Sean Murray is the President and Chief Editor of deBanked and the founder of the Broker Fair Conference. Connect with me on LinkedIn or follow me on twitter. You can view all future deBanked events here.
Articles by Sean Murray
My Marketplace Lending Yield Dropped: What Gives? (SCRA)
September 6, 2015
It’s a case of the ‘ol bait and switch, at least at first glance. The interest earned on fixed rate notes is supposed to be predictable, but it can change at any moment due to the Service members Civil Relief Act (SCRA). The earliest versions of the law were enacted in 1940, and they provided America’s active duty military servicepeople with certain protections while they were abroad.
One of those protections is a cap on interest rates. Specifically, the SCRA requires that the interest rate on preexisting debts, such as Loans, be set at no more than 6% while the qualified service
member or reservist is on active duty. This rule extends to online lenders as well, not just traditional banks and credit card companies.
I personally was reminded of the law when one of my Lending Club notes had their interest rate dropped from 12.69% to 6%. I guess I should’ve known it was a possibility considering the borrower’s job title was listed as Command Sergeant Major.
When the serviceperson returns from active duty, the rate goes back to what it originally was but the difference between the agreed upon rate and 6% while away is automatically forgiven.
The Lending Club prospectus states, “We do not take military service into account in assigning loan grades to borrower loan requests. In addition, as part of the borrower registration process, we do not request our borrowers to confirm if they are a qualified service member or reservists within the meaning of the SCRA.”
The risk of deployment is one that investors take on their own. The SCRA cap has affected a measly .004% of all the consumer notes that I’ve acquired across two platforms. To an investor, the impact on portfolio yield should be immaterial, and as for servicepeople, well I hope it makes a difference for them. They deserve all the protections and benefits they can get!
Qwave Capital Steps Up Pressure to Acquire IOU Financial
September 2, 2015
The nuclear scientists in venture capital clothing have laid out their case to IOU Financial’s shareholders that they would be better served if they were running things. In a letter distributed on Monday by Qwave Capital, the firm trying to acquire IOU, they criticized the lender’s state of affairs.
In all, IOU continues to demonstrate that it cannot grow profitably and compete effectively within its current model. This is made worse by the fact that, because IOU does not have sufficient capital, conservative lenders are reluctant to provide IOU access to capital at competitive rates. In comparison, OnDeck, IOU’s major online lending competitor, had raised far more capital when at the same stage of development that IOU is at today. OnDeck can now attract the lower interest funds it requires to lend out to customers and support its profitable growth in the U.S. and Canada.
Qwave chastised IOU’s board members for decisions it didn’t feel aligned with the best interests of the company.
“IOU transactions have allowed Board members and insiders to maintain their dominant interest in IOU and purchase shares for below-market value,” they wrote.
And continued:
“For instance, IOU recently completed a private placement financing at $0.40 per share, a 20% discount to Qwave’s Offer and the private placement’s original $0.50 per share price. IOU completed the $0.40 per share offering even though Qwave’s offer was on the table and IOU had confirmed offers at $0.50 per share on its books. Parties related to IOU management subscribed to approximately 17% of the offering at the discounted offer price.”
Judging by the rest of the letter, IOU shareholders will certainly have a lot to consider. You can read a full copy of it here.
Stock Slump Makes Marketplace Lending Look Like Safe Haven
September 2, 2015
The premium might be gone in peer-to-peer lending, but a step forward is definitely still better than three steps back. Probably the most frustrating thing for long term investors in the stock market is the day-to-day volatility. Some of it’s rational, and some of it’s just, well, who knows…. it’s the stock market.
It’s a hopeless feeling to see your stock portfolio balance drop substantially all because something is happening in China. But if you’ve diversified your overall investment portfolio beyond just stocks, it’s not all bad right now. It’s actually a bit of a golden era.
On Lending Club, my portfolio’s Adjusted Net Annualized Return is 8%. On Prosper, my Annualized Return is 11%, though that portfolio is younger and smaller. And then there’s my merchant cash advance portfolio which is beating both of those by a long shot.
These investments are a wonderful balance to the stock market because they don’t care what’s happening in China either. It’s times like these though when you need to be patient and not overreact. The easy mistake to make right now is to substantially reallocate your portfolio so that the majority of your capital is in marketplace loans.
LendingMemo’s Simon Cunningham believes that having 20% of your portfolio in peer-to-peer lending investments is reasonable.
And Lend Academy founder Peter Renton told Equities.com last year that, “The official word from the platforms is that you should not invest more than 10 percent of your net worth.” He also went on to say that some people are putting half their life savings into this and that it’s probably not a good idea.
And he’s right. As volatile as stocks can be, your steep loss today can be erased by a rally tomorrow. With notes backed by the performance of loans, a loss today can’t just rally back tomorrow. When the loans go bad, the money is gone and thus the risk of loss is a little bit more permanent since you can’t just ride it out.
In that same interview, Renton said, “If there were another 2008 or 2009 now, I feel very confident that my returns would remain positive. I’m earning close to 12 percent right now. If there were another 2008-9 right now, I might go down to 6 percent.”
I think that’s probably a best case scenario in a worst case scenario. Everyone should plan for events or contingencies that will lead to losses. If there were no possible outcomes that could lead to losses, then the market has obviously mispriced the loans and I don’t believe that has happened.
One nightmare scenario to consider for example, is if the loans are invalidated by a court. Oddly enough, this very possibility is being discussed after the outcome of the Madden v. Midland ruling which hurt the reliance on chartered banks to originate loans. Lending Club’s CEO answered concerns over that by saying they were protected by their choice of law provision, a safeguard that just recently proved to be imperfect.
As Patrick Siegfried, Esq, wrote, “Last Thursday, the Attorney General of North Carolina was granted an injunction against Western Sky Financial and CashCall prohibiting them from offering any loans to North Carolina consumers or collecting on any outstanding accounts in that state.” The companies pointed to their choice of law provisions that supposedly made the rates permissible. This practice is actually commonplace for alternative lenders. But Siegfried said, “Because the Attorney General was not a party to the agreements, the court found that the Attorney General was not bound by the agreements’ choice of law. Therefore it could enforce North Carolina’s usury laws against the defendants.”
Now however remote the possibility of judicial or regulatory invalidation of loans, it is sobering possibilities like these that should prevent anyone from putting half their life savings into marketplace lending. It is a nice complement to a portfolio of stocks, but not a replacement for one.
Over the last week, my marketplace lending portfolios have been a bright spot and a source of optimism in a news cycle and market that has suddenly turned bearish. I’m tempted to reallocate my investments accordingly, but I’m not going to.
Hopefully you won’t make any impulsive maneuvers either…
Letter From the Editor – September/October 2015
September 1, 2015
If you hadn’t noticed, we’ve got an executive on the cover of this issue. And why shouldn’t we? However alternative the industry’s roots might be, today’s small business funders are more like bankers than ever before.
But they didn’t all start off that way. Some of the industry’s leaders come from modest backgrounds outside of finance and we explore one of those stories in this edition.
Jared Weitz got his start in the industry at a company that was founded before the financial crisis. And that got me wondering if the funders that have been around for a decade or more possessed some secret recipe or knowledge that made them so successful. In The Decade Club, we reached out to several leaders to hear their perspectives and glean advice for you, the reader, somebody who potentially has not been in this business for at least ten years.
And if you’re new and just now walking through the industry’s front door, you’ll want to make sure your deals don’t slip out the back door. As some brokers have shared here, there is a potential for a deal to end up somewhere you may not have intended it to.
There is a reason that the term ‘deal’ is most often used to describe some of the business financing products we cover and that’s because at the heart of each transaction is a deal worked out between at least two commercial entities. A small business is still a business (just smaller) but there are folks that don’t exactly agree. I consider it important to point out the distinction and the extent to which the differences are respected in American culture. Even if you disagree with my assessment, surely there are opinions and viewpoints where we can find common ground.
A wide array of ideas has been shared lately and some of those have been expressed more vocally and more publicly than others. One thing that I have learned is that there is no perfect concept or methodology for success in this business. All you can try to do is serve your clients and yourselves as best you can.
–Sean Murray
Dealstruck’s Response to the Treasury RFI
September 1, 2015
The Treasury Department has extended the comment deadline on the Marketplace Lending Request for Information until September 30th. In the meantime, one well known lender, Dealstruck, has already submitted their response. A few excerpts of their comments are below, but you can view their response in its entirety here.
We encourage the Treasury to weigh stated use of proceeds and debt service coverage ratio heavily when considering factors important in extending credit for alternative online lenders.
We have no opinion or recommendation as to whether lenders should have skin in the game. If there is a seller and a buyer for an asset, a market exists, and the United States promotes open markets. At Dealstruck, we have chosen to take balance sheet risk because it helps us to position ourselves for a longer-term sustainable model across economic cycles, and allows us more flexibility in riding out potential future economic downturns.
we believe that the best way for banks to participate in the alternative online lending space is to offer financing to the innovative lenders, rather than attempt to change underwriting procedures and processes to facilitate smaller, riskier loans themselves
The federal government can also take a substantial role in leveling the regulatory playing field in pricing and access to SMB capital. Each state has substantially different regulations over commercial transactions, including lender licensing and usury caps. This has created perverse and unintended consequences, hampering both small businesses and transparent lenders
Should Alternative Lenders Reconsider IPOs?
August 31, 2015
OnDeck has gotten very quiet over the past month as the stock hovers near its all time low, and down more than 50% from its IPO price. The only updates related to them on the news wire lately are reminders from law firms to join in on the existing class action lawsuit. One has to wonder if they regret going public.
To make the things murkier, the Madden v. Midland decision effectively makes it illegal in a handful of states for alternative lenders to rely on chartered banks to originate loans for them at interest rates that violate state usury laws. In states such as New York, that’s a big problem for OnDeck, but fortunately for them and other lenders like them, they can still fall back on a choice of law provision to still be able to make the loans.
Combine that landmark ruling with the Treasury RFI, The Dodd Frank Section 1071 Reg B rule that everyone wants enforced all of the sudden, and a chorus of lenders calling for regulatory action, and we don’t exactly have an ideal environment for other alternative lenders considering an IPO.
But does an IPO really matter?
I am reminded of a long email that Elon Musk sent to employees of SpaceX two years ago regarding their aspirations to go public so that they could monetize their stock options and get rich.
“Some at SpaceX who have not been through a public company experience may think that being public is desirable. This is not so.”
“Another thing that happens to public companies is that you become a target of the trial lawyers who create a class action lawsuit by getting someone to buy a few hundred shares and then pretending to sue the company on behalf of all investors for any drop in the stock price.”
“Public companies are judged on quarterly performance. Just because some companies are doing well, doesn’t mean that all would. Both of those companies (Tesla in particular) had great first quarter results. SpaceX did not. In fact, financially speaking, we had an awful first quarter. If we were public, the short sellers would be hitting us over the head with a large stick.”
“Public company stocks, particularly if big step changes in technology are involved, go through extreme volatility, both for reasons of internal execution and for reasons that have nothing to do with anything except the economy. This causes people to be distracted by the manic-depressive nature of the stock instead of creating great products.”
“It is important to emphasize that Tesla and SolarCity are public because they didn’t have any choice. Their private capital structure was becoming unwieldy and they needed to raise a lot of equity capital.”
“Those rules, referred to as Sarbanes-Oxley, essentially result in a tax being levied on company execution by requiring detailed reporting right down to how your meal is expensed during travel and you can be penalized even for minor mistakes.”
Any other alternative lenders possibly considering an IPO should strongly evaluate whether or not it’s necessary to go public to carry out their objectives. Surely the folks at OnDeck must be at least a little bit distracted by the manic-depressive nature of their stock price, the class action lawsuit, reactions to their quarterly reports, and the unyielding scrutiny by analysts and pundits. Surely it could be argued that they’ve lost some of their PR mojo in the mix.
It’s not easy running a public company, especially a lender in a post-financial crisis world where Wall Street hatred still runs hot. Hopefully if you are in this industry, you are in it for the long haul and not just for an IPO to cash out and give up…
Expansion Capital Group Crosses $50 Million Milestone
August 27, 2015
Move over New York and Silicon Valley, Expansion Capital Group (ECG), a young Sioux Falls, South Dakota-based business lender is quickly rising up the ranks. Founded just two years ago, a company representative has confirmed to deBanked that they’ve already funded more than $50 million to small businesses nationwide.
While South Dakota might be better known as the home state of Mount Rushmore, they have made a name for themselves in an industry largely centered around New York, California, and South Florida.
Jay Larson, ECG’s COO, shared with deBanked, “We are definitely excited to cross the $50 million deployment milestone. First and foremost, we’d like to thank all of our industry partners for all their help and support in getting us here. Second, this is only the beginning of ECG’s journey [and] as such we’re looking forward to reaching the $100M milestone in a much shorter period of time.”
On the industry leaderboard, ECG is not that far behind competitors that have been in the industry for much longer. Credibly, for example, has reportedly funded more than $140 million since inception but that’s spread out over a period of more than four years.
Business Financial Services Acquires Entrust Merchant Solutions
August 26, 2015
A representative for Coral Springs, FL-based Business Financial Services (BFS) has confirmed that the company has acquired Entrust Merchant Solutions. Entrust is a well established and widely known NY-based ISO/broker shop that was founded in 2007. As part of the deal, Entrust CEO Ilya Fridman will remain with the company and for the time being, the Entrust name will not change. They are now a part of the BFS family of companies however.
The news comes on the heels of a major milestone. Just a month ago, BFS announced that they had funded more than $1 Billion since inception, earning them a spot as one of the industry’s largest players.
The Entrust acquisition is representative of an M&A trend taking place in the industry. Below is a list of some of the more recent ones:
- Enova International acquired The Business Backer (for $27 million)
- Merchants Capital Access acquired Reliant Funding
- Capital Z Partners acquired Pearl Capital
- World Business Lenders acquired the business loan operations of Plan B Growth (and has made 11 acquisitions total over the past 12 months)
Prior to the deal, Entrust was an ISO for BFS. Over the last few days though, some insiders speculated that the relationship had suddenly grown even tighter. It turns out they were right.
