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
Are Your Sales Agents or ISOs Up to Snuff? (Take Our Research Survey)
August 12, 2015If you enjoy reading deBanked’s articles, please take the time to take our short survey:
Some background:
What started as a few sensational articles about practices in small business lending and merchant cash advance is now turning into a cry for a governmental crackdown by not only observers outside the industry but lenders from inside the industry itself.
Stories that look like they’ve been written by consumer activist groups are being penned by your peers. Just recently, Fundera’s Brayden McCarthy submitted his thoughts to American Banker and the Huffington Post.
“As evidence,” he wrote. “One need only look to some lenders’ triple-digit interest rates, the proliferation of shady loan brokers and inadequate or nonexistent disclosure of price and terms. Some practices, such as brokers that brand themselves as impartial but take incentives to market certain lenders over others, resemble behavior seen in the run-up to the financial crisis.”
Along with the Treasury’s RFI, there is a mass lobbying effort to regulate the industry as fast possible. As Patrick Siegfried, Esq pointed out recently, former SBA Administrator Karen Mills recently urged the the CFPB to implement the Small Business Data Collection Rule of the Dodd-Frank Act, a law which could potentially outlaw the underwriting practices of the entire business lending and merchant cash advance industries.
There’s also been the publication of a Small Business Borrowers’ Bill of Rights and the formation of the Responsible Business Lending Coalition. And on Forbes, an interview with loan broker Ami Kassar described the industry as the wild, wild west.
As a long time participant and observer in the industry, (this is my 10th year now) I want nothing more than a bright and prosperous future for both my peers and America’s small businesses. I hope you’ll take two minutes to take our survey above.
Thanks!
OnDeck vs. IOU Financial: Are one of these lenders mispriced?
August 12, 2015
Has OnDeck’s stock price dropped so much that it’s now a buying opportunity? You’ll probably want to read this before you decide.
OnDeck’s IPO market cap was $1.3 billion. They funded $1.2 billion worth of loans in 2014. OnDeck’s stock has since dropped though, bringing its market cap down to around $650 million. The company is often compared to Lending Club despite their business models being completely different. But since there has been seemingly no one else to make comparisons with, the two have become star crossed lovers in a new FinTech Lending category of the market.
Everyone seems to have ignored the fact that one of OnDeck’s direct competitors is also a public company and I don’t mean a subsidiary of a giant conglomerate for which no individual comparison would be logical, but a standalone entity that is a serious player.
Kennesaw, GA-based IOU Financial (formerly IOU Central) is actually a public company in Canada, even though its only operational activities are small business loans in the U.S. The company is not a fly-by-night me-too business lender, as they funded more than $100 million in 2014 and earned a spot on the deBanked leaderboard for being one of the biggest in the industry.
OnDeck out-loaned IOU in 2014 at a ratio of 12 to 1, but here’s the kicker, OnDeck’s market cap is more than 34x the size of IOU. When converting to USD, IOU’s market cap is only slightly above $18 million.
$18 million…
That for a company that loaned $100 million last year. It’s no wonder that the perceived low market value has invited a hostile takeover bid from Russian venture capitalists. The tender offer of $15 million, presumably in Canadian dollars, would’ve acquired 55.9% of the company’s outstanding shares. The company is currently waiting for its shareholders to vote on the offer.
Meanwhile, another competitor, Kabbage, was recently valued at $875 million on loan volume last year of $400 million.
Ignoring all other factors that comprise a lender’s worth
- Kabbage was valued at more than twice its annual loan volume
- OnDeck’s IPO value was about equal to its annual loan volume, but their current market cap is almost half its annual loan volume
- IOU Financial’s current market cap is less than 20% its annual loan volume.
On these stats alone, IOU Financial seems to be incredibly undervalued, especially for a company whose spokesperson is celebrity investor and TV personality Kevin O’Leary.
OnDeck touts OnDeck marketplace as a way to sell off loans and generate income but IOU also regularly sells off its loan receivables while retaining the servicing rights just like OnDeck does.
Kabbage out-loaned IOU last year by a ratio of only 4 to 1, yet is valued almost 50x higher than IOU.
Every company has strengths, weaknesses, and reasons why they stand apart from their peers even if they look very much like them. However, given the mind blowing disparity in valuations for lenders that compete for the same customer with similar products, there surely has to be a buying or selling opportunity in here somewhere.
I think the Russian nuclear scientists are on to something…
Jeb Bush Owns Lending Club Notes
August 10, 2015Former Governor and Presidential Candidate Jeb Bush recently released thirty three years of tax returns, but included in his Office of Government Ethics Form 278e was a notable asset, Lending Club notes. Lending Club stock wouldn’t earn interest income so these are clearly the notes that any investor can buy on the platform. The value of the notes held was declared to be between $1,001 and $15,000 and the interest income between $15,001 and $50,000.
ABC News was the first to mention the asset but I am posting a photo of the actual line item.
The value of the notes held are so small, one has to wonder if Bush himself did the investing.
This was also stated about the asset at the end of the packet:
And another republican presidential candidate is a big proponent of Bitcoin. Back in April, I got to meet U.S. Senator Rand Paul at a Bitcoin event in NYC.
Between Bush and Paul, the republican candidates sure are shaping up to be FinTech friendly.
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.
