s secret is the ability to generate loan volume at virtually no cost because the product is merely an add-on to their payments-first business. And that’s a problem for OnDeck, because Square has a lot of money to spend on marketing its payments business. More than $400 million a year to be precise. OnDeck, meanwhile, only spent $44 million last year on sales and marketing.
With OnDeck being outspent by a factor of 10, there is a likelihood that Square will overtake OnDeck in the business loan market within the next two years.
And Square’s strength is the ecosystem it’s building. On the Q4 earnings call, company CEO Jack Dorsey said, “I believe the ecosystem is extremely sticky, because it builds durable relationships. If we’re just focused on providing payments in the Register, certainly, there are so many other competitors out there. But when people come in for payments in the Register and then they use [our] payroll for their restaurant and they use Caviar and are really getting offers from Square Capital, it’s really hard to find that mix anywhere else and that builds durability.”
New York Legislators Introduce Small Business Usury Bill
February 20, 2019Two members of the New York State legislature have introduced a bill to apply consumer usury protections to small businesses. Bill A03638, introduced by New York Assemblymembers Yuh-Line Niou and Crystal Peoples-Stokes define a small business as “one which is resident in this state, independently owned and operated, not dominant in its field and employs one hundred or less persons.”
The bill is separate from the one introduced to outlaw Confessions of Judgment in financial contracts.
