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
Hillary Clinton Wants to Harness the Potential of “Online Lending Platforms”
August 24, 2016
Presidential candidate Hillary Clinton acknowledged online lending on Tuesday when she published her plan to help small businesses. “Small businesses owners cite insufficient access to capital as a primary inhibitor to starting, growing, and sustaining a small business,” she asserted in a fact sheet posted to her website.
To solve that dilemma, she wants to:
- Harness the potential of online lending platforms and work to safeguard against unfair and deceptive lending practices.
- Streamline regulation and cut red tape for community banks and credit unions while defending the new rules on Wall Street.
- Give the SBA administrator the authority to continue providing 7(a) loan guarantees to small businesses if demand is higher than the yearly cap, helping even more small businesses get affordable bank loans.
- Etc.
The WSJ and other media outlets have claimed Clinton’s reference to online lending means “marketplace lending” but that appears to be an exaggeration. The two are not synonymous. One company for example that just secured a $100 million credit facility from Goldman Sachs to make more loans online is not a marketplace, but rather a balance sheet lender that helps banks make loans to their clients.
Hillary Clinton’s plan for small business growth is focused on community banks, the SBA and tax incentives. Fintech and marketplaces were not mentioned. You can read it here.
Fundation’s $100 Million Credit Facility From Goldman Sachs Is A Return To Banking
August 23, 2016
The online lending party isn’t over yet. And neither is bank lending…
Fundation, which company CEO Sam Graziano described to the WSJ as a credit solutions provider rather than a lender, has secured a $100 million credit facility from Goldman Sachs. But they are a lender, a direct small business lender in fact, that uses their own balance sheet to make loans.
Fundation is different in that they bolt their platform on top of the traditional banking system. Their partnership with Regions Bank for example, allows Regions Bank customers to apply for a Fundation loan right through the Regions.com website.
The sizable credit facility, the system it will help foster, and the name behind it further demonstrates the demise of peer-to-peer lending. “We decided to be an integrated partner of the banking system,” said Fundation’s Graziano to the WSJ in regards to the saturated environment of lending platforms.
The WSJ also reported that the firm will use the funds to make more loans to Regions bank customers as well as other community banks that they have partnered up with.
Prosper Marketplace Bitten in Q2 With Major Loss
August 17, 2016Prosper Marketplace Inc. reported a Q2 2016 loss of $35.5 million, down from a loss of only $6 million over the same period last year. While not publicly traded, the company is still required to file its results. Originations for the quarter totaled $445 million.
For comparison purposes, rival Lending Club posted an $81 million loss on $1.96 billion in originations.
Prosper incurred $14 million in expenses just from restructuring related to their downsizing and layoffs which includes the closing of their Salt Lake City office and the termination of 167 employees.
The company also used a lot of cash, finishing Q2 with only $29 million in the bank, down from $66 million at the beginning of the year. Lending Club by comparison had $573 million in the bank at the end of Q2.
According to their 10Q, “Prosper Funding saw reduced listings on the marketplace as Prosper slowed down marketing efforts to reduce demand from Borrowers and maintain marketplace equilibrium. As a result, Prosper Funding experienced a decline in administration fee revenue-related party during this period and expects a decrease in administration fee revenue-related party in the third quarter of 2016 from the third quarter of 2015.”
Meanwhile, the performance of their actual loans has remained steady. View their latest performance update HERE.
Google’s Payday Loan Ad Ban References The Truth in Lending Act (TILA)
August 15, 2016
Did the government pressure Google?
Payday loan ads have mostly disappeared from Google’s search results after they banned ads for personal loans where the Annual Percentage Rate (APR) is 36% or higher. In a May 12th post, shortly after the proposed ban was announced, I speculated that the sudden change was likely due to government intimidation, rather than the come-to-Jesus moral reckoning claimed by Google’s Director of Global Product Policy, David Graff.
Google’s official Adwords policy regarding personal loans now cites the Truth in Lending Act, hinting that compliance with the policy is really about compliance with federal law.
Advertisers for personal loans in the United States must display their maximum APR, calculated consistently with the Truth in Lending Act (TILA).
This policy applies to advertisers who make loans directly, lead generators, and those who connect consumers with third-party lenders.
The TILA regulations can be found at 12 CFR Part 1026. The description of which charges are included and excluded from the calculation of “Finance Charge” is found in Section 1026.4. The APR calculation for “Open-End Credit” is found in Section 1026.14. The APR calculation for “Closed-End Credit” is found in Section 1026.22.
The timing of this change is suspicious since just one month before Google announced the ban, the owners of an online payday loan lead aggregator were hit with a lawsuit by the Consumer Financial Protection Bureau (CFPB). Among the allegations is that the defendants ran a lead aggregation business that did not attempt to match consumers with the best loan for their needs, as consumers were led to believe by some lead generators.
“In particular, consumers are likely to be steered to lenders that charge higher interest rates than lenders that comply with state laws, that do not adhere to state usury limits, or that claim immunity from state regulation and jurisdiction,” the complaint says.
The company the defendants ran, T3Leads, was also sued by the CFPB in a separate action.
Google too, as master aggregator, arguably does not attempt to match consumers with the best loan for their needs, nor have they likely been continuously vetting their lending advertisers for legal compliance. While Google has not been sued or accused of any wrongdoing, the CFPB seemed to be laying the groundwork for such a challenge in the future. And as a blanket hedge or perhaps after a direct threat, they’re now applying certain federal loan laws as if they were already subject to them.
You can see an example of the before-and-after of Google’s search results HERE.
Square Capital Outgrows Square
August 11, 2016
You don’t need to process payments through Square anymore to get a loan from Square Capital. Restaurants that use Upserve, a restaurant payments and data analytics system, are now eligible as well.
Formerly known as Swipely, Upserve is still relatively small, with only 7,000 restaurants as customers. But it’s a milestone for Square nonetheless, whose loan program within their own ecosystem has become so successful, that they feel comfortable venturing outside of it.
“We are proud to partner with Upserve and offer loans through Square Capital to even more small businesses who traditionally face barriers when seeking access to funds,” said Jacqueline Reses, Head of Square Capital.
The move puts them on a path to truly competing with other alternative lenders such as OnDeck and CAN Capital. Loans are repaid just like they are through Square, through a percentage of each day’s card sales with the option to repay early at no additional fee.
Calling Timeout On Financial Regulations, A Pump For Trump?
August 10, 2016
Only 24% of small business owners say that Hillary Clinton is the presidential candidate that has their best interest at heart, according to a survey conducted by Capify, a business financing company based in New York. 53% selected Donald Trump.
And whatever your opinions about Trump, his proposed moratorium on new financial regulations could entice both small businesses and alternative financial companies to consider a Trump presidency.
“Under my plan, no American company will pay more than 15% of their business income in taxes,” Trump said in Detroit on August 8th.
A report published by the National Federation of Independent Business (NFIB) last month found that 20% of business owners ranked taxes as the single most important problem facing their business. Only 2% reported that financing was their top business problem.
Message received? It appears not
In states like Illinois, some legislators are focusing their efforts on finding ways to make it harder for small businesses to obtain financing, convinced that questionable lending practices are the source of their problems, not taxes. But in a call with Bryan Schneider, secretary of the Illinois Department of Financial and Professional Regulation, he told deBanked that no one has complained of any small-business lending problems in Illinois to state regulators.
Regulators should not indulge in creating solutions in search of problems, Sec. Schneider cautioned. “When you’re a hammer, the world looks like a nail,” he said, suggesting that regulators sometimes base their actions on anecdotal isolated incidents instead of reserving action to correct widespread problems.
And that’s why a moratorium on financial regulations (albeit on the federal level) might also resonate with small businesses. Lawmakers don’t appear to be addressing their grievances and ironically, passing new laws that make it harder to obtain financing could potentially even exacerbate the problems they’re already vocalizing.
Small businesses seemed to have become aware of the government-as-obstructionist role however since 22% of them surveyed in the NFIB study, said that government requirements and red tape were the single most important problem they faced, more than anything else.
The Finance Side
A timeout is not a sure-fire way to woo Wall Street however, since a moratorium on federal regulations could actually serve as a hindrance for some financial companies hoping to reach some legal framework consensus down the road. Last year, Bizfi founder Stephen Sheinbaum, said that a 50-state patchwork of laws would make operating companies like his more challenging. “Personally, I’d be glad to see it on the federal level, we won’t have to deal with 50 individual states, which is more unruly,” Sheinbaum said in regards to potential regulation.
But a timeout on making any moves might indeed be in order anyway, given the questions that are being asked by some federal legislators. Last month during a hearing, Rep. David Scott asked what made business loans different from consumer loans. Parris Sanz, the Chief Legal Officer of CAN Capital, who was there testifying on behalf of the Electronic Transactions Association (ETA), gave his answer.
But there is a fear, just by those questions, that some legislators are still having trouble understanding the fundamentals. And that may be why a dozen trade associations and lobbying groups have formed in the last year to provide educational resources about alternative financing.
In states like Illinois, Scott Talbott, SVP of government affairs for the ETA, said they are encouraging legislators to adopt a “go-slow approach” that affords enough time to understand how the industry operates and what proposed laws or regulations would do to change that.
Keep it Simple?
With Trump, despite all his quirks, it’s possible that his ideas about a moratorium, could be a deciding factor in how small business owners and those employed by alternative financial companies vote. Lower taxes, timeout on regulations, has the potential to resonate far and wide.
60% of small business owners think that the outcome of the presidential election will have a severe impact on small businesses, according to the Capify survey. 29% said it possibly will have a severe impact. With taxes and government red tape at the top of their list of grievances, there might just be a pump for trump on both sides of the alternative finance aisle.
OnDeck is NOT a Marketplace Lender
August 9, 2016
It’s finally time to stop calling OnDeck a marketplace lender.
The company only sold 15.6% of its originated loans through the OnDeck Marketplace, according to their Q2 earnings report. That’s down from 26% in the prior quarter. It’s not hard to see why that might be as the Gain on Sale Rate was only 3.5% in Q2, a significant drop from the 5.7% in Q1 and 7.8% at this time last year.
On the earnings call, OnDeck’s chief officers argued that demand for their loans remained very high but that investors are requiring more return for the same risk. With the profit incentive to sell loans severely diminished, the company plans to continue selling only 15% – 25% of their loans going forward on the basis of keeping institutional relationships and diversification.
But if not a marketplace? Then?
OnDeck is a non-bank commercial balance sheet lender. And as a result, the company’s cash dropped from $160 million on December 31, 2015 to only $78 million at the end of Q2. OnDeck CFO Howard Katzenberg said that this wasn’t a burn, but rather cash being invested into their loans, all part of their plan of moving away from the marketplace. The company still has $300 million in GAAP equity, $100 million available to it from its warehouse lenders, and other debt facilities that it plans to increase for more leverage.
OnDeck funded a whopping $590 million in loans in Q2 but posted a net loss of $17.9 million. Origination figures include the full loan principal amount on renewals even though part of the principal may be used to pay off an existing loan.
Marketing costs remained relatively stable as did loan performance. Little was said about their relationship with JPMorgan Chase other than the fact that it’s still “early days at this point.”
OnDeck, Lending Club to Announce Earnings Today
August 8, 2016
Both OnDeck and Lending Club are scheduled to host their Q2 earnings calls today At 5 PM EST.
For Lending Club, investors will have an opportunity to assess the damage that rocked the company in May. Back then, the sudden resignation of the CEO was brought on by a loan manipulation scandal and conflicts of interests. That led to a DOJ Grand Jury investigation that was compounded by a New York Department of Financial Services subpoena in an unrelated probe. The ensuing appetite to buy their loans waned, forcing Lending Club to use their own balance sheet to ensure the flow of their business went on uninterrupted. On July 28th, CEO Scott Sanborn announced that they were NOT becoming a balance sheet lender and were holding only 2% of their expected quarterly loan volume. More recently, investment bank Jefferies is said to have sold $105 million in bonds backed by Lending Club loans, showing signs that confidence in the company’s product remains.
OnDeck isn’t embracing the tech company characterization as much as they used to. Earlier in the year, CEO Noah Breslow described the company as a “non-bank commercial lender” in an interview on CNBC. As such, origination growth at the expense of all else is no longer likely to excite investors who have shifted to judging the company on its path to profitability and its long term plan to sustainability. In Q1, they were asked what would happen if the company stopped the marketplace aspect and just held all its loans on balance sheet. The response? More short term losses, due to accounting standards. Two things investors will surely be looking at is the cost of marketing in Q2 in the face of increasing competition and loan performance.
