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
Renaud Laplanche on Madden v. Midland
August 8, 2015
In case you missed the comments by Lending Club’s CEO regarding the Madden v. Midland decision, we’ve got the transcript of it from the Q2 earnings call below. A brief of that case was published on deBanked back on June 11th by lawyers from Giuliano McDonnell & Perrone, LLP.
Smittipon Srethapramote – Morgan Stanley
And do you have any comments on the Madden versus Midland funding case that’s going through the court system right now in terms of how it potentially impacts your business?Renaud Laplanche – Founder & CEO
Yes, so we’ve seen that case that came out a couple of months ago. I think the –our take there is obviously the particular circumstances of the case are different from what we’re seeing on our platform. But in general what really helps us apply Utah law to most of our loans is really a couple of things. One is for the all preemption. And the second is choice of law provision in our contract. The Madden case really challenged the federal preemption but did not challenge the choice of law provision, so that’s really the – and we don’t need both, we need one of them. So we continue to operate in the Second Circuit district where that decision was rendered exactly as we did before and are relying on our choice of law provisions.Note that this particular case is getting challenged by a lot of players in the banking industry, including the American Banking Association. And I think it’s an unusual case, but certainly that doesn’t come back to us in that the sense that we continue to rely on choice of law provision. If we were to see that the choice of law provision was getting challenged elsewhere which there’s no reason to expect at this point, we could also think of a different issuance framework than the one we’re using now where we would switch to a series of state licenses. And that’s in [indiscernible] we provided in our slide deck that shows that using the current mix we have about 12.5% of our loans that would exceed the state interest rate caps.
So that certainly would be [indiscernible] demand and we’d have to revise our pricing in certain states, but that certainly would be another option available to us if our choice of law provision and federal preemption was getting challenged in other states.
On July 28th, Attorney Patrick Siegfried pointed out that the Madden case could be the start of a chilling trend after a subsequent ruling in Blyden v. Navient Corp. In that brief, he wrote, “Blyden also demonstrates that debtors that become aware of subsequent assignments of their loans may be inclined to use the assignment event as a way to invalidate otherwise legitimate debts.”
Funding Circle Breeds Bean Bags
August 7, 2015Yogibo CEO Eyal Levy saw a business loan ad for Funding Circle and applied. “The process was very smooth,” Levy said, who made a point to say that he was interviewed by an underwriter. Today, Yogibo has around 25 retail store locations and their bean bag business is booming.
Bloomberg’s Eric Schatzker expressed surprise that it wasn’t an instantaneous automated algorithmic approval that online lending has a reputation for these days. Video below:
Just like Lending Club, whose CEO appeared on Bloomberg earlier today, Funding Circle is one of the original founders of the Responsible Business Lending Coalition. They announced a “borrowers bill of rights” yesterday.
Is Online Lending the Next Credit Crisis?
August 7, 2015CIT CEO John Thain went on Bloomberg earlier to say that “some of the most leveraged lending is being pushed out of the bank space.” The comment was used to challenge Lending Club CEO Renaud Laplanche about whether or not online lending would be the next credit crisis. Laplanche answered that marketplace lending is the least levered model.”It’s a profit match between assets and liabilities, one to one,” he said.
Laplanche also said that life as a public company has been good because it’s made customers more likely to trust them and large companies more likely to partner with them.
You can listen to what he had to say in the video below:
Lending Club is one of six members that recently founded the Responsible Business Lending Coalition, which made headlines yesterday when it announced a borrowers bill of rights.
Is This OnDeck Class Action Lawsuit a Sham?
August 7, 2015Update: The lawsuit was withdrawn on September 28, 2016
If you haven’t actually read the class action complaint filed against On Deck Capital on August 4th for an alleged violation of securities laws, you can download it here. Reactions throughout the industry are generally mixed, but the big surprise is that anyone would actually be surprised about who OnDeck is or what they are doing.
The company sourced 68.5% of its loans from commercial finance brokers in 2012 and 45.6% of its loans from them in 2013. By the second quarter of this year, that percentage had drifted down to 20.6%.
To OnDeck, this gradual shift has been part of an overall strategy to control their sales process, costs, and reputation. While it might impede origination growth in the short term, it would be a heck of a lot harder to explain to investors in the future that the company’s fate was in the hands of unknown salespeople who may or may not be swayed to work with their competitors at any moment.
Understandably, many brokers were not happy when OnDeck suddenly terminated them. Angry feelings spilled out on to DailyFunder, an online message board, and were eventually cited in a Seeking Alpha article, the very same article the lawsuit opens up with to make its case.
“THE TRUTH BEGINS TO EMERGE,” the complaint states. “On February 11, 2015, less than two months after the IPO, SeekingAlpha.com published an article entitled “On-Deck Capital: Bad Loans, Bad Interest Rates, Bad Business Plan.”
But the author of the article, TheStreetSweeper, which describes itself as as “a publisher of news and opinion,” placed a disclaimer that they held a short position in OnDeck’s stock. And notably, TheStreetSweeper website is run by Hunter Adams, a convicted felon who makes no effort to hide his past. His website bio says, “his career ended in 2001, when government investigators accused him of manipulating worthless penny stocks.” And continues, “he pled guilty to two conspiracy charges — for securities fraud and money laundering — and served time in prison for his crimes. Years later, he pled guilty to racketeering charges, fully cooperated with the government and accepted full responsibility for his actions.”
Today, his opinion on a stock for which he holds a short position in, has somehow become credible enough for lawyers to make the case that the “truth” had come out about OnDeck. But it’s no small oversight by the Pomerantz law firm, the attorneys that brought the suit on behalf of plaintiff Carl A. Stitt. A cursory glance at the law firm’s past press releases and filed complaints show that the firm regularly relies on TheStreetSweeper’s stories to solicit plaintiffs as well as to bolster class action complaints.
Notably, TheStreetSweeper’s analysis (overseen by convicted mob associate pumper dumper Hunter Adams), which Pomerantz accepts at face value and offers as evidence of misleading default rates, calculates a loan loss rate 24.8%. That formula is unfortunately incorrect. $26.7 million in charge offs divided by $107.6 million in gross revenue might return 24.8% but that’s not how one assesses a loan loss rate. $107.6 million is the interest income, not the aggregate loan principal.
OnDeck had an aggregate unpaid principal balance on loans outstanding of $422.1 million for the nine months ending September 30, 2014. $26.7 million was charged off during that time period.
Some quick math: $26.7 million/$422.1 million = 6.3% lost.
This is decent considering the company generated $107.6 million worth of interest income, not to mention consistent with what company management has both said and reported. TheStreetSweeper’s math and the plaintiff’s reliance on it is unsurprisingly wrong.
Reading through the rest of the suit, the plaintiff’s complaint hinges almost entirely on the phony calculation.
OnDeck might not be popular with the commercial finance brokers these days, and I myself have published several posts about their progress (good and bad), but if anything is garbage, it’s probably this lawsuit.
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Note: I do not and have never had a financial position in OnDeck.
Do Borrowers of a Feather Flock Together?
August 6, 2015Facebook believes that you might be the company you keep, at least according to a patent it has.
“When an individual applies for a loan, the lender examines the credit ratings of members of the individual’s social network who are connected to the individual through authorized nodes,” reads an explanation of the technology. “If the average credit rating of these members is at least a minimum credit score, the lender continues to process the loan application. Otherwise, the loan application is rejected.”
Diagram below:
This is one of those concepts that if ever used, is likely to end up prohibited under an amendment to the Equal Credit Opportunity Act or similar.
What are your thoughts on this?
And also, you might want to check out similar patents that Kabbage has in its arsenal.
MCC and BizFi Founder Stephen Sheinbaum on Bloomberg
August 4, 2015Earlier today on Bloomberg TV:
“Automation doesn’t mean no underwriting,” said Stephen Sheinbaum, the founder of Merchant Cash and Capital and BizFi.
Sheinbaum also said that they have never raised an equity round from an institution.
“We do want to go public,” he added. If they can obtain an equity investor, he put their timeline to go public at 12 to 18 months.
Watch the video below:
Have Your Marketing Response Rates Changed?
August 4, 2015
Notice anything different with your marketing response rates lately? OnDeck has…
During the OnDeck Q2 earnings call yesterday, company CEO Noah Breslow said, “there are no two or three competitors dominating this trend (direct marketing), but we know the sheer number of marketing solicitations targeted to small businesses has grown meaningfully over the last six months which impacts our response rates.”
The comments were interesting because while they opposed any correlation between the increased competition and their continuously declining interesting rates, it was an acknowledgement that they are not alone in their marketing efforts, nor are their marketing methodologies proprietary.
The comment was focused mainly on direct mail campaigns and Breslow argued their strategy was to “break through the clutter” and “better communicate our value proposition.”
“Competition for customer response remains elevated,” he later added.
OnDeck still managed to fund $419 million for the quarter, up only $3 million from the previous quarter, but a 69% increase over the same time period a year ago.
During the Q&A which was unfortunately not part of the recorded transcript so I will paraphrase as best I can from memory, a few analysts inquired deeper about the competition.
One wondered if their competitors’ marketing efforts were sustainable or if they were simply on a market share binge and would eventually go away. Breslow said there would probably be a combination of both, that some would continue to stick around long term and others might fall off. It was a safe answer because while some of their competitors may indeed have high acquisition costs, there are still profits being made and nobody should expect the competition to subside any time soon, if ever.
Breslow also shared that the competition was bidding up the price online, talking at least in part about Pay-Per-Click marketing.
OnDeck shed more Funding Advisors (brokers) in Q2 than they expected to because of their “re-certification program.” Brokers either didn’t make the cut or would not go through the program. Only 20.6% of their loans were originated by brokers in Q2 of this year as opposed to 30.8% during this time last year. Brokers brought in bigger loans though on average because they made up 28.4% of the dollar volume of loans originated this year. Last year at this time they made up 42.9% of the volume.
OnDeck has managed to grow despite their dwindling reliance on brokers and a marked increase in competition.
Have your direct mail and online advertising response rates changed recently? If OnDeck has taken notice, surely you must have too…
Update: You can read the full transcript of the call here, including the Q&A
deBanked’s Next Issue Shipping Soon
August 3, 2015Are you ready for another issue of deBanked Magazine?!
In this edition, we explore the Australian market, the commission chargeback debate here at home, the quest for national bank charters, a deeper look at the Midden v. Midland case and MORE!
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We distribute thousands of copies to ISOs, brokers, lenders, funders, and other players in the alternative business lending ecosystem. Want to be included in future issues? Drop me a line at sean@debanked.com
