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
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
OnDeck Regains Their Swagger in Q4 Earnings Call – Lends $1.9 Billion in 2015
February 23, 2016
OnDeck’s chief executive Noah Breslow and chief financial officer Howard Katzenberg brimmed with confidence in their Q4 earnings call, assuring investors that it’s full steam ahead. After two previous quarters of profitability and getting no love from the market for it, they’re back to doing what they know best, growing.
OnDeck loaned a record $557 million in Q4, an increase of 51% year-over-year. Despite market fears of an impending economic downturn, the company is just not seeing signs of the alleged doom in the performance of their loans. “We are not seeing weakness in our portfolio at this time,” Breslow said.
Later in the call they reemphasized that their early warning systems are not setting off any alarms. In fact, they said, origination growth is their main goal in 2016. “We currently believe we can grow annual originations by 45% to 50% in 2016,” Katzenberg said.
OnDeck reminded investors that their unique model is specifically built for economic downturns. Among their strengths are their short duration, pricing spreads and daily payments, they said. Those attributes (which are sometimes criticized by consumer groups today) will serve as the backbone of sustainability if the economy goes south.
Also coming back into the fold are outside brokers, which they refer to as “Funding Advisors.” OnDeck spent a lot of time recertifying those relationships in 2015 and the bulk of the effort associated with that is over, they said. The percentage of loans generated from brokers rose from 18.6% in Q3 to 20.1% in Q4.
They also rebuffed speculation that they were giving up their business model in favor of becoming a bank technology service. While they admitted finding value in the partnerships they’ve formed, particularly with JPMorgan Chase, their core business is and will continue to be lending to small businesses. According to Katzenberg, 2016 will have two key objectives however, “One, launching and refining our pilot program with Chase, and two, continuing to build out our infrastructure to add and support additional partners that understand the small business capital assets problem and are willing to invest in a great customer experience.” They expect to see bank service revenues really begin to scale in 2017 and 2018.
Breslow said in regards to the Chase deal, “Chase will be able to offer almost real-time approvals in the same or next day funding a dramatic improvement over a traditional loan process that might take weeks. Chase will hold the loans, which will be priced like bank products on their balance sheet and OnDeck will earn servicing and platform fees based on volume.”
Their 15+ Day Delinquency ratio was down.
Their partnerships with Minor League Baseball and Barbara Corcoran have been very successful.
They lent $1.9 billion in 2015 across the U.S., Canada, and Australia.
Steal A Deal, Go To Jail – MCA Broker Takes Fight Over Backdoored Deals To Law Enforcement
February 22, 2016
A suspicion over stolen deals has led to the arrest of a sales agent, deBanked has learned.
It’s yet another case of a deal slipping out the back door, one that resulted in handcuffs, according to multiple sources familiar with the matter. deBanked obtained evidence of the arrest, which happened earlier this month, and confirmed the identity of the individual charged.
A sales agent’s ill-fated meeting with law enforcement began when an MCA brokerage suspected their hard-fought applications were being rerouted to a third party by way of a New York based funding company they usually submit to, according to one source. To confirm these suspicions, they submitted at least one funding application that was tagged with a specially designated phone number that they possessed. The tactic would allow them to do a clean trace on their deal by seeing who called upon that number, multiple sources confirmed.
Sure enough, someone other than the funding company reached back out to them, not knowing it was a trap. Unfortunately, that call wasn’t conclusive enough to connect it to the funder, according to one source. The sales agent attempting to snatch the deal wasn’t employed by the funder and the funder wasn’t sure how the sales agent was getting the deal in the first place. Somehow this guy was getting data he wasn’t supposed to be getting and the funder wanted nothing more than to make sure their integrity remained intact, a source said.
The victimized brokerage set their sights on the rogue sales agent and together with the cooperation of the local police department, apparently staged a sting operation. The rogue agent allegedly attempted to sell the stolen deal data to an undercover cop who was assisting with the case.
The suspect was charged with criminal possession of computer related material, a Class E felony, and released on recognizance three days later, according to arrest records obtained by deBanked. The penalty for such a crime can earn an offender up to 4 years in prison.
The funding company and brokerage are reportedly both relieved to have gotten to the bottom of the issue. Notably, in this case of deals slipping out the back door, it was the alleged recipient of the stolen deals that was charged. The hole that allowed him to get those deals in the first place has apparently resolved itself, sources said.
In the September/October 2015 issue of deBanked Magazine, interviewed MCA brokers agreed that the industry should police itself when it comes to backdooring. One brokerage, although not one that was named in that article, apparently took that advice literally when they enlisted the police to assist them.
All the sources to this story agreed that the arrest should serve as a warning. Backdooring deals has to stop, they concurred.
—
The name of the accused and the names of the sources in this story were kept anonymous because it’s an ongoing criminal matter. The suspect is innocent until proven guilty.
