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
SEC Chair to Marketplace Lenders, Disclose Material Information to Investors
April 1, 2016
Stanford UniversityFor marketplace lenders, less is not more when it comes to disclosure.
At an event held at Stanford University yesterday titled, The Silicon Valley Initiative: Protecting Investments in Pre-IPO Issuers, SEC Chairman Mary Jo White gave a keynote speech that mentioned marketplace lending. “As investors are attracted by potentially higher yielding but riskier marketplace loans as an investment strategy, information about the borrower’s ability to repay the loan underlying the investment is critical,” she said.
The message? The SEC is indeed watching.
“We are also concerned about the adequacy of the information received by investors in registered offerings,” she added. “We expect that investors will receive disclosures about the loans underlying their investments, including information about the borrowers as well as the platform’s proprietary risk and lending models, that will enable them to make informed investment decisions – both at the time of investment and on an ongoing basis.”
Her warning comes at a time when the industry has considered reducing disclosures instead of increasing them. Last year, Lending Club announced that investors on their platform would only have access to 56 data points, down from 100, a decrease of almost half. At that time, investors and industry advocates balked at the news.
Lend Academy’s Peter Renton shared what he thought on his blog, “It is pretty obvious by now that I don’t like these changes. For quite some time now Lending Club has been reducing the amount of transparency for investors. Now, some changes I completely understood such as removing the Q&A with borrowers and even the removal of loan descriptions. But removing data that investors have been using to make investment decisions is a step too far in my opinion.”
Some speculated that Lending Club was being forced to do this as a way to prevent investors from trying to reverse engineer their models and beat their grading system for above average yields. For reasons unknown, but potentially due to negative feedback from investors over disclosure, Lending Club changed course and instead added 15 new fields.
To be fair, many marketplaces find that investors simply don’t make use of certain data points and thus they are deemed immaterial. Marketplace lenders also have to balance the privacy of their borrowers with transparency to their investors.
The SEC Chair also spoke about crowdfunding, robo-advisors, the blockchain, and the illusions that subjective private market valuations can create.
Small Businesses Say ‘Yes’ to Online Lending Through NFIB Partnership With Kabbage
March 31, 2016
The largest association of small and independent business owners in the country is embracing online lending.
The National Federation of Independent Business (NFIB) announced a strategic partnership with Kabbage yesterday. The NFIB has more than 325,000 members.
Speaking about Kabbage, NFIB SVP Mark Garzone said, “Access to working capital for an expansion, repairs or short-term cash flow needs is essential for small businesses to thrive. We know that our members will benefit from this valuable resource.”
While the partnership is clearly a sign of Kabbage’s prowess, it also serves to reinforce the value that online lenders can provide to small businesses in general. “Many of our members – like a number of small businesses – struggle with the standard loan process when they need access to working capital,” said Garzone.
Not all online lenders are created equal, but a few have stood out from the crowd, in this case, Kabbage.
Earlier this month in The Atlanta Journal-Constitution, NFIB representative Holly Wade said, “Our fear is that they will over-regulate [online lending] out of existence or to the point that it’s no longer a benefit.”
Marketplace Lenders Will Return to Their Peer Roots, Insiders Say
March 30, 2016
Will marketplace lending revert back to peer-to-peer lending? Insiders said “yes,” during a panel hosted at CommonBond’s NYC office yesterday. Moderated by WSJ reporter Telis Demos, The State of Fintech Lending included two panelists that had something to say about the greatly exaggerated death of “peers” in peer-to-peer lending.
Marketplace lenders will look to tap back into individual investors, said CommonBond CEO David Klein, specifying that accredited investors were an obvious choice but that true retail investors would also play a role.
Fundera CEO Jared Hecht said marketplace lenders can achieve a “network effect” with retail investors, something not likely to occur with institutional sources. The network effect is a phenomenon whereby a good or service becomes more valuable when more people use it. “Retail investors are more loyal to a specific platform,” Hecht said.
Klein explained that the retreat from peers over time stemmed from Lending Club and Prosper’s historical issues with the Securities and Exchange Commission. Both companies faced an existential threat in 2008 over the alleged sale of unregistered securities to unsophisticated investors. They were able to overcome this by agreeing to register every single loan offered on their platforms as a security with the SEC. Today, that has led to both companies becoming part of the top five filers of securities in the US, Klein said. While this registration process is mostly automated, the road to get there was complicated and thus there was a shift towards institutional sources for most new entrants.
But there are signs it’s coming back. Two weeks ago, small business lender StreetShares announced that retail investors would soon be able to invest on their platform. But even then, StreetShares has accomplished this through a less complicated process than the ones Lending Club and Prosper adhere to. Under the JOBS Act’s Regulation A+, startups can raise up to $50 million over a 12-month period from retail investors.
The return path may be slow, however. Prosper for example, still sells 92% of its loans to institutional sources and only 45% of Lending Club loans are sold to retail investors. Even they are not entirely peer-to-peer.
The marketplace lending industry will inevitably come to respect the “peer” again, panelists concluded. “2016 will be the year that marketplace lenders will go from the mainstream to maturity,” Klein said.
Not All Marketplace Lenders Are Created Equal – The State of Fintech Lending
March 30, 2016
It’s kind of a problematic term, said CommonBond CEO David Klein about “marketplace lending.” Klein was one of four industry experts on the State of Fintech Lending panel hosted at their office on Tuesday morning. “Not all marketplace lenders are created equal,” he said. There are different asset classes, different credit spectrums and even different investor responses, he explained.
CommonBond for example, focuses on student lending and more specifically, the very upper end of the credit spectrum. As proof, Klein said the company has not even experienced a 30-day delinquency or default. Compare that asset with some of the products offered by Fundera, which range from merchant cash advances to SBA loans and it’s easy to see why marketplace lending as a category can be overly broad. Fundera CEO Jared Hecht was another panelist alongside PeerIQ CEO Ram Ahluwalia and Macquarie Group Managing Director Brian Foley. WSJ reporter Telis Demos served as the moderator.
Klein’s company deals with institutional investors, which loosely qualifies it as a marketplace in the sense that there are buyers for their loans. Hecht’s company is a marketplace too but for small business owners seeking loans. Fundera is not a lender. “We don’t have to run around and deal with the capital markets,” Hecht said.
Despite the incredible diversity of asset and credit classes, PeerIQ’s Ahluwalia described the quality of the securitizations taking place throughout the industry as very good. “This is going to be a very different movie than The Big Short,” he said. As of the end of 2015, PeerIQ ranked total cumulative securitizations at $8.4 Billion, with 41 deals issued to date (25 Consumer, 9 Student, and 7 Small Business).
Pension funds and insurance funds who are attracted to this space are focused on AAA rated bonds, said Macquarie’s Foley. “They want scale, performance and track record,” he said, adding that they’re happy to trade away return for a reduction of risk so that they can sleep at night.
There’s over 200 marketplace lenders in the US, Klein stated. Only 12 or 13 have reached a certain level of scale though, he added. “2016 will be the year that marketplace lenders go from the mainstream to maturity,” he said.
Perhaps as part of that, however, the marketplace lending term will have to mature with it. “Each category is very different,” said Klein.
The Coalition for Responsible Business Finance Adds Yet Another Perspective on Small Business Lending Advocacy
March 29, 2016Is three a crowd? The Coalition for Responsible Business Finance (CRBF) seeks to improve small business finance.
As a new advocacy organization, the CRBF is dedicated to bolstering the credibility, reliability and security of the growing non-traditional small-business lending industry, they say. Spearheaded by Tom Sullivan, former Chief Counsel for Advocacy in the Small Business Administration, CRBF Advisory Board executives include representatives from the National Federation of Independent Business (NFIB), the National Small Business Association (NSBA), and the Small Business & Entrepreneurship Council (SBE Council).
“CRBF was created to educate state and federal policymakers, media, and communities on how technology and innovation are providing small businesses access to capital that is necessary for growth,” Sullivan said in an organization announcement this morning.
The organization has been developing for some time, but its official pronouncement nearly coincides with that of the Commercial Finance Coalition, another group with a similar goal.
And it’s shaping up to be quite the Spring here in 2016 because the Small Business Finance Association, yet another organization, is preparing to unveil a white paper of guiding industry principles.
And so that makes three, yet each appear to be bringing their own unique perspectives to the table. That is perhaps better than hundreds of unorganized perspectives under no collaborative banners, some industry vets are saying.
“Small business owners expect and deserve choices for credit,” Sullivan said. “And we at the [CRBF] believe that a better understanding of non-traditional small business lending will lead to greater acceptance by customers, regulators, and local, state, and federal elected officials.”
Touché.
Platinum Rapid Funding Group Partners Up With The Asian American Hotel Owners Association
March 29, 2016
NY-based Platinum Rapid Funding Group has become the exclusive funding partner of the Asian American Hotel Owners Association (AAHOA). AAHOA has over 15,000 members and is the largest hotel owners association in the world.
“Our enthusiasm to create this new relationship serves as the galvanizing force that will assure we attain deliverable results for AAHOA,” said Platinum CEO Ali Mayar. The company originated more than $100 million in funding last year alone.
As the largest hotel owners association in the world, AAHOA’s mission is to advance and protect the business interests of hotel owners through advocacy, industry leadership, professional development, member benefits, and community involvement.
“We are delighted to partner with Platinum Rapid Funding and look forward to sharing their services with our members,” said AAHOA President & CEO Chip Rogers.
Platinum’s unique business model is said to have played a role in AAHOA’s selection, including among many other attributes, their “white glove” service.
Small Business Finance Association To Unveil White Paper
March 29, 2016
The Small Business Finance Association (“SBFA”) will soon publicly unveil a set of guiding industry principles, deBanked has learned, and they’ll fall under four broad categories that espouse transparency, responsibility, fair dealings and security.
Transparency will not just be about the disclosure of fees but also likely about the disclosure of process, methodology, and application rejection, among others.
The principles of fair dealings are unlikely to touch on pricing or costs. Instead they will be about a commitment to being truthful and fair in dealings with small businesses. That is sure to include marketing materials that are clear and understandable, an area that will undoubtedly extend out to the brokers they work with, if any.
While responsibility will speak to the notion of being a legally compliant good citizen when it comes to dealing with customers, security will be more than just the use of an SSL Certificate to access the website. Verifying the business’s legitimacy and confirming the owner’s identity are high on the list of a secure process, deBanked has learned.
SBFA members already adhere to a set of standards and have since the group was formed eight years ago. Their new white paper will serve to codify them in a way that others can adopt and conduct themselves to accordingly.
The white paper will be the first major achievement of the organization since Stephen Denis came on as the executive director in mid-December. Denis is the former deputy staff director of the U.S. House Committee on Small Business.
“The goal is to start from scratch and take a look at everything the association is doing,” Denis said in deBanked’s previous magazine issue, “and to really build this out to a robust group that represents the interests of small businesses.”
In another interview conducted for that story, SBFA president and founder David Goldin explained that he had been troubled by misconceptions over the industry’s prices. “Most people don’t understand the economics of our business,” he said.
The SBFA also plans to revamp their website in the near future.
Will Marketplace Lending Revert Back to Peer-to-Peer Lending?
March 28, 2016
Institutional investors wanted higher yields on Prosper’s latest bond offering, an entire five percentage points higher, according to the WSJ. This wasn’t necessarily brought on by performance either. Instead the once voracious appetite for all things online lending is being tempered by uncertainty.
Bain Capital Ventures partner Matt Harris told the WSJ that online lenders will need to replace the easy hedge fund money by “longer-term capital.” Normally, that would include traditional bank lines and credit facilities, but moving that direction could irreversibly sever the ties with their peer-to-peer roots and image.
Peer-to-peer (p2p) lenders embraced Wall Street’s easy money to scale, rationalizing to the peers on which they were founded that this was all necessary to change the status quo. The road to the sharing economy utopia required hobnobbing with the very institutions they were set on disrupting, they said. The P2p term wasn’t compatible with this narrative so it was replaced with “marketplace lending,” which helped it retain its Silicon Valley feel and gave it the range to argue that hedge funds and peers were virtually the same thing since they were both buyers in a new-age marketplace.
But early this year, something started to happen. Loan originators like SoFi (which was never peer-to-peer) could not sell loans fast enough. One solution they came up with was to launch their own hedge fund to buy their own loans. SoFi CEO Mike Cagney said, “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.”
But blaming financial institutions for pulling back credit is a scenario that has played out thousands of times in history. One only need watch The Big Short to connect why it’s dangerous for a lender to depend on the institutional credit markets. That’s where the peer-to-peer model was supposed to come in, a new way for a new day without Wall Street to prevent these problems.
But it’s not too late to go back. Lending Club for example, has capped their wholesale channel (the institutional portion) at 50%. They’ve kept more than 100,000 retail investors and intend to grow that even larger. “We’ve always been more exposed to retail, and I think we want to keep it that way,” said Lending Club CEO Renaud Laplanche to the Financial Times. “We’ll probably see that as a competitive advantage, as a source of stability and predictability, particularly in an economic downturn,” he added.
Prosper meanwhile has depended almost entirely on the institutional channel, an astounding 92% of their loans were sold to that category of investors. It’s a far cry from the slogan that appeared on their website back in 2007. “People-to-people lending. It’s an old idea that’s new again,” it said. Today it says, “We connect people looking to borrow money with investors.” Those investors are predominantly Wall Street.
But what to do when Wall Street will one day no longer be interested? It’s not too late to go back in time.
“Borrow money from people just like you,” said Prosper’s website nine years ago. People just like you might not suddenly decide they want five percentage points more. Peer-to-Peer implied a human aspect to the marketplace, that empathy played a role in a world where Wall Street had always been stone cold.
Will the industry revert back to the people? Or will ideas such as starting your own hedge fund to buy your own loans rule the day?
