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
Letter From the Editor – March/April 2016
March 1, 2016
In early 2016, a recession seemed inevitable, until it didn’t. Rumors of rising defaults across a variety of marketplace lenders have been defended as falling within model estimates. The stock market’s sudden plunge recovered. And Madden v Midland’s long-term impact is being chalked up as overblown. All is well again, well mostly anyway. Institutional investors have gotten a little spooked and the once insatiable appetite seems to have become just a little bit satiable.
But we’re back, and so is the beast that has come to be known as “marketplace lending.” The FDIC says that term 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. It can “include any practice of pairing borrowers and lenders through the use of an online platform without a traditional bank intermediary,” they wrote in their Winter 2015 Supervisory Insights report.
In this issue, we examined one piece of marketplace lending that has created many success stories, the merchant cash advance industry. For years, it’s turned hungry 20 somethings into front-page worthy stars. Will that trend continue or has the moment passed? The quality of leads will play a role in who makes it big and who doesn’t, said some of the folks we interviewed. Ironically, while the industry is often considered to be online, the Internet is reportedly becoming a less reliable place to acquire customers because of competition and cost. Having problems with leads? You’re not alone, we’ve learned.
But not everyone is struggling. In March, we published a list of the top 8 alternative small business funders of 2015. The numbers were either reported to us directly or we determined them using publicly available information. In this issue, we’ve got the year-over-year statistics for 18 companies. Some of them might surprise you.
I don’t want to finish off my introduction to this issue with the R-word, but since there were signs of weakness earlier this year, we did ask the wider marketplace lending industry what to expect from the next recession. Everything is at risk, they said, from borrower defaults to institutional backing to regulatory action. Marketplace lending, however big and strong it is now, is not believed to be impervious to market forces. Will the beast prevail? Or is it destined to fail?
–Sean Murray
Task Force Convenes to Investigate Terrorism Financing
March 1, 2016
It’s a hearing that the country probably wishes it didn’t have to have. But after it was discovered the San Bernardino terrorists had obtained a loan from an online lending marketplace, government officials and news media wondered if something could’ve been done to prevent it.
Today, members of the House Committee on Financial Services are convening the terrorism financing task force for a hearing titled, “Helping the Developing World Fight Terror Finance.”
“As terrorist financing and other illicit financial activity continues to pose risks to the international financial system, some have called for greater [anti-money laundering / combating the financing of terrorism] cooperation between, and among, national and international agencies,” reads a memo circulated in advance of the hearing.
Back in December, committee spokesman Jeff Emerson said that the task force was expected to look at whether any new regulations are needed after the San Bernardino shootings, according to the Los Angeles Times.
The Hill reported that when asked whether online lenders would get extra scrutiny, Committee Chairman Jeb Hensarling said, “Everything’s on the table.”
In the latest memo however, the words online, marketplace lending, Prosper and other related terms were not on the agenda, but that may be perhaps because the focus of this hearing is on the “developing world.”
The last time this task force was convened was a month ago on February 3rd, when they held a hearing titled, “Trading with the Enemy: Trade-Based Money Laundering is the Growth Industry in Terror Finance.” Online lending was not part of that agenda either.
It is uncertain if online lending will actually become a focus or be discussed by this task force in the future. At this point, it does not appear to be a pressing matter.
CFPB To Begin Accepting Small Business Loan Complaints
February 29, 2016
Unhappy with your small business loan? The CFPB wants you to complain to the federal government about it. Small business loans including term loans, credit lines, and business credit cards, among other products, and lenders both small and large banks and non-banks such as online or marketplace lenders will soon all answer to the CFPB.
“Subject to an assessment of feasibility, the Bureau’s consumer response team will build the infrastructure to intake and analyze small business lending complaints,” a new priority report says.
That would add a new category alongside mortgages, student loans, vehicle loans, and payday loans.
Accepting these reports will likely mean that small business lenders would have to respond directly to the CFPB. Companies who receive a lodged complaint typically have 15 days to provide an answer. Both the complaint and the answer are stored in a public database that anyone can view.
In their report, the CFPB states that “existing research suggests that significant discrimination against minorities may exist in the small business lending market.” However, no link to any such research is provided and historically they’ve made such judgments (with stunning inaccuracy) by guessing the racial makeup of last names.
The CFPB accepts a wide range of complaints. Some companies have been reported simply because a company representative came off as rude over the phone. In other cases, company customer service was reportedly too slow or website outages caused undue stress.
Small business lenders can’t be penalized by the CFPB, but receiving a disproportionate number of complaints could certainly place one on a regulatory radar.
Over the next two years, “the Bureau will build a small business lending team and begin market research and outreach for rulemaking on business lending data collection,” the report promised.
PayPal’s Merchant Cash Advance Program Grows, Performance Improves
February 27, 2016The PayPal Working Capital program has advanced more than $1 billion to small businesses since inception. Rooted in merchant cash advance methodology since PayPal withholds a percentage of each transaction until receiving payment in full, they are not actually buying future receivables. Rather, they originate loans through WebBank, the same Utah-chartered industrial bank that OnDeck uses. But OnDeck’s payments are fixed and PayPal’s are tied to sales activity.
PayPal’s loans therefore don’t have a fixed term but they evaluate historical sales activity and use that to project a loan payoff usually within 9 to 12 months. According to their Q4 2015 earnings report, their 2015 results performed just as well if not better than their 2014 results.
$421 million was outstanding at the end of 2015 compared to $103 million at the end of 2014. 77% of the $421 million was on pace to pay off within 30 days of their planned projections. 11.16% was on pace to finish 30-59 days beyond them. PayPal broke it down by dollars in their earnings report.
But we’ve broken it down into percentages below:
| Total outstanding balance | Within Projections | 30-59 days greater | 60-89 days greater | 90-180 days greater |
| $421 million | 77.43% | 11.16% | 4.99% | 5.70% |
| Total outstanding balance | Within Projections | 30-59 days greater | 60-89 days greater | 90-180 days greater |
| $103 million | 76.70% | 9.71% | 4.85% | 6.80% |
PayPal borrowers cannot simply stop accepting PayPal payments in order to avoid loan repayment. They are required to pay at least 10% of their total loan amount (loan + the fixed fee) every 90 days so that they make consistent repayment progress regardless of their sales volume. Notably, their website warns, “If you do not meet the requirements in the above policies and your loan goes into Default status, your entire loan balance could become due and limits could be placed on your PayPal account.” For businesses that depend on PayPal sales, that is certainly a downside worth avoiding.
Lending Club Shifts Fee Arrangement With WebBank
February 26, 2016
It’s a “belt and suspenders” precaution according to Lending Club CEO Renaud Laplanche. The Madden v Midland case has forced the company to rethink their arrangement with WebBank, the chartered bank that allows them to make loans nationwide. Under the new terms, the fee LendingClub pays to WebBank for the loans it issues will be related to how the loans perform over time.
Even if the U.S. Supreme Court were to rule unfavorably in Madden, Lending Club would still have been able to operate freely under their old arrangement. The change then may be a response to several cases, including ones that have accused online lenders of using chartered bank relationships to carry out alleged abuses. According to law firm Ballard Spahr, a “federal court refused to dismiss Pennsylvania racketeering claims against companies alleged to have partnered with a state bank to market Internet loans illustrates the risks inherent in these relationships and the importance of proper structuring.”
In a brief, Ballard Spahr wrote:
In Commonwealth of Pennsylvania v. Think Finance, Inc., et al., the Pennsylvania AG, working with a well-known private plaintiffs’ firm, claimed that the companies and their individual principal had engaged in a “rent-a-bank” scheme in which a Delaware state bank “acted as the nominal lender while the non-bank entity was the de facto lender—marketing, funding and collecting the loan.”
By WebBank maintaining an interest in the outcome of the individual loans, Lending Club will reduce its potential standing as the de factor lender.
Notably, the breaking story focused on Lending Club. WebBank also has a relationship with others in the alternative finance community such as CAN Capital, Prosper, AvantCredit and PayPal. It’s uncertain if their arrangements will also be subject to change.
OnDeck (ONDK) Stock Continues to Sink. Now What?
February 26, 2016OnDeck reached another new all-time low share price on Thursday, closing at $6.35 but hitting $6.05 intraday. The continued spanking follows their 2015 earnings release that apparently did not impress the market. And there’s many reasons to be troubled by that since the tone of the earnings call oozed of renewed confidence. It was expressed as much in OnDeck Regains Their Swagger in Q4 Earnings Call – Lends $1.9 Billion in 2015
OnDeck can’t win. When growth was high, critics complained about profitability. When OnDeck achieved profitability, critics complained that growth had slowed. On Wednesday, critics hit them with the kitchen sink. Growth has slowed, losses are mounting, guidance was revised down, the JPMorgan Chase partnership isn’t yielding revenue, operating expenses rose, etc.
The real problem now is that they can’t seem to overcome these objections during a period of economic calm. The stock market is currently operating at rather rational levels. The S&P 500 is only down 3% year-to-date. OnDeck is down 35% over that same time period.
In a recession, financial companies can be uniquely vulnerable to irrational fear. JPMorgan Chase for example, lost more than 50% of their market cap between August 2008 and February 2009. This is a nightmare scenario now for OnDeck.
“These companies have been valued as if there’s really no credit risk or capital-markets risk whatsoever,” said Bill Ryan, an analyst at Portales Partners, to the WSJ. “I think that’s what changed.”
“We are not seeing weakness in our portfolio at this time,” said OnDeck CEO Noah Breslow during the earnings call.
Apparently that doesn’t matter and one has to wonder what will in the future.
No, Social Media isn’t the New Credit Score
February 25, 2016
The “social media is the new FICO score” crowd suffered a blow on Wednesday when a Wall Street Journal article reported that it ain’t working too good.
Almost 3 years ago, Kabbage co-founder Marc Gorlin told CNN that small businesses who link up their facebook and twitter accounts up with their system, were 20% less likely to be delinquent on their loans. Around that time, Hong Kong-based Lenddo was heralding other positive claims about the value of social media. In the loans they made in Colombia and the Philippines for example, Slate reported that “they scrutinized the applicants’ connections on Facebook and Twitter and that the key to getting a successful loan from Lenddo was having a handful of highly trusted individuals in your social networks.”
For a time, non-bank lenders were saying that social media was the future of credit. That is until it wasn’t.
The WSJ recently reported that lenders are backing away from social media data because it’s becoming harder to tap into and because of the potential regulatory consequences under fair credit laws. Just last month for example, the FTC published a report titled, Big Data, A Tool for Inclusion or Exclusion? In it, the FTC warned that “if a company targets services to consumers who communicate through an application or social media, they may be neglecting populations that are not as tech-savvy.” The implication is that there is potential for unconscious and unintended discrimination of certain minority groups. “Systemic disparate treatment occurs when an entity engages in a pattern or practice of differential treatment on a prohibited basis. In some cases, the unlawful differential treatment could be based on big data analytics.”
But even then, companies like Kabbage have seemingly softened their stance on the value of social media anyway. “Who your social circle is, or whether you play ‘Mafia Wars’—we haven’t seen that as very valuable,” Kabbage CEO Rob Frohwein said to the WSJ.
Facebook is restricting the depth of data available to third parties now anyway. As a result, dozens of startups (not just lenders) that had been using Facebook data have shut down, according to the WSJ.
Lenders like OnDeck might not be surprised by the industry’s sudden realization. Two years ago at LendIt 2014, company CEO Noah Breslow said you have to be careful with the noise of social media as there can be a lot of false signals. And RapidAdvance COO Joe Looney was already telling CNBC three years ago that his company was “not going to make a decision based solely on a string of online comments on a social-media site” even though they would consider the mere presence of an active social-media footprint to be a “good sign.”
It looks like the future of credit scoring isn’t likely to be social media any time soon. All hail the fundamentals.
Loan Brokers: Here’s How to Submit a Deal to a Licensed California Lender
February 24, 2016
Brokers that wish to submit deals to a licensed California lender must also be licensed in the state. This does not apply when the lender is lending via a chartered bank relationship or if the transaction itself is a purchase of future receivables (AKA a traditional merchant cash advance). QuarterSpot for example, recently became a licensed lender (#603-K646) and will be operational to lend in the state starting on March 7th, according to the company.
While the process wasn’t easy, they want to make sure that brokers are abiding by the rules as well. To this end, QuarterSpot EVP Mike Green posted a link on the deBanked forum to the licensing form that brokers must complete to apply:
We will require our partners to submit their CFLL License as required by the State. Please send those in ASAP to partners@quarterspot.com
1. Licensing form outlining requirements for licensure – http://www.dbo.ca.gov/forms/Finance_Lenders/DBO_CFLL_1422.pdf
2. Article further explaining legislation – http://www.paulhastings.com/publications-items/details/?id=e867e669-2334-6428-811c-ff00004cbded
In addition to the 31 page application is the payment of a $25,000 Surety Bond. Suffice to say, the process and costs are probably not a good fit for a 2-man upstart loan brokerage with a razor thin budget working out of month-to-month office space. But for a moderately sized operation or bigger, being a licensed broker can potentially be a competitive advantage.
The reason that brokers don’t need to be licensed to send deals to lenders like OnDeck, is because OnDeck operates through a chartered bank relationship and is therefore exempt from licensing requirements. As always, ask an attorney for an opinion if you’re not sure or need help. A broker may be just as culpable for submitting a deal to an unlicensed lender as the lender would be for operating unlicensed.
You can check to see if a lender is licensed at http://www.dbo.ca.gov/fsd/licensees/ but keep in mind that the database is rarely updated (the last time was 2 months ago).
Other helpful information
Can California Lenders Pay Referral Fees to Unlicensed Brokers?
Getting a California Lender’s License
