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
Brief: The CFPB’s Unconstitutionality
December 28, 2016The Director of the consumer agency wields so much power that his authority actually violates Article II of the United States Constitution, according to the United States Court of Appeals for the District of Columbia Circuit which presided over PHH Corp v. CFPB. “In short, when measured in terms of unilateral power, the Director of the CFPB is the single most powerful official in the entire U.S. Government, other than the President,” the Court wrote. “Indeed, within his jurisdiction, the Director of the CFPB can be considered even more powerful than the President.”
Article II of the Constitution grants the President alone the authority to take care that the laws be faithfully executed. That means that Congress can’t even legally legislate another single individual to possess that amount of power even if they wanted to. But rather than order the dismantling of the CFPB, the Court suggested two remedies, either the director be overseen by the President of the United States or the single-directorship model be reconfigured to become a multi-member commission, a workaround that other executive agencies operate under.
Even though the agency is tasked to protect consumers, the Court recognized the potential for corruption when overseen by a single unaccountable person. “The CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked Director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency,” the Court asserted.
Meanwhile, the CFPB has cast the decision aside as nonsense and has refused to comply, even going as far as to directly rebut it in another case shortly thereafter. In CFPB v. Intercept Corporation, the CFPB argued that the D.C. Circuit’s decision was “wrongly decided” and “not likely to withstand further review.” They’ve also asked the D.C. Circuit to rehear the case in part because they believe the decision “purports to override Congress’s explicit determination to create ‘an independent bureau’ to exercise regulatory and law enforcement authority in a particular segment of the economy.” The Court can simply deny to rehear the case.
One wild card to consider in this debate is that President-Elect Trump has pledged to repeal the Dodd-Frank Act, the law that created the CFPB to begin with. At the very least, Trump may feel it necessary to flex the power granted to him under Article II and subvert the directorship of the agency.
CAN Capital’s Collateral ‘Adjustment’
December 24, 2016Last month, CAN Capital disclosed that they had “self-identified that some assets were not performing as expected” on the same day that three of the company’s top executives were put on leave. Since then it’s been reported that a discrepancy arose when CAN’s old systems were not equipped to handle the shift from variable payment advances to fixed payment loans. This is notable given that CAN began doing fixed payment loans all the way back in April 2010.
The discrepancy found its way into CAN’s 2014 securitization. S&P Global Ratings recently reported on this that “there was a correction of previously misclassified assets that affected the results of the calculation of [the] adjusted performing asset balance” on CAN Capital Funding LLC Series 2014-1.
Ratings agency DBRS illustrates the collateral dip on CAN’s securitization once the classifications were reported correctly on Series 2014-1 below.
This is the first public glimpse into what CAN’s old systems got wrong and by how much.
The drop triggered a rapid amortization event, potentially causing liquidity issues for CAN, hence why new funding may be paused. The principal balance on the $200 million notes has dropped by nearly $70 million in the last two months, indicating big payouts.
The process to manage a rapid amortization event is described in the original DBRS ratings report. The implications aren’t good given that this appears to be brought on by misclassifying assets rather than a natural deterioration of loan performance.
Last week, CAN laid off nearly half of its employees as it tries to correct course.
Update: On December 25th, deBanked published a brief of a newly discovered lawsuit filed against CAN Capital on December 19th by an aggrieved shareholder alleging the company had failed to pay her a $150,000 settlement payment.
Broker Running Around Calling Himself a ‘Direct Lender’ Shut Down by CA Regulators
December 21, 2016A loan broker representing themselves to be a “direct lender,” was not a direct lender at all, according to witness testimony entered against Financial Services Enterprises DBA Pioneer Capital. The California Department of Business Oversight (DBO) noted in its case against Pioneer that “the evidence did not show that respondent actually funds loans itself, and did not include documentation of any loans actually consummated.”
The regulatory action, which was centered around whether or not the business loan broker was unlicensed in California ended unfavorably for Pioneer, with the DBO ordering the company to Desist and Refrain. You can read a good summary on LeasingNews by attorney Tom McCurnin: http://leasingnews.org/archives/Dec2016/12_21.htm#dbo
The Twelve Days of Funding
December 20, 2016On the Twelfth day of funding, my true love gave to me
Merry Christmas, Happy Hanukkah and may all your deals fund!
CAN Capital Woes Continue – Layoffs Commence
December 16, 2016More information is slowly starting to come out about the recent C-level removals at CAN Capital. In the meantime, the company announced major layoffs just before the holidays. American Banker says the number is 136 employees laid off just at CAN’s Kennesaw, GA office.
Multiple brokers that have done business with CAN in the past have told deBanked that CAN is not actually servicing renewals for existing customers or that they’re only doing them on a highly selective basis, despite what the company said two weeks ago.
The company’s chief executive officer, chief financial officer and chief risk officer were all put “on a leave of absence” in late November after discovering that “some assets were not performing as expected and that there was a need for process improvements in collections.” All of their names have been removed from the leadership page on the company’s website.
While the collective expectation has been that CAN would resume funding new business again in January, the wave of layoffs do not inspire confidence. No executive replacements have been named and CAN’s chief legal officer still remains in place as the company’s “acting chief executive.” It’s a bizarre sequence of events that seems to indicate there will not be a return to normalcy any time soon.
Fifth Third Bank/ApplePie Capital Deal Great, But Bank Deals For Many Other Business Lenders Still a Pie in the Sky
December 13, 2016
Fifth Third Bank is buying a stake in franchise marketplace lender ApplePie Capital as part of a $16.5 million venture round, the WSJ reported. The prediction that non-banks are evolving into banks is slowly coming true, but will the trend in the commercial space continue?
Consider that ApplePie has only made 120 loans over the last two years, a small piece of pie compared to a company like CAN Capital which has made nearly 200,000 loans and advances since inception. But ApplePie and CAN are not competitors, nor is ApplePie really like the rest of the industry that has long proclaimed that banks can’t profitably make small business loans under $250,000 or lend to borrowers with poor credit history. Instead, ApplePie’s model, terms and customers have always had a common synergy with banks, $420k loans (on average) for up to 7 years to franchise owners at 8.62% APR (on average) and 750 FICO (on average). It’s a borrower profile that has literally resulted in zero defaults for ApplePie so far, though it’s still early days. Business owners can get term-sheets in 5 days and funding in approximately 30 days. Sounds mighty bankish to me.
ApplePie’s loans are even issued by a New Jersey State chartered commercial bank, Cross River Bank. But ApplePie is the platform, using technology to draw attention to franchise owners in need of financing, streamlining the process and providing a way for investors to participate in the deals. Denise Thomas, the company’s CEO and co-founder told the WSJ that banks’ costs are now too high to make $420,000 loans. That might be true but one wonders if such loans should be done over such a long period of time and at such low rates, especially considering that their borrowers are not asked to put up any personal collateral.
Another lender that tried their hand at prime small business borrowers closed their doors last month. In an op-ed penned by Candace Klein of the now defunct Dealstruck, she said of moving away from the mid-prime borrower to prime, “yields began to tighten. Lenders stopped making a profit and backend capital began to question whether there was a ‘there’ there after all.”
But whereas Dealstruck was constrained by their cost of capital, a bank could potentially make it work. One pitfall that ApplePie has however is limited time in business. It’s easy to claim no defaults on loans with 70 month terms (on average) when you have only been business for two years. Even still, it’s not hard to see why a bank would be interested in their particular model. The vast majority of non-bank small business funding companies operate in a totally different universe, with smaller loans, poorer credit, shorter terms and faster service. These are the ones typically associated with fintech, seeing as they have been able to make tens of thousands or hundreds of thousands of loans in a short amount of time. If that market was as easy as pie though, banks probably would’ve forged more partnerships by now.
SBA ‘SmackDown’ In Linda McMahon, As Pick for Administrator Brings More WWE to Small Business Funding
December 8, 2016
President-Elect Trump’s pick to head the Small Business Administration is Linda McMahon, the former CEO of World Wrestling Entertainment (WWE). The publicly-traded company has produced many household names over the years, from The Undertaker to Bret “The Hitman” Hart to The Rock.
In a public announcement, Trump said “Linda has a tremendous background and is widely recognized as one of the country’s top female executives advising businesses around the globe. She helped grow WWE from a modest 13-person operation to a publicly traded global enterprise with more than 800 employees in offices worldwide.”
If confirmed by the Senate, McMahon will succeed Maria Contreras-Sweet, who has held the position since 2014 and has had a pretty open attitude about online lenders. The former WWE exec taking her place might find even more common ground with the non-bank finance community given that Bret the Hitman Hart is the official spokesperson for a merchant cash advance company.
Sharpshooter Funding in Canada, which heavily features Hart in their marketing campaigns, is affiliated with First Down Funding, a US-company that also does small business funding. A joint-company press release from earlier this year quotes Hart as saying, “When you sit down and listen to the whole format and how it provides money to much needed businesses and small business owners that need financial support and extra funding. It’s a worthwhile endeavor, and I’m actually very grateful that Paul Pitcher involved me with it so far.”
Meanwhile, McMahon says she is up to the task. “Our small businesses are the largest source of job creation in our country,” she said in an announcement. “I am honored to join the incredibly impressive economic team that President-elect Trump has assembled to ensure that we promote our country’s small businesses and help them grow and thrive.”
LendingMania might be just around the corner in 2017.
New deBanked Magazine Issue is On The Way
December 7, 2016
The Nov/Dec issue of deBanked magazine is on the way! Can you guess who is on the cover? Hint: his face is blurred out in this image so you can’t cheat!
This edition closes the end of 2016, celebrates the journey of an industry veteran, recaps late fall conferences, and reveals new clues and details into a former industry player’s devilish fall from grace.
Stay on top of the industry and finish out the year with our latest major stories that are released in print well before they’re online. If you’re not already subscribed to deBanked Magazine, register now for FREE!
