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
Square’s Merchant Cash Advance Program Now Among Biggest in the World
March 10, 2016Square originated more than $400 million worth of merchant cash advances advances in 2015, according to their Q4 earnings report. Their average deal size was just shy of $6,000. The result is a 300% increase year-over-year and makes them one of the largest players in that industry worldwide.
RANKINGS
| Company Name | 2015 Funding Volume | 2014 Funding Volume |
| OnDeck | $1,900,000,000 | $1,200,000,000 |
| CAN Capital | $1,500,000,000 | $1,000,000,000 |
| Funding Circle | $1,200,000,000 | $600,000,000 |
| PayPal Working Capital | $900,000,000 | $250,000,000 |
| Bizfi | $480,000,000 | $277,000,000 |
| Fundry (Yellowstone Capital) | $422,000,000 | $290,000,000 |
| Square Capital | $400,000,000 | $100,000,000 |
| Strategic Funding Source | $375,000,000 | $280,000,000 |
A much longer list will be available in deBanked’s March/April 2016 Magazine Issue. SUBSCRIBE FREE to make sure you obtain a copy.
Marketplace Lending Investors: Enjoy Redlining While it Lasts
March 9, 2016
For investors, geographic discrimination in marketplace lending is not only a possibility, it’s a privilege and a joy
Two years ago, LendingMemo’s Simon Cunningham openly boasted about his exclusion of Florida borrowers from his marketplace lending strategy. In, The Joy of Redlining: Why I Never Lend Money to Florida, Cunningham wrote “folks from Florida are less likely, in a statistically significant way, to pay back their p2p loans. So I have never loaned a dollar to people in Florida, and have gone on to earn a higher net return on my peer to peer investment than 90% of p2p lenders.”
And he could openly say that because so long as the lenders are the ones making the loans, it’s within his right to buy pieces of the ones he wants in a secondary market. If Lending Club themselves were to underwrite that way however, well then they could potentially be accused of discriminatory redlining.
Lending Club used to offer rather precise geographic data to investors such as the actual city of the borrower, but that has since changed to only include the first 3 digits of the zip code. Racial and gender identity are obviously not disclosed.
NSR Invest, a marketplace lending investment-advisory firm, told the WSJ that about about 16% of people who buy loans from online marketplaces use a borrower’s state to make lending decisions. Some investors however are simply ignoring states like Vermont, New York and Connecticut because of a peculiar court ruling with jurisdiction over those three states.
Investors might not be able to redline forever, its foretold. According to the WSJ, the CFPB is reviewing this practice. “The agency said it aims to ensure that companies aren’t incorporating potentially discriminatory factors into marketing or underwriting.” Jo Ann Barefoot, a former advisor to the CFPB, said that “it may be unclear whether the investors in marketplace loans would have liability,” adding that the practice is in the regulatory gray space.
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Full disclosure: I currently exclude borrowers from 11 states in my marketplace lending strategy, including Florida.
SoFi Starts Hedge Fund – And It’s Weird
March 8, 2016
With investor interest waning, SoFi’s solution to sell more loans is to launch their own hedge fund to buy them. Are they hypocrites?
Why stop at a dating app when you could also launch a hedge fund?
According to the WSJ, SoFi needs to be able to sell more loans so that they can continue to grow, but investors just aren’t buying them fast enough. A new hedge fund launched last month solely for the purpose of solving this problem has already raised $15 million. It has “a real chance to solve the balance-sheet problems facing the industry,” said SoFi CEO Mike Cagney to the WSJ. Called the SoFi Credit Opportunities Fund, Cagney believes it could grow to manage $1 billion and be used to buy loans from other lenders, not just SoFi.
News of the hedge fund arrives on the heels of a leaked rumor that the company was exploring the formation of a REIT to keep up with its burgeoning mortgage business, which it also does alongside student lending. Just a few months ago, SoFi was reportedly originating more than $50 million a month in mortgages.
Cagney’s choice of words in the WSJ interview seem to depart with his previously held beliefs on the capital markets. “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,” he said. Emphasis mine.
In Cagney’s August 2015 Op-ed for American Banker, he said “The beauty of marketplaces is real-time information feedback. If there are too many buyers, the loan rates are too high. If there aren’t enough, they are too low.”
In practice, SoFi’s reaction to there not being enough buyers has been to start their own hedge fund to continue originating loans at a fever pitch. Absent a buyer, they’ll simply become their own buyer.
“If there is no buyer, MPLs simply stop lending — they won’t start originating underwater loans,” Cagney wrote back then.
Broadmoor Consulting’s Managing Principal Todd Baker warned of this exact scenario, ironically in an Op-ed battle with Mike Cagney. “An MPL has to keep issuing loans to survive. It can’t slow down lending and slash operating costs to stay afloat while collecting cash from existing loans, like a traditional finance company, because it doesn’t own any loans,” he wrote.
And although SoFi’s survival is not currently at stake, SoFi is indeed not slowing down.
Cagney and Baker actually faced off in person last November at the Marketplace Lending and Investing Conference in NYC. There, Cagney told the crowd that “the beauty of marketplace lending is we’re balance sheet light.” But just a few months later, he’s claiming the industry has “balance-sheet problems,” as in there’s not enough money floating around to buy the loans they want to generate regardless of demand.
Slowing down growth is apparently not a path that SoFi is looking to take. More loans originated means more fee income, and that’s ultimately the conflict of interest that Baker had pointed out.
Brendan Ross, who heads up a similar hedge fund that buys only business loans, expressed concern over the existence of an institutional buyer in the market that is connected to the seller. “You wouldn’t want to have SoFi advisers cherry-picking the best loans,” Ross said to the WSJ.
One thing is certain. SoFi’s “We’re Not a Bank” slogan says what they’re not, but these days it’s becoming harder to tell what exactly they ARE.
Yellowstone Capital Welcomed to New Office Location By City Mayor
March 8, 2016
It’s a change of scenery, insiders at Fundry subsidiary Yellowstone Capital say about their new office.
The company has officially relocated from 160 Pearl Street in Manhattan to 1 Evertrust Plaza in Jersey City. On their first day in the new location, Jersey City Mayor Steven Fulop made an appearance and posed for a photo with company executives Isaac Stern and Jeff Reece to celebrate their arrival. Aside from outgrowing the NYC office that they operated from for years, Yellowstone was wooed to the State by the New Jersey Economic Development Authority to create jobs in the area in exchange for a tax incentive. The hundreds of employees they bring with them to the neighborhood now will also serve to stimulate Jersey City’s burgeoning economy.
The company originated close to half a billion dollars in funding for small businesses in 2015.
Just one stop from the Path Train’s World Trade Center station, Yellowstone’s new office environment makes it feel as if the company has been transported a million miles away. deBanked was given a tour of the new space, which at 25,000 square feet, was easy to get lost in. One employee said the upgrade from their previous location felt so immense, that it felt like they had moved to Japan.
A clear view of NYC’s Freedom Tower from many of the floor’s windows assures them that they are not that far.
Cost of Online Lenders Takes Back Seat to Cost of Government Regulations
March 8, 2016
Study indicates that regulation and taxes are the chief problems, not borrowing costs.
Small businesses are being smothered in the age of marketplace lending… by the government. According to the National Small Business Association’s (NSBA) most recent year-end annual report, regulatory burdens and federal taxes ranked among the most significant challenges to business survival.
The NSBA is a non-partisan small business organization with 65,000 members. In the survey they used to prepare their report, 33% of respondents said regulatory burdens were one of the most significant challenges to their future growth and survival. 24% cited federal taxes. The cost of health insurance benefits beat both of those with 36% of respondents choosing it.
Only 3% of those surveyed reported using an online lender or non-bank lender within the last 12 months. 43% used a bank loan, half of which came from a large bank. In another study, dissatisfied borrowers were slightly more likely to have transparency problems with big banks than online lenders.
Regulators might want to take notice of these statistics when considering future regulations for the commercial side of the marketplace lending industry. That’s because the cost of complying with any such regulations would likely increase the cost to borrowers, not reduce it.
Such was the case with Dodd-Frank and its impact on community banks. Speaking on behalf of the Independent Community Bankers of America last fall during a House Committee hearing, B. Doyle Mitchell Jr., the CEO of Industrial Bank, said that “Dodd Frank has only increased our costs.”
For bank loans in particular, 11% of respondents to the NSBA study that had taken a bank loan within the past 12 months said that the terms have become less favorable to their business. Only 4% reported the terms becoming more favorable.
When it came to the number one issue that small businesses believe that Congress and President Obama should address first, 15% said simplify the tax system, 9% said reduce the tax burden, 9% said rein-in the cost of health care reform, 8% said reduce the regulatory burden on businesses, and only 5% said increase small business access to capital.
Regulators mulling more regulation might want to consider what their constituents are actually saying, and that’s to roll back regulations, not come up with new ones. Online lenders might be expensive, but when asked what’s challenging their growth and survival, they barely even register, if they even register at all.
In a recent story by The Atlanta Journal-Constitution, Holly Wade, a representative of the National Federation of Independent Business, said “Our fear is that they will over-regulate [online lenders] out of existence or to the point that it’s no longer a benefit.”
CFPB Now Accepts Complaints About Marketplace Lenders
March 7, 2016
The Consumer Financial Protection Bureau wants consumers to voice their complaints about marketplace lenders on their website, according to an announcement made earlier today.
“When consumers shop for a loan online we want them to be informed and to understand what they are signing up for,” said CFPB Director Richard Cordray. “All lenders, from online startups to large banks, must follow consumer financial protection laws. By accepting these consumer complaints, we are giving people a greater voice in these markets and a place to turn to when they encounter problems.”
A consumer guide to marketplace lending published by the CFPB, says “If you consider a marketplace lender as one of your options when shopping for a loan, keep in mind that marketplace lending is a young industry and does not have the same history of government supervision and oversight as banks or credit unions. However, marketplace lenders are required to follow the same state and federal laws as other lenders.”
Consumers can submit complaints in the manner they normally would. For instance if the marketplace lender is a student lender, consumers should choose the “student loan” option.
“The CFPB forwards complaints to the marketplace lender and works to get a response – generally within 15 days,” the CFPB says. “Consumers are given a tracking number after submitting a complaint and can check the status of their complaint by logging on to the CFPB website. The CFPB expects companies to close all but the most complicated complaints within 60 days.”
This new complaint feature applies only to consumer products, but according to a recent report, business lenders are next on the list.
Merchant Cash Advances Costly But Not Opportunistic, Fed Study Finds
March 6, 2016Only 71% of business owners that apply for a merchant cash advance actually get approved for them.
Equipment loans, commercial mortgages, and company vehicle loans all have higher approval rates than merchant cash advances, a comprehensive Federal Reserve study revealed. Lines of credit were approved just as often as merchant cash advances. Right behind them were business loans and SBA loans at approval rates of 69% and 59% respectively.
The statistics disprove the theory that merchant cash advance companies don’t underwrite or that they are doing so recklessly at the expense of their small business customers.
Only 7% of small businesses have ever even applied for a merchant cash advance.
The propensity to apply for a merchant cash advance ranked higher among businesses less than two years old and those seeking less than $100,000.
Notably, small businesses reported being much less satisfied with online lenders than banks, but overwhelmingly cited cost as the reason behind it. Big banks scored worse on transparency than online lenders among dissatisfied borrowers.
The findings are not surprising. 35% of small businesses said that speed of the decision process was a factor influencing where they applied. 37% said ease of the application process was a factor and 40% said the perceived chance of being funded played a role.
In these areas, online lenders walloped small and large banks. More than 50% of dissatisfied bank borrowers fingered a difficult application process as a reason and more than 40% said it was the long wait for a credit decision.
The results fall in line with expectations, that speed and ease often come at a cost. However, merchant cash advance companies do not appear to be approving applicants just to opportunistically charge a high fee. The approval rates are in line with other types of financial products, and are even less likely to be approved than a mortgage.
Hedge Funds Will Call The Shots in P2P Lending, Survey Says
March 6, 2016
P2P lending platforms will increasingly rely on larger hedge funds to fund their expansion, The New York Hedge Fund Roundtable believes.
The Roundtable is a non-profit organization committed to promoting education and best practices in the hedge fund industry. Timothy P. Selby, the organization’s president, said of a recent study they conducted, that institutional investors can’t afford to ignore Peer-to-Peer (P2P) lending. “Investing in peer to peer loans not only means the promise of high risk-adjusted returns, such private debt investments also provide less correlated risk relative to more traditional fixed income portfolios,” he said.
And as P2P platforms expand and need money, hedge funds feel it is they that will have the leverage in the negotiations.
In a survey of their members, 21% of respondents chose Lending Club as the business they believe best represents the future of banking 10 years from now. 11% picked Capital One. 6% chose Facebook.
Yet only 17% of respondents had actually actually invested in P2P lending so far. Part of the hesitation comes from the present state of interest rates. 20% of respondents believe that institutional capital will move away from P2P lending and back into traditional finance once interest rates start to really increase.
In the meantime, increasing interest in P2P lending by institutional investors will lead to riskier loans, they say, and it could lead to another credit crisis.
Credit crisis? What Credit crisis?
78% of respondents said history has proven that investors have incredibly short memories and that if securitizations backed by P2P loans offer attractive returns investors will likely dive in.
Of the survey respondents, 24% were fund managers; 9% were allocators; 9% were risk management or trading; 46% were service providers; and 12% were other industry participants.
