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
It’s Time to End the Phrase ‘Marketplace Lending’ – Because it’s Insane
May 19, 2016
Nobody knows what “marketplace lending” means, including me. That’s kind of ironic considering deBanked is for the most part a publication dedicated to it. In fact, the cover of the March/April issue featured a big yellow robot sporting a name tag that actually said, “Hello, my name is Marketplace Lending.” Even the letter I penned that introduced readers to the issue used the phrase not once, not twice, but FIVE TIMES.
The FDIC basically defined it as encompassing all types of financing that include the practice of pairing borrowers over an online platform. Eager to be hip to the industry’s newest lingo, I got on board, and unfortunately perpetuated something that makes almost no sense.
Many companies operating under the marketplace lending umbrella don’t even know that they’ve been lumped into it. It’s become a media buzzword, something to help the simple masses understand so that they will click on a news headline without worrying if the content will only be geared toward the financially savvy.
Imagine shopping for a loan at a supermarket, but ONLINE, and voilà, marketplace lending!
But there are virtually no online platforms that work like that. The simplest explanation to describe a dizzyingly diverse industry is the most incorrect one. Lenders set rates and terms, borrowers don’t choose exactly what they want from a virtual shelf and put them in an imaginary shopping cart. There are however, portals where prospective borrowers can review different offers from different lenders in an Expedia-like environment, but this is really just Online Lead Aggregation 2.0, not a new-age system of lending.
Of course, some adopters of the phrase will point out that the marketplace was supposed to refer to the investor side, not the borrower side. It is investors that can shop for loans or notes that they want to invest in. Indeed, on platforms like Lending Club and Prosper, investors can select individual notes with terms befitting their desires and place them in an online shopping cart for purchase. Behold, the marketplace!
But what if you didn’t deal with retail investors hand-selecting $25 notes at a time? Notably, some online platforms that sell their loans to institutions in giant pools by the thousands or millions believe that such activity constitutes a marketplace because somebody is buying what they’re selling. And so long as somebody is selling something to somebody else at some point, the whole thing might as well be a marketplace. And even if it’s not, referring to it as such anyway will garner more press, attract more investors, and boost valuations.
I mean, would a site like TechCrunch be more likely to write about a FinTech Marketplace Lender or a generic financial company that sold a batch of loans to a bank?
I can tell you firsthand that if a press release submitted to us used the term “marketplace lender” instead of “finance company,” we’d at least check it out, or at least we used to. These days, we are becoming numb to its overuse.
Peer-to-Peer lending was an awesome term and it was descriptive too. Everybody could understand it. But then those platforms had to go and start selling their loans to Wall Street instead of peers and come up with something else to still sound trendy, techie, and disruptive. There’s nothing trendy of course about selling loans to financial institutions. It is a quintessential boring business activity of Wall Street. It is the opposite of disruptive, except in the events where all the loans go bad and the entire economy collapses like in 2008.
The FDIC specifically said that marketplace lending can encompass unsecured consumer loans, debt consolidation loans, auto loans, purchase financing, real estate loans, merchant cash advance, medical patient financing, and small business loans. This wildly diverse list, which even includes a non-loan product, will obviously have platforms in every category where people or businesses can get paired with a source of funds via the Internet. It’s 2016. It’d be weird if you couldn’t search for financing online. You can do everything else on the Internet. Just because a search happens online shouldn’t mean that the resulting options should be thrown together in some special broad category of lending and then be judged according to what all the other sectors do.
None of this is said to diminish the technological feats that many platforms have achieved. People and businesses can access capital in much faster and more convenient ways than ever before. Their growth and success is America’s economic gain. Jobs have been created and borrowing costs reduced. Hooray, perhaps, for marketplace lending.
The problem is merely the characterization that anyone lending to anyone else these days must also be a marketplace. That makes no sense.
Who will be the first to stop the madness?
Lending Club Faces Another Subpoena, This Time It’s NY Regulators
May 18, 2016
Adding to its list of woes, New York financial regulators have subpoenaed the lender on its interest rates charged to borrowers in New York. CNBC reports that this matter is unrelated to Laplanche’s exit.
From its CEO resigning on May 9th to being slapped with a Justice department notice the same week, the lender’s reputation has been through a lot of trauma. Its stock tanked more than 8 percent on Tuesday and opened under $4 on Wednesday.
And to add to the heap of bad news, the company evaluated its staffing needs and cancelled its 10-week summer internship program.
Lending Club received a Department of Justice grand jury subpoena on May 9th, according to the company’s quarterly earnings report, the same day that the resignation of their iconic CEO was announced. Grand juries are selected to decide if a criminal indictment should be brought against a party. The timing of the subpoena is suspicious because it leads one to suppose that a federal prosecutor had listened in on the May 9th earnings call, read news reports, decided there might be criminal activity, summoned jurors and issued a subpoena all within hours of the original announcement.
The WSJ, which did a great job reporting the details of the events leading up to Laplanche’s ouster, was not able to pin down the smoking gun that “convinced directors that more drastic action was needed,” just that the board had been “presented with evidence” that Laplanche knew many details of the $22 million loan sale.
A highly likely possibility (and this is just my theory) is that someone at Jefferies, the investment bank that Lending Club fudged the numbers on and ultimately bought $22 million worth of loans back from, tipped off federal authorities as to what took place with the loan sale.
Contrary to what people think about Wall Street, many bankers are scared to death about having knowledge of something that could lead to investors being harmed. Someone at Jefferies (and again just my theory) very well could have been so bothered by what Lending Club did, that they made sure the authorities knew what transpired. In doing so, they would probably have been viewed positively for blowing the whistle on bad behavior.
Cue a prosecutor’s interest, a grand jury, and likely a subpoena to individuals who would’ve had direct knowledge of the transaction. In my opinion, nothing would convince a board of directors more to give their famous CEO 24 hours to resign or be fired than having acquired knowledge of a grand jury investigation.
According to the WSJ, by Thursday, May 5th, Laplanche was removed as board chairman. On May 6th, he resigned. Over the weekend, he emailed friends from a new personal address, and on May 9th it was announced that he had resigned. That same day, Lending Club (the company), received a grand jury subpoena, of what I theorize was probably part of an investigation that was already in progress.
We may never know the full truth, but a seemingly innocent chain of events has clearly spiraled out of control to the point where over the course of a single week, Lending Club’s business model is seemingly coming undone. If nobody wants to buy loans or notes from their marketplace, then they are essentially out of business.
The dearth of interest in buying the loans they originate given the recent news has forced the company to disclose that it might actually have to use its own money to fund loans. No buyers, no business. So what else can they do? For one, they admit that they may need to reduce the volume of loans they originate, and that in doing so, it would likely have material adverse impact on their business.
These consequences have been predicted for years. What happens when investors just don’t want to buy the loans? How could a company where 90% of the income comes from loan origination fees provide continuous value to shareholders in an environment where there are no longer buyers?
Notably, veteran banker Todd Baker has been one of the most vocal on this issue. Six months ago, he publicly challenged SoFi CEO Mike Cagney about the viability of the marketplace model. Cagney had previously addressed Baker in an American Banker article by writing, “It is true that an MPL [Marketplace Lender] needs a buyer to originate loans — without one, the marketplace needs to raise rates until a buyer emerges. If there is no buyer, MPLs simply stop lending — they won’t start originating underwater loans.”
Stop lending?
Seemingly willing to undermine his own assertions, Cagney told the WSJ less than a year later a different story. “In normal environments, we wouldn’t have brought a deal into the market, but we have to lend. This is the problem with our space.” The environment of which he spoke then of course, was one where loan buyer interest was simply not as high as they would’ve liked, and thus it was becoming a “problem.”
Cagney’s reversal played right into Baker’s point, that a marketplace lender has to keep issuing loans to survive. When those loans don’t have organic buyers, at least in SoFi’s case, the weird idea of launching a hedge fund to potentially artificially keep up loan originations was proposed.
For Lending Club, their Plan B to keep things going is to simply buy their own loans if no buyers are available. Lending Club has a strong balance sheet and could potentially have success with this, for a time of course. The problem is that it would be taking on the credit risk of those loans as a result and put its retail note buyers at risk in the process.
Here’s why: When investors use the Lending Club platform, they are lending money to Lending Club and Lending Club is using that money to lend to borrowers. Investor yield might be tied to the performance of the notes they acquire but the credit risk is ultimately Lending Club itself. If Lending Club goes kaput, note holders would have a major problem, one that hasn’t really been a possibility until now because Lending Club hasn’t kept much risk on its balance sheet. That might soon change, according to their recent quarterly earnings report, where they say they might have to balance sheet some loans. Investors then wouldn’t really be participating in some disruptive peer-to-peer sharing economy revolution, but rather become very much like bondholders in an unregulated non-depository financial institution. And that smells horrifyingly risky. Throw in the fact that Lending Club is facing class action lawsuits, one of which alleges them to be a Racketeer Influenced Corrupt Organization. Does this sound like the kind of bond you want to invest in if you’re an unaccredited retail investor?
What Laplanche actually did or what a grand jury finds are unimportant in the grand scheme of what’s already been revealed. The only thing that matters is that when buyers dry up (whether for rational or irrational reasons), the entire system’s foundation shakes. The marketplace as it was supposed to be anyway, certainly can’t forever operate as a marketplace when it has shareholders who expect ever-increasing revenues and profits. According to Cagney’s original libertarian fantasy, nothing should theoretically be going on balance sheet. Lending Club should just be lending less, and if there are ultimately no buyers, the company should shut down until such a day that buyers return. One could only imagine that conversation with shareholders.
At the LendIt Conference last month, Renaud Laplanche joked with the crowd about cutting off the sleeves of his Lending Club jacket to make the Lending Club vest he sported on stage during his keynote speech. But was it just the sleeves that were missing? Speaking so confidently, Laplanche projected the authority of an emperor, perhaps one we’ve all been introduced to before.
“Was it really just the sleeves that have been cut away?” You may have thought to yourself for a split second. Or is it possible that the emperor of the marketplace, unbeknownst to the crowd, was simply wearing no clothes at all?
Business Loan Brokers and MCA ISOs Call it Quits
May 17, 2016
Hard times reported just a month ago are already turning into farewells
Hard times for those facilitating small business financing solutions are starting to cause a visible exodus from the space. In their wake, industry vendors have told deBanked of unexpected credit card charge disputes for leads long past purchased or for ISO software previously paid for.
One failed ISO who lasted just 14 months aired it all out on an industry forum. “I do have to say the entire journey was not fun or lucrative. I lost $250,000 of my own money [and] could not broker a deal to save my life,” he wrote. From what he could also tell during his experience, is that nobody else around him was really making any money either.
He’s not alone in feeling this way. Another user just two months earlier started a thread with this title, “Does anyone really make money in merchant cash advance?” In it, he wrote, “The merchant cash advance industry sucks. I’ve been in this business for now 1 year after 20 years of sales experience and what I find is that this industry is the craziest thing I have ever seen.”
Some sales reps or ISO owners are simply venting frustrations and continuing on but others are writing real goodbye letters. A few days ago for example, one long-time MCA industry consultant wrote on LinkedIn that he was “done with merchant cash advance” and that he had finally moved on to something that made him happy, which from the looks of it, is a career in playing Poker full time.
Gil Zapata of Lendinero wrote to deBanked in an email about what’s happening out there. “Lead generation is expensive,” he said. “Most people think that obtaining a new client is just cold calling. Wrong. There is a cultivation process.”
And part of it may be a misunderstanding of what the sales process is like, he insinuates. “Many people who have tried entering this industry think it’s the mortgage business,” he said. “It’s not.”
On forums, users often attribute some of the issues to “low grade professionals,” salespeople who would clearly benefit from more training. They’re part of the reason why an official training course is in the works and should be available some time this year.
“Good agents are not easy to find. Recruiting, hiring, and training is costly,” said Zapata.
And even then with the right salespeople, he added that “a lot of the internet leads are dead deals or not the best leads. Forming partnerships is not easy if you are looking to generate massive deal flow.”
Bright Spot
Unlike some who are throwing in the towel, Zapata is not going anywhere. Neither is another sales rep who contacted deBanked off the record. Just 16 months in to the business, he’s reportedly funding more than $500,000/month just from cold calls and claims that he is not stacking any deals. He admittedly says that he eats at his desk and never leaves. Being an equity trader in a prior life is what helped him succeed at this, he said.
“Some ex-stock brokers who can pound the phones can do very good,” Zapata said. “We only lose deals to hot shot brokers in N.Y. who were aggressive stock brokers or sold some sort of financial product out of Wall Street.”
Indeed, just last week deBanked learned that a sales rep from NYC that we had previously spoke with had just bought a red Lamborghini to celebrate his long and hard fought success. He’s not even 30-years-old yet and business is obviously going well.
More than a year ago, I wrote that it had become much too late to get into this business if all you had was a couple thousand bucks in startup funds. At Transact 16, one attendee told me they believed that the absolute minimum needed to stand a chance in setting up your own ISO shop at this point was $250,000, purely because marketing costs have skyrocketed.
Might it really take the cost of a new Lamborghini to start an ISO these days? If true, that would ironically mean that as a generation of disenchanted brokers make their way for the exits, they may be passed by an entirely new generation of brokers riding exotic Italian cars on their way in.
Even so, they should heed caution from those that have spent years in the trenches. “This industry is not as easy as it seems,” Zapata wrote. “Cost can eat you up alive.”
GAME OVER: Is The Marketplace Lending Model Dead?
May 17, 2016
Lending Club received a Department of Justice grand jury subpoena on May 9th, according to the company’s quarterly earnings report, the same day that the resignation of their iconic CEO was announced. Grand juries are selected to decide if a criminal indictment should be brought against a party. The timing of the subpoena is suspicious because it leads one to suppose that a federal prosecutor had listened in on the May 9th earnings call, read news reports, decided there might be criminal activity, summoned jurors and issued a subpoena all within hours of the original announcement.
The WSJ, which did a great job reporting the details of the events leading up to Laplanche’s ouster, was not able to pin down the smoking gun that “convinced directors that more drastic action was needed,” just that the board had been “presented with evidence” that Laplanche knew many details of the $22 million loan sale.
A highly likely possibility (and this is just my theory) is that someone at Jefferies, the investment bank that Lending Club fudged the numbers on and ultimately bought $22 million worth of loans back from, tipped off federal authorities as to what took place with the loan sale.
Contrary to what people think about Wall Street, many bankers are scared to death about having knowledge of something that could lead to investors being harmed. Someone at Jefferies (and again just my theory) very well could have been so bothered by what Lending Club did, that they made sure the authorities knew what transpired. In doing so, they would probably have been viewed positively for blowing the whistle on bad behavior.
Cue a prosecutor’s interest, a grand jury, and likely a subpoena to individuals who would’ve had direct knowledge of the transaction. In my opinion, nothing would convince a board of directors more to give their famous CEO 24 hours to resign or be fired than having acquired knowledge of a grand jury investigation.
According to the WSJ, by Thursday, May 5th, Laplanche was removed as board chairman. On May 6th, he resigned. Over the weekend, he emailed friends from a new personal address, and on May 9th it was announced that he had resigned. That same day, Lending Club (the company), received a grand jury subpoena, of what I theorize was probably part of an investigation that was already in progress.
We may never know the full truth, but a seemingly innocent chain of events has clearly spiraled out of control to the point where over the course of a single week, Lending Club’s business model is seemingly coming undone. If nobody wants to buy loans or notes from their marketplace, then they are essentially out of business.
The dearth of interest in buying the loans they originate given the recent news has forced the company to disclose that it might actually have to use its own money to fund loans. No buyers, no business. So what else can they do? For one, they admit that they may need to reduce the volume of loans they originate, and that in doing so, it would likely have material adverse impact on their business.
These consequences have been predicted for years. What happens when investors just don’t want to buy the loans? How could a company where 90% of the income comes from loan origination fees provide continuous value to shareholders in an environment where there are no longer buyers?
Notably, veteran banker Todd Baker has been one of the most vocal on this issue. Six months ago, he publicly challenged SoFi CEO Mike Cagney about the viability of the marketplace model. Cagney had previously addressed Baker in an American Banker article by writing, “It is true that an MPL [Marketplace Lender] needs a buyer to originate loans — without one, the marketplace needs to raise rates until a buyer emerges. If there is no buyer, MPLs simply stop lending — they won’t start originating underwater loans.”
Stop lending?
Seemingly willing to undermine his own assertions, Cagney told the WSJ less than a year later a different story. “In normal environments, we wouldn’t have brought a deal into the market, but we have to lend. This is the problem with our space.” The environment of which he spoke then of course, was one where loan buyer interest was simply not as high as they would’ve liked, and thus it was becoming a “problem.”
Cagney’s reversal played right into Baker’s point, that a marketplace lender has to keep issuing loans to survive. When those loans don’t have organic buyers, at least in SoFi’s case, the weird idea of launching a hedge fund to potentially artificially keep up loan originations was proposed.
For Lending Club, their Plan B to keep things going is to simply buy their own loans if no buyers are available. Lending Club has a strong balance sheet and could potentially have success with this, for a time of course. The problem is that it would be taking on the credit risk of those loans as a result and put its retail note buyers at risk in the process.
Here’s why: When investors use the Lending Club platform, they are lending money to Lending Club and Lending Club is using that money to lend to borrowers. Investor yield might be tied to the performance of the notes they acquire but the credit risk is ultimately Lending Club itself. If Lending Club goes kaput, note holders would have a major problem, one that hasn’t really been a possibility until now because Lending Club hasn’t kept much risk on its balance sheet. That might soon change, according to their recent quarterly earnings report, where they say they might have to balance sheet some loans. Investors then wouldn’t really be participating in some disruptive peer-to-peer sharing economy revolution, but rather become very much like bondholders in an unregulated non-depository financial institution. And that smells horrifyingly risky. Throw in the fact that Lending Club is facing class action lawsuits, one of which alleges them to be a Racketeer Influenced Corrupt Organization. Does this sound like the kind of bond you want to invest in if you’re an unaccredited retail investor?
What Laplanche actually did or what a grand jury finds are unimportant in the grand scheme of what’s already been revealed. The only thing that matters is that when buyers dry up (whether for rational or irrational reasons), the entire system’s foundation shakes. The marketplace as it was supposed to be anyway, certainly can’t forever operate as a marketplace when it has shareholders who expect ever-increasing revenues and profits. According to Cagney’s original libertarian fantasy, nothing should theoretically be going on balance sheet. Lending Club should just be lending less, and if there are ultimately no buyers, the company should shut down until such a day that buyers return. One could only imagine that conversation with shareholders.
At the LendIt Conference last month, Renaud Laplanche joked with the crowd about cutting off the sleeves of his Lending Club jacket to make the Lending Club vest he sported on stage during his keynote speech. But was it just the sleeves that were missing? Speaking so confidently, Laplanche projected the authority of an emperor, perhaps one we’ve all been introduced to before.
“Was it really just the sleeves that have been cut away?” You may have thought to yourself for a split second. Or is it possible that the emperor of the marketplace, unbeknownst to the crowd, was simply wearing no clothes at all?
The Direct “Lender” Test – For ISOs/Brokers
May 16, 2016
ISOs/Brokers: Unsure if the company you’re speaking with is a direct lender? There’s a few ways to immediately spot a faker. Fakers are often confused between loan products and sales of future receivables, an issue that will likely open them up to all kinds of legal liabilities. For this reason alone, you don’t want to end up working with the wrong company. In some states brokering a deal to an unlicensed lender could have severe consequences.
First, if anyone tells you they are a direct lender, a popular phrase these days, ask them how it is they lend. Do they comply with lending laws on a state-by-state basis or do they have a bank charter relationship? If a bank charter, ask them what bank. Verify it. If they have a lending license in a single state or multiple states, verify it. You can look up licensed California lenders here for example.
If they don’t know what you are talking about when you ask about chartered banks or state licensing, you should end the conversation.
If they’re supposedly only in the business of purchasing future revenues or receivables but call themselves a direct “lender,” you should run away as fast as you can. If a company buying future receivables believes they are indeed a lender, they and anyone working with them could face all sorts of penalties, up to and possibly including criminal charges. No amount of commission is worth this.
If a company is only in the business of buying future receivables (what some would call a true or traditional merchant cash advance), a more proper title would be a direct “funder.”
Keep in mind that a lender reliant on a bank charter relationship technically would not qualify as being a “direct lender” either since the bank itself would be the lender.
The differences between loans and sales will be taught in the industry’s upcoming online certification course. I highly recommend that newcomers sign up for it.
Lending Club Faces Pressure to Redeem An Entire Industry
May 15, 2016
In the wee early morning hours of May 3rd, I finally wrapped up the latest deBanked story and hit the publish button. Then as I made my way off to bed, I started to second guess the headline. Titled, Is The Marketplace Lending Apocalypse Upon Us?, I fretted over whether or not it was overly sensational.
Apocalypse. Apocalypse. Apocalypse, I repeated over and over in my head.
As I tossed and turned for an hour, I worried that thousands of readers would think deBanked was crossing over into tabloid territory. I decided to leave it up anyway, certain enough at least that the clouds forming over the horizon signaled the arrival of a dark storm.
Less than a week later, Lending Club’s famous CEO would resign in disgrace in a scandal that also brought down several other employees. The company would delay its quarterly earnings report and the stock would drop by more than 50% over the course of just a few days. Closely related companies like OnDeck would be dragged down by the news, Wall Street banks would announce suspensions of securitizations, and community banks would halt the purchases of Lending Club loans. Blackstone Group would end its planned foray into online lending and banks like Wells Fargo, smelling blood in the water, would strike at the heart of some marketplace lenders by announcing a new technology-enabled product.
Reporters from all types of media outlets would contact me to ask what I thought of it all and I spoke from my gut in some of them.
Little details would trickle out, such as a whistle-blower submission to the SEC last July over Lending Club’s disclosure practices and another board member’s stake in a little known company named Cirrix Capital would be called into question. The non-stop fearmongering headlines from the media definitely didn’t help.
Lending Club’s complete silence after Monday morning’s announcement only made it worse. Those who buy notes on their platform never received a single communication about it, a fact that might be entirely related to quiet period rules surrounding the release of quarterly earnings. For some platform users, that continued silence fed into even the most rational investors’ worst fears.
On the LendAcademy forum for example, some users argued that Lending Club could be facing bankruptcy before the end of the year. Many who were more calm but still concerned, indeed said they were refraining from purchasing new notes until they got further guidance just to be safe. Others ventured off into complete paranoia while rational minds tried to reel them back to reality. As someone who has a significant Lending Club portfolio, I found myself shifting back and forth between those roles.
Everything is fine. Or is it?! No, everything should be fine. BUT WHAT IF IT’S NOT?!!
On Monday, In what will be a semi-post-apocalyptic world, Lending Club will have a lotta ‘splainin to do. New CEO Scott Sanborn will be tasked with restoring order to the world of marketplace lending. His predecessor, Renaud Laplanche, was the face of peer-to-peer finance. He was an icon. As the four-time keynote speaker of LendIt, Laplanche’s persona assured a skeptical public that disruption in lending was true Silicon Valley innovation, not Wall Street engineering. This lending marketplace could not possibly be risky, one might have supposed, because it looked so charmingly French. The intellectual in the red vest with a degree from école des Hautes Etudes Commerciales de Paris did not look and sound like Dick Fuld from New York City. And yet Lending Club’s offense that led to Laplanche’s departure, opened it up to comparison to the shoddy mortgage origination market in the early 2000s that led to Lehman Brothers’ collapse and the Great Recession.
This week, Scott Sanborn will have to make a most convincing argument to restore belief in the movement. Regulators, legislators, investors, and borrowers alike, have pegged at least some of their perceptions surrounding fintech to Lending Club. What happens this week may very well decide the future of online lending altogether. For Sanborn, those are some very big shoes to fill, or in Lending Club’s case, it will all depend on how good he looks in his red vest.
Autres temps, autres mœurs
Godspeed.
Google’s Payday Loan Ad Ban Smells Like Government Intimidation
May 12, 2016
CFPB Director Richard CordrayGoogle loved payday lending and products like it, until something happened.
Google Ventures is one of the most notable investors in LendUp, a personal lender that charges up to 333% APR over the period of 14 days. The famous creator of Gmail, Paul Buchheit, is also listed as one of LendUp’s investors. Four months ago, Google Ventures even went so far as to double down on their love for the concept by participating in LendUp’s $150 Million Series B round.
This week, Google Inc. has apparently found Jesus after “reviewing their policies” and determined that personal loans over 36% APR or under 60 days will be forever BANNED from advertising on their systems. “This change is designed to protect our users from deceptive or harmful financial products,” they wrote in a public message. Ironically of course, Google is tacitly admitting that it must protect users from its own products that it has invested tens of millions of dollars in because they are deceptive or harmful.
LendUp is not the only company that Google Ventures has invested in that charges more than 36% APR. A business lender they previously invested in charged up to 99% APR. That investment was for $17 million as part of a Series D round. At the time, they called the management team’s vision “game changing.”
The only thing game-changing now is their about-face after their supposed policy and research review. It’s hard to imagine that in 2016, Google is just finally reading research about payday lending, especially considering that payday loan spam has for so long been a part of their organic search results. It cannot be understated that they’ve even created entire algorithms over the years dedicated to payday search queries and results. And “loans” as a general category is their 2nd most profitable. Yes, surely they know about payday.
Predatory middleman
Google has good reason lately to be afraid of sending a user to a website to get a payday loan however, even if they’re just an innocent middleman in all of this.
Last month, the Consumer Financial Protection Bureau filed a lawsuit against Davit (David) Gasparyan for violating the Consumer Financial Protection Act of 2010 through his previous payday loan lead company T3Leads. In the complaint, the CFPB acknowledges that T3Leads was the middleman but argues that its failure to properly vet the final lender customer experience is unfair and abusive. At its core, T3Leads is being held responsible for the supposed damage caused to individuals because they may not have ended up getting the best possible loan terms.
One has to wonder if Google could be subject to the same fate. Could they too be accused of not auditing every single lender they send prospective borrowers off to?
Four months before being sued by the CFPB personally, the CFPB sued T3Leads as a company.
Gasparyan however, is already running a new company with a similar concept, Zero Parallel. That company is indeed advertising on Google’s system.
Chokepoint
For the CFPB, coming fresh off of having made the allegations that even a middleman sending a prospective borrower off to an unaudited lender is culpable for damages, the most bold way to achieve their goals of total payday lending destruction going forward would be to threaten the Internet itself, or in more certain terms, Google.
It’s quite possible that Google has been strong-armed into this new policy of banning short term expensive loans by a federal agency like the CFPB. Not giving in to such a threat would likely put them at risk of dangerous lawsuits, especially now that there are some chilling precedents. By forcing Google to carry out its agenda under intimidation, the CFPB wouldn’t have to do any of its day-to-day work of penalizing lenders individually that break the rules. Google essentially becomes a “chokepoint” and that’s quite literally something right out of the federal regulator playbook.
In 2013, the Department of Justice and the FDIC hatched a scheme to kill payday lenders by intimidating banks to stop working with them even though there was nothing illegal about the businesses or their relationships. That plan, which caused a massive public outcry, had been secretly codenamed “Operation Chokepoint” by the DOJ. A Wall Street Journal article uncovered this and a Congressional investigation finally put an end to the scheme after two years, but not before some companies went out of business from the pressure.
Given this history, it’s highly plausible that Google has been pressured in such a way that it’s too afraid to reveal it.
Google has long known all about payday lending. Their recent decision smells like government and they just might very well be the chokepoint.
Loan Originations Slow Industrywide
May 10, 2016
It’s not just one marketplace lender experiencing a slowdown in originations. Some of the largest players across the spectrum cooled their jets in Q1 of this year compared to Q4 of last year.
| Company | Origination Growth |
| Lending Club | +7% |
| Square Capital | +4% |
| OnDeck | +2% |
| Prosper | -12% |
| Avant | -27% |
While Lending Club weathered the storm relatively well, the resignation of their CEO amid a loan manipulation scandal does not bode well for its immediate future prospects.
Avant CEO Al Goldstein, whose company’s loan volume among the bunch dropped off the most, told Crain’s Chicago last month, “If we can’t find capital, we’re not going to grow fast. If we can, we will.”
In a later comment to the WSJ, an Avant spokesperson explained that Q4 loan volumes are typically elevated because of the holidays and Q1’s volume down because many borrowers are receiving their tax refunds.
