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
Federal Government Wants Your Thoughts About Online Lending
July 19, 2015
Whether you’re a funder, lender, broker, or platform, the U.S. Treasury Department deserves to hear your input.
Only July 16th, the Treasury announced that it was seeking public comment on various business models and products offered by online marketplace lenders to small businesses and consumers. One stated purpose of this is to study “how the financial regulatory framework should evolve to support the safe growth of the industry.”
The comment period is only open for six weeks.
Over the last year, many funders and brokers have voiced their opinions on best practices, ethics, and standards. Some want regulation to curb what they believe to be immoral behavior and others just want clarity where the laws are obscure, illogical, or even in conflict with themselves.
In at least one recent case, a merchant cash advance company CEO wrote about the complexity of dealing with an endless amount of state laws. In Lift the Fog, Give us Regulation, Merchant Cash and Capital CEO Stephen Sheinbaum wrote, “It is also better, at least for the financial services industry, if the central government is the one to craft the regulation instead of getting one rule from each of the 50 state governments.”
Meanwhile the Consumer Financial Protection Bureau (CFPB) will eventually start to enforce the amendments to the Equal Credit Opportunity Act, which technically already became the law under Section 1071 of the Dodd Frank Act. As part of that, underwriters of business loans and merchant cash advance alike may no longer be allowed to meet applicants, speak with them on the phone, examine their driver’s licenses, review their social media profiles, or even ask what their business model is or how they market themselves.
One has to look at any opportunity afforded by a government agency to share input before future regulations are implemented then as a duty. It might not matter, but you should do it anyway, just like voting.
Below are the questions, the Treasury wants you to answer (or Click to view on Treasury.gov):
1. There are many different models for online marketplace lending including platform lenders (also referred to as “peer-to-peer”), balance sheet lenders, and bank-affiliated lenders. In what ways should policymakers be thinking about market segmentation; and in what ways do different models raise different policy or regulatory concerns?
2. What role are electronic data sources playing in enabling marketplace lending? For instance, how do they affect traditionally manual processes or evaluation of identity, fraud, and credit risk for lenders? Are there new opportunities or risks arising from these data-based processes relative to those used in traditional lending?
3. How are online marketplace lenders designing their business models and products for different borrower segments, such as:
• Small business and consumer borrowers;
• Subprime borrowers;
• Borrowers who are “unscoreable” or have no or thin files;
Depending on borrower needs (e.g., new small businesses, mature small businesses, consumers seeking to consolidate existing debt, consumers seeking to take out new credit) and other segmentations?
4. Is marketplace lending expanding access to credit to historically underserved market segments?
5. Describe the customer acquisition process for online marketplace lenders. What kinds of marketing channels are used to reach new customers? What kinds of partnerships do online marketplace lenders have with traditional financial institutions, community development financial institutions (CDFIs), or other types of businesses to reach new customers?
6. How are borrowers assessed for their creditworthiness and repayment ability? How accurate are these models in predicting credit risk? How does the assessment of small 10 business borrowers differ from consumer borrowers? Does the borrower’s stated use of proceeds affect underwriting for the loan?
7. Describe whether and how marketplace lending relies on services or relationships provided by traditional lending institutions or insured depository institutions. What steps have been taken toward regulatory compliance with the new lending model by the various industry participants throughout the lending process? What issues are raised with online marketplace lending across state lines?
8. Describe how marketplace lenders manage operational practices such as loan servicing, fraud detection, credit reporting, and collections. How are these practices handled differently than by traditional lending institutions? What, if anything, do marketplace lenders outsource to third party service providers? Are there provisions for back-up services?
9. What roles, if any, can the federal government play to facilitate positive innovation in lending, such as making it easier for borrowers to share their own government-held data with lenders? What are the competitive advantages and, if any, disadvantages for nonbanks and banks to participate in and grow in this market segment? How can policymakers address any disadvantages for each? How might changes in the credit environment affect online marketplace lenders?
10. Under the different models of marketplace lending, to what extent, if any, should platform or “peer-to-peer” lenders be required to have “skin in the game” for the loans they originate or underwrite in order to align interests with investors who have acquired debt of the marketplace lenders through the platforms? Under the different models, is there pooling of loans that raise issues of alignment with investors in the lenders’ debt obligations? How would the concept of risk retention apply in a non securitization context for the different entities in the distribution chain, including those in which there is no pooling of loans? Should this concept of “risk retention” be the same for other types of syndicated or participated loans?
11. Marketplace lending potentially offers significant benefits and value to borrowers, but what harms might online marketplace lending also present to consumers and small businesses? What privacy considerations, cybersecurity threats, consumer protection concerns, and other related risks might arise out of online marketplace lending? Do existing statutory and regulatory regimes adequately address these issues in the context of online marketplace lending?
12. What factors do investors consider when: (i) investing in notes funding loans being made through online marketplace lenders, (ii) doing business with particular entities, or (iii) determining the characteristics of the notes investors are willing to purchase? What are the operational arrangements? What are the various methods through which investors may finance online platform assets, including purchase of securities, and what are the advantages and disadvantages of using them? Who are the end investors? How prevalent is the use of financial leverage for investors? How is leverage typically obtained and deployed?
13. What is the current availability of secondary liquidity for loan assets originated in this manner? What are the advantages and disadvantages of an active secondary market? Describe the efforts to develop such a market, including any hurdles (regulatory or otherwise). Is this market likely to grow and what advantages and disadvantages might a larger securitization market, including derivatives and benchmarks, present?
14. What are other key trends and issues that policymakers should be monitoring as this market continues to develop?
The Treasury asks that you include your name, company name, address, job title, email address, and phone #. You can submit your responses on http://www.regulations.gov/. Just click on the tab that says “Are you new to the site?”
You can also submit by mail:
To: Laura Temel,
Attention: Marketplace Lending RFI,
U.S. Department of the Treasury, 1500
Pennsylvania Avenue NW., Room 1325
Washington, DC 20220
If you have questions, email marketplace_lending@treasury.gov or call 202-622-1083.
OnDeck (ONDK) Curiously Flips the Script
July 17, 2015
“The company is now reportedly losing tens of millions of dollars through defaults on its loans,” reads a release put out just hours ago by Robbins Arroyo LLP about OnDeck. Their announcement is a little late because OnDeck just announced a Q2 profit on July 15th.
After nearly eight straight years of losses, OnDeck issued a press release announcing that their Q2 earnings call on August 3rd would reveal GAAP net income of somewhere between $4 million and $5 million.
It’s a stark difference from the guidance issued in their Q1 earnings report which put projected Adjusted EBITDA for Q2 at between a loss of $3 million and a loss of $4 million. Projected GAAP losses were much worse.
2015 was supposed to be another year of carefully planned red ink for the business lender as they continued their unrelenting strategy of growth. So where did this profit come from? And were some of their business decisions in Q2 influenced by unhappy shareholders?
Unlike Lending Club who had some company insiders file notices with the SEC to announce they had sold stock, OnDeck did not experience a rush to the selling exits when the lockup period expired. No insider sales were reported.
I published my theories about the stock’s drop back on June 29th.
And now suddenly we have a profit, but the source of the cash is clearly identified in the release. OnDeck sold off a lot of their loans to institutional investors and booked the revenue.
“In the second quarter, 19% of the loans sold through Marketplace were loans originated prior to the second quarter that were previously designated as loans held for investment,” the release stated. That sale also allowed them to reduce their loan loss reserves, it said.
The downside is that the perceived risk of the loans themselves at least for now in the public’s mind has not changed. OnDeck is simply transferring the risk to someone else but they can only do that in the future so long as there are buyers. Therefore they need to consider creating an asset that they and their shareholders would be comfortable holding on to and plan for the economic doomsday where there are no buyers, which will inevitably come.
Compass Point analysts Michael Tarkan and Andrew Eskelsen were not impressed by the pre-announcement. In a note to clients, they wrote, “On the surface, results were stronger than expected due to significantly higher gain on sale revenue and lower expenses. However, if we exclude the one-time gains, core revenues came in well below our expectations, suggesting a meaningful deceleration in loan origination growth and/or another decline in yields.”
Notably, OnDeck’s sudden reliance on the OnDeck Marketplace to achieve profit coincides with a U.S. Treasury Department request for public comments on online marketplace lenders.
“Treasury seeks responses that will allow policymakers to study the various business models and products offered by online marketplace lenders, the potential for online marketplace lending to expand access to credit to historically underserved borrowers, and how the financial regulatory framework should evolve to support the safe growth of this industry.”
OnDeck experienced a surge in its stock price the morning following the Q2 forecast. It has since come down a little and closed at $13.45 on July 16th.
—
Note: I have never bought or sold OnDeck stock.
Do Bank Statements Matter in Lending? Business Lenders and Consumer Lenders Disagree
July 16, 2015Bank statements. Those in consumer lending argue they’re all but irrelevant because FICO and credit reports do the job of predicting risk just fine, but over in today’s small business lending environment, there’s an entirely different sentiment; Reveal your recent banking history or be declined.
After having bought nearly $60,000 worth of consumer notes on Lending Club and Prosper combined, there’s something I’ve seen a lot of, bounced ACHs.
Lending Club doesn’t reveal borrower bank data to their investors. Sure, anyone can see the credit report, the income level, zip code, and job title, but the borrower could have negative $10,000 in the bank and be living off overdraft protection on day 1 and an investor would never know it.
For all the fanfare surrounding online marketplace consumer lending, access to borrower banking history is oddly absent.
“Welcome to consumer lending, where the rules are different because the game is too,” replied a user to my comment on a peer-to-peer lending forum.
Veteran consumer lenders assumed I was a lost newbie who knew nothing about lending. “I have a feeling if you ask to crawl someone’s bank account, they’ll just go elsewhere,” one user said. “Seems that’d only work on subprime borrowers who have limited bargaining power.”
“I’m assuming you may be new to lending,” he continued. “Making a loan based on deposit balances is rarely a good idea.”
My initial question to them was that without bank statements, how could they ascertain if a borrower’s finances were actually in order at least at the time the loan was issued? It’s really easy to access someone’s banking history for the last 90 days by using common tools like Yodlee or Microbilt, I argued.
Some people sympathized with my logic but others believed requesting bank data would be suicide in today’s competitive environment. And still more wondered if there might be consumer protection laws that prevented lenders from seeing a loan applicant’s banking records (which sounded ridiculous).
A Credit Card Issuer’s Take
Those questions led me to interview an underwriting manager at one of the nation’s largest credit card issuers who would only speak on the condition of total anonymity, including the bank’s name. There, he oversees a department of people that manually assess credit card applicants. There is no algorithmic approval process. In his department, humans underwrite each application, conduct phone interviews with the prospective borrowers, and request additional documents if they feel it’s warranted.
Requesting bank statements is a regular part of the job, explained the manager. “We require proof of income for any line over 25k,” he added. “It’s the main thing we ask for along with proof of address.”
Requesting these documents keeps them compliant with the Bank Secrecy Act, he explained, but the bank statements in particular are their first choice in verifying somebody’s income, even more than pay stubs. And their underwriters aren’t oblivious zombies, he noted. If an applicant has no money in the bank, they’ll decline it.
“The Adverse Action reason [for that] would be ‘sufficiently obligated’,” he stated. “That’s when their bank account shows they can not take on any additional financial obligations.”
The manager shared however that he believed there is a very strong correlation between what’s on the credit report and what to expect in the bank statements. Generally speaking, good credit will show a healthy banking situation, he explained. They’re rarely taken by surprise. Overall, the credit reports and phone interviews are enough for them to feel comfortable and the bank statements are really just there to check off a compliance box.
Meanwhile, those that speculated requesting bank data would be a death knell competitively might want to talk to Kabbage’s sister company, Karrot. Karrot already crawls bank accounts as part of their consumer loan application program and competes with Lending Club, Prosper, and Avant. Considering Kabbage has funded more than half a billion dollars worth of business loans using this very methodology, it’s safe to say that applicants aren’t flocking to competitors in droves over the perceived injustice or inconvenience of filling out three additional fields on a web application to share their transaction history.
Bounced Payments
Kabbage CEO Rob Frohwein offered these comments last year about their underwriting, “A critical aspect of consumer lending is determining the appropriate amount of a payment to collect so that an account doesn’t become overdrawn. Our intelligence accurately predicts how much of a payment to request via ACH so consumers avoid the cost and headache associated with non-sufficient funds.”
I thought about those statements when I noticed that thirty-six of my Lending Club notes carried a Grace Period status the other day. These are borrowers whose payments just recently bounced. Some are only three or four months into a five-year loan. Worse, there are those that are saying they have no money whatsoever to make a payment. How can this be when they just practically got approved?
To the consumer crowd it’s business as usual. “If you got their bank account, you still wouldn’t be able to predict who will default. You can’t predict defaults on any individual borrower,” argued one veteran on a forum.
But it’s not all about the lender’s tolerance for risk. ACH rejects can have consequences that affect a lender’s ability to debit accounts in the future.
“Ultimately, regulatory thresholds set by NACHA will continue to become more and more critical of returns,” said Moe Abusaad of ACH Processing Co, an ACH processor based in Plano, TX. “I think it’s safe to say that there is a positive correlation in considering statements as a component of the underwriting process to the rate of returns incurred,” he added.
And while it’s true that bank data can’t make predictions perfectly on its own, nobody in small business lending or merchant cash advance would consider an approval without it.
Bank Statements or Bust
“There is no substitute for banking information when reviewing a client for approval,” said Andrew Hernandez, a co-founder of Central Diligence Group, a risk management firm that allows business lenders and merchant cash advance companies to outsource their underwriting.
“Money moves fast through these businesses and every business is unique, so a lot more variables come into play than just having to account for the timely monthly payments of credit cards, cars, and mortgages as you find in the consumer world,” he added. “A FICO score along with other information presented in a credit report provide a detailed, historical snapshot of a client’s creditworthiness in consumer lending, and while these are great complementary tools for us to use in our underwriting process, I believe that banking data paints us a picture of its own which is absolutely essential in assessing the risk of a B2B transaction in our space.”
Those underwriting business loan deals have reported seeing applicants with open personal loans from Lending Club, which shows that the exact same borrowers are being underwritten in two different ways.
But Julio Izaguirre, another co-founder of Central Diligence Group added that, “banking transactions are essential in gauging the cash flow of the business by looking at recent and up-to-date bank volume, but it is even more important with businesses that lack historical data and cannot provide financials or other documentation to show and prove their track record.”
Translation: A lack of credit history and formal financial statements can be overcome thanks to in-depth analysis of bank account data.
“When our underwriters look at a bank statement you can get a better understanding of the business cash flow, operational cost and how the owner manages his business,” said Heather Francis, CEO of Gainesville, FL-based Elevate Funding. “The credit score is like a person’s blood pressure reading,” she continued. “It indicates there may be an issue but until lab work is pulled and analyzed you don’t know what that issue is. The bank statement is that lab work and it can tell you more about the issues behind the scenes than a credit score can.”
Greg DeMinco, a Managing Partner of Americas Business Capital based in Cherry Hill, NJ would probably agree. “FICO isn’t everything,” he shared. “Bank statements can tell a great story especially if there is upward momentum month after month, and more importantly a high ratio of deposits to requests for the advance.”
Meanwhile, the manager of the credit card issuer was surprised to hear about the high value placed on bank statements in business lending. I offered him the example of an applicant with good credit that was consistently negative in the bank because of a reliance on overdraft protection as a way to make sure all the bills were being paid. “That’s the craziest thing I ever heard,” he commented.
But over in the peer-to-peer lending forum it didn’t sound so crazy at all. “Plenty of Americans are ‘broke’, in the sense that they have negative net worth, yet they’ll continue servicing their debts for… a long time… no matter what it takes,” shared one user.
The argument seems to come full circle, that business lending and consumer lending are just different.
But to Isaac Stern, the CEO of New York-based Yellowstone Capital, the bank statements are not just about financial health. “We are literally underwriting against fraud,” said Stern, who said his office regularly receives applications with doctored statements. “Logging in [to the banks] and verifying those statements are probably the most important part of the process,” he noted.
His logic goes that a consumer that is paid a salary has a predictable stream of income and so that information along with a credit report might be enough for a consumer lender, but business revenue is less predictable and can vary practically day-to-day.
“You can’t just look at a FICO score and say, ‘this is a good a business’,” Stern explained. “The story is in the bank statements.”
Deal Alert: Angelo Gordon Acquires Reliant Funding
July 14, 2015
Angelo, Gordon & Co, a $27 Billion private equity firm has acquired San Diego-based Reliant Funding. Reliant was recognized a year ago as the 385th fastest growing private company in the nation on the Inc. 500 list as well as the 28th fastest growing financial services company.
A person who claims to have worked on the deal and is currently employed by the company shared the news publicly.
The deal is at least the second in the space for the private equity firm, who acquired Long Island-based Merchants Capital Access last year.
A Decade of Funding
July 7, 2015Next month is my 9 year anniversary in the merchant cash advance industry, which means I’ll be starting my 10th year. A decade of merchant cash advance… holy shit. I’ve had the opportunity to view it from many different angles and have accrued my fair share of adventures, plenty of which I’ve written about and others I’ll have to take to my grave.
I also launched this very website exactly 5-years ago under its original name MerchantProcessingResource.com. Not many people can say they’ve authored more than 600 stories (yes, seriously) on merchant cash advance, but I can. I’m fortunate to have turned something I merely enjoyed in the beginning into a business of its own.
Looking back now, there weren’t many people keeping a live diary of events as the industry dove headfirst into the financial crisis. Who would’ve bothered to report on an industry that was arguably made up of only a thousand people?
In April 2009, even before deBanked launched, I submitted a story to the only merchant cash advance magazine of its kind. It didn’t have a very clever name, just Merchant Cash Advance Publication. My story, titled, An Underwriter in Salesman’s Clothing, rambled on about the end of the industry’s glory days, the wave of declined deals in the recession, and how funders should be more appreciative of ISOs.
Here’s a summary of what I wrote more than six years ago:
I was complaining about stacking as far back as 2007 apparently. I addressed it as a merchant problem. Merchants were taking advantage of funders, not the other way around like some frame the argument in 2015.
I left my post as Director of Underwriting in late 2008 because “I wanted the ringing phones, the commotion, the markerboards with stats, the glory, the $20,000 [monthly] checks.”
Funding companies became super conservative during the financial crisis and all my deals were being killed (25 deals declined in a row at one point.)
I had recently charged my first closing fee, felt bad about it, and got in trouble for it.
I said 1.40 factor rates wouldn’t last (I was wrong about this!)
I bitched about algorithmic declines (I apparently thought computers underwriting files was a good way to upset ISOs.)
I acknowledged my own hypocrisy when I realized how hard it was to be a sales rep after thinking sales reps were overpaid and overrated in my previous years as an underwriter.
I continued on as a sales rep for another two and a half years after I wrote that. That means that in 2010 when I started deBanked, I was still calling UCCs, closing deals and boarding merchant accounts while sitting in a windowless room rented by a startup ISO.
But what was there to blog about in 2010? Oh little stuff like who the biggest funding companies were at the time by checking UCC filings since almost everyone filed UCCs back then. Notably, the third largest merchant cash advance company of 2010, First Funds, is no longer in business.
I also wrote about shopping deals around and the impact that might have on a merchant’s credit report. That was the day-to-day stuff though, information I was just putting out there hoping someone on the Internet might see it. What got everyone excited was the 2010 New York State leaderboard which eventually prompted me to spend my nights and weekends investigating the industry on a wider level.
I began talking to people at other funding companies about their monthly numbers. It wasn’t that hard to get information as an industry insider, especially if you had deals to send somebody’s way. I also spent money to acquire secured party lists to count the number of UCC filings by funders in all 50 states rather than just look at one free state like I did with New York originally. I think I was the only person in the industry at the time running up their personal credit card bill to conduct such research. I had also been in the industry for four years at that point and had a great network of contacts who could clue me in on their volume.
While I said that I also looked at census records and department of labor records, I’ll admit that data wasn’t extremely useful. The end result was a best guess estimate that in 2010, there were approximately 21,000 merchant cash advances transacted for $524 million.
My data would go on to be republished in ISO&Agent Magazine, The Scotsman Guide, and Leasing News, and also end up in many other places I didn’t expect, like in the business plans of merchant cash advance companies that were looking to raise capital. In fact, in a private meeting I had with an MCA company months later in South Florida, the CEO let me take a peek at the docs they had just submitted to a bank for a credit facility. Included was a printout of these numbers with my name on it and all. Apparently there was something to this writing thing…
My last day as a sales rep was in the Fall of 2011. I left the commission-only life (oh what, you 2015 pansy closers actually get a base salary?) for something even more risky, an entrepreneurial life. For a couple years, I played underwriting consultant to a handful of merchant cash advance companies and industry expert to institutional investors interested in the space. I learned how to code in my spare time and spent more than a year in online lead generation.
I never stopped writing.
Along the way I’ve visited the offices of dozens of ISOs and funders, syndicated in deals, and test-drove new technology.
None of this makes me particularly special, especially when I hear about how much some of my old sales buddies are making these days on deals. “Are you SURE you don’t want to come back?” they ask. It’s enticing no doubt. A part of me wants to grab the phone out of their hand and attempt to shatter their record on the markerboard this month even though I’m pretty sure I’m rusty as hell.
One thing noticeable between now and 9-years ago is that my hair turned grey. This industry will do that to you (or at least it did to me.) And I still get a kick out of meeting folks who got into the industry years before I did. The 90s/early 2000s AdvanceMe crowd likes to tell me that they were funding merchants while I was still in diapers. They are practically right.
As I enter my own tenth year in the biz however, it’s exciting to think that the industry is just now getting started. OnDeck was the first IPO in the space and the general public is learning about short term business funding for the first time. There’s no shortage of news to report and that keeps me plenty busy these days.
And so even after a decade of MCA, it’s never too late to put on your Funded pants. Opportunity awaits and I hope you’ll continue to ride the wave with me. Thanks for reading since 2010!
OnDeck Q2 Earnings Announcement
July 6, 2015Update: The news reports that said OnDeck was reporting earnings today on July 6th were false
An OnDeck representative said they have not yet scheduled a date.
OnDeck (ONDK) was reportedly going to release 2015’s Q2 earnings after the market closed on Monday, July 6th (That information was confirmed as false.) Analysts predict the company will show a loss of 7 cents a share.
The company has faced a fierce sell-off in recent weeks, moving the stock to all time lows and down more than 50% from its high. The trend began after the Q1 report in which company executives argued that a decrease in the interest rates charged to their customers was not a response to competitive pressure.
Bloomberg’s Zeke Faux ran the following headline anyway:
Since then, the stock has struggled to recover. I posted a summary of why that might be on June 29th, in a short piece tiled, What Happened to OnDeck.
Barron’s was particularly tough on them, labeling them a subprime lender in dot-com clothing. For now, the key to an OnDeck rebounds seems to be about shedding that toxic label and convincing investors that despite a crowded field, they are the clear standout choice.
An increase in the default rate this quarter however would probably evoke a further negative response.
Lending Club Ends Q2 With Crisis Nobody Noticed
July 1, 2015
Lending Club investors are used to wonky stuff happening in the run up to a quarter’s end, but perhaps now since the company is public, making sure the numbers align with nice perfect trends that analysts expect is more important than ever. Either that or all hell really broke loose.
On the Lend Academy forum, where you can get a great glimpse of the front lines, chatter about a loan surge started on June 22nd and escalated from there.
“Huge # loans dumped in all of a sudden, and almost all allocated to fractional,” wrote veteran user Fred93. “Hard to fathom. My best guess is that this flow might be a result of having turned on some new source. Hard to guess why they are allocating them all to fractional.”
I personally noticed the increase too when I realized I didn’t have to fight robots and algorithms to get the loans I wanted. There were so many that I could pick them at my leisure.
Around this time, Anil Gupta of PeerCube pointed out that Lending Club’s Q2 loan volume had been about 10% lower than Q1’s, thus potentially putting the company in emergency mode to show growth.
But with all those loans piling up, something else happened. The loans weren’t actually issuing and conspiracy theories began to develop.
“I had nothing issued as well….with over 120 notes pending…lc playing end of quarter games,” wrote one user named kya.
Other users speculated that there was something more ominous than just games. There was a lot of discussion of the possibility that something had happened to the major institutional buyers that was causing almost all of the loans to be suddenly dumped off on retail investors, where there just wasn’t enough supply of capital to handle them.
And for a couple of days there, nothing appeared to be getting through. A handful of users reported that only 1% of purchased notes were actually becoming issued loans. The other 99% were in limbo. Everyone’s money appeared to be locked up.
But then suddenly on June 29th, the loan spigot turned off completely. “This would be a new quarter end behavior,” wrote a veteran user by the name of BruiserB. “Normally they keep placing notes on the platform for investors to buy, but they just hold up actually issuing the notes. This is the first time I have seen them stop even offering notes.”
Not that anyone really needed more notes since practically none of the previous ones they had recently bought had been issued. Everything was backlogged.
So was all the chaos just quarter-end volatility? Many did not think so. A member representing LendingAlpha.com thought the system might actually be breaking down. “What is happening now is highly unusual, as they typically push hard to find a large number of borrowers and at the same time their systems broke.”
Others started talking about a purported breakage too on June 30th, including the possibility that Lending Club’s Automated Investing option stopped functioning in the last week of the month.
LendingAlpha.com claims to have gotten a response from a Lending Club representative that admitted there were actual technical problems at play. “Their engineering team is communicating internally that the problem should be resolved by tomorrow (July 1, 2015), and the supply and demand imbalance should be back to normal by early July,” he posted on the Lend Academy forum.
All of the irregular activity prompted LendingRobot, a third party automated investing service to issue a notice to all of its users.
While chatter on Lend Academy’s forum surged about the strange events, it got literally no coverage by blogs or news media. Fortune and Bloomberg claimed that the sudden plummet in Lending Club’s stock price had to do with investors suddenly waking up to the risks of online lending.
Fortune’s Leena Rao seemed to rely on Compass Point Research & Trading analyst Michael Tarkan to form a thesis that long term regulatory concerns were suddenly putting pressure on the stock. “Tarkan further explained that Wall Street has realized that the stock price was overvalued considering the competitive and regulatory risks in the alternative lending space,” Rao wrote.
Meanwhile, veteran note buyers like user lascott were conversing about an unprecedented breakage that had led to long loan issuance delays and in all likelihood, unhappy borrowers.
It should be noted that several forum users also trade the stock. Might the hysteria and speculation that the institutional investors were all dead and backlogged loans were blowing up the system have caused some selling activity?
At the end of June when everyone’s finally starting to hit the beach, I doubt Wall Street suddenly woke up and thought, “Damn, this regulatory risk is scary as hell. Time to sell Lending Club.”
I don’t know why the stock is down exactly but it’s ironic to see news media offer broad market generalities while a crisis unfolds in a public forum.
What happened at Lending Club in the last week of Q2? Nobody really knows but it seems like everything’s getting back to normal now that we’ve started Q3. The institutional investors aren’t gone and backlogged loans are starting to issue.
Nothing to see here folks. What were you saying about regulatory risks again?
Letter From the Editor – July/August 2015
July 1, 2015
G’day mates,
Merchant cash advance and similar financial solutions have expanded beyond the United States. Canada was always the next logical option but it’s made its way far beyond that, all the way to Australia. And in the land down under, Australian natives are competing with American-based companies for market share. There’s not a lot of information available about the landscape there so we went out and got the inside scoop, fair dinkum!
Speaking of international, the race is on here at home to obtain a national or state bank charter. Loans allow for much more customization than is possible with merchant cash advances, noted Glenn Goldman, CEO of Credibly. But is the industry setting itself up for a stable future or are some companies betraying their roots as a bank alternative by in essence becoming banks themselves?
And even while the crowd cheers for charters, a baffling appellate court ruling in New York State threatens to undermine that strategy completely. If you haven’t heard of Madden v. Midland Funding, we’ve got some information about it inside.
I must note that deBanked celebrated its 5-year anniversary this past July. The world was much simpler when I started it. In 2010, I was able to quantify the industry’s size with ease, but today it’s a challenge to define what the industry even is, let alone calculate how big it is.
Everything is evolving and quickly, but some things still say the same, like when a broker’s commission is pulled back because a deal defaulted. Shouldn’t lenders take full responsibility for their own underwriting decisions? Not all brokers thought so apparently when we asked them. It appears that today’s broker is thinking more like a lender and if long-term growth is one of their goals, they’re probably thinking about becoming a lender themselves. That of course brings us right back to bank charters and court rulings to make that possible.
And if those topics are exhausting to think about, then sit back, relax and let us guide you through the beautiful Australian Outback. From Uluru to a kangaroo, alternative lending is never out of reach.
–Sean Murray
