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
OnDeck Loans Record $557 million in Q4, But Reports $4.6 Million Loss
February 22, 2016
OnDeck funded a record $557 million in Q4 2015, generating $67.6 million in revenue. That came at a cost because they reported a $4.6 million GAAP net loss.
All told however, they loaned $1.9 billion to small businesses in the U.S., Canada and Australia for the full year of 2015.
A record $201.9 million of loans were sold through OnDeck Marketplace® in Q4.
Provision for loan losses during the fourth quarter of 2015 decreased to $20.0 million, down from $20.4 million in the comparable prior year period. The Provision Rate in the fourth quarter of 2015 was 5.6% compared to 6.7% in the comparable prior year period.
OnDeck was up nearly 5% for the day in the hours before earnings were reported. The company has regained some public favor after a partnership with JPMorgan Chase was announced in December. Still, critics have pointed out that the company’s last few positive quarters were dependent on their ability to sell existing loans off their balance sheet to book the necessary revenue to show a profit.
OnDeck has seemingly now returned to their original plan, growth over profits.
In Q3, origination growth had slowed. They reported a profit of $3.7 million on $482 million worth of loans originated. During that quarter, reliance on third party brokers slowed, dipping to 18.6% of their deal flow, but OnDeck CEO Noah Breslow hinted that they may have reached a floor in that ratio. That channel could stabilize and even grow a little bit, he said.
Q4 indeed saw a resurgence to 20.1% from the brokers.
The effectiveness of direct mail marketing was hotly debated in the 2015 Q2 Q&A, but seemed to have relaxed in Q3.
OnDeck’s share price was still down by more than 50% from their IPO, a factor that has potentially contributed to the postponement of other online lending IPOs.
A Loan Bazaar Where You Can Literally Buy Loans for Pennies – FOLIOfn
February 22, 2016
Welcome to the true marketplace where you can trade debt on any level you like
You haven’t experienced marketplace lending until you’ve entered the world of FOLIOfn. Operating as a secondary market for Lending Club and Prosper investors, the platform offers more than just liquidity for holders of 3-5 year consumer debt-backed notes. It’s a sort of anything-goes bazaar for loans, the kind of place where you can bet on a borrower making their last and final loan payment after having made 35 straight monthly payments with no problems.
For the price of 82 cents, an investor could literally buy the remaining 83 cent principal balance (their last payment) on a $25 3-year note.
Why invest in a borrower with no proven track record anyway? On FOLIOfn, you don’t have to. You can buy a note from someone else after the borrower has made their first few payments.
And what if you just want bigger? You can get that. Some investors are offering much larger loan pieces. You can even buy whole loans from them. Would you buy the entire remaining principal of a $6,000 loan paying 21% APR if you knew the buyer had already made all their payments in the first year on time? Somebody will make you that deal, but you’ll have to pay more than the outstanding principal balance to get it.
FOLIOfn has a bet for everyone. You can buy notes for example where the borrower’s FICO score has dropped by more than 200 points but is still surprisingly current on their loan. A drop by that much likely indicates that the borrower is delinquent on their other forms of credit, so you might want to get a discount on buying it. And yet, many investors list such loans at a premium, which could indicate that scarcity is a prevailing force.
The effects of scarcity are certainly evident on FOLIOfn, considering how many loans are up for sale on the platform in which no payments have been made yet because the loans are newly issued. With these, a different kind of loan speculator could hope to book a quick 5% gain in just 1 month by reselling a highly prized note to someone who seeks it. Do this over and over 12x a year and well… you could make a killing.
Millions of dollars worth of loans and loan pieces are being marketed at any one time. At the time this was written, there were more than 300,000 trades offered. Of course, they’re all ASKs. There’s no BIDs on FOLIOfn, which limits the efficiency of the marketplace and creates information asymmetry. Hence, a lot of the proposed trades are terrible and investors on industry forums are at times not shy about expressing their hope that a sucker buys them.
And just like one might expect at a bazaar, you don’t always know exactly what you’re going to get. Last year on the Lend Academy forum for example, investors pointed out that you could inadvertently buy notes that had already paid off. What was happening was that a note was being sold from one investor to another before Lending Club could process that the note had been paid off in full. If the investor paid a premium for it, they would immediately lose the premium and forfeit the future interest, causing a loss. The buyer would likewise take home a free premium.
Consider this conundrum. The note selling for 82 cents has a remaining principal balance of 83 cents that is coming due in less than a month, a bet that supposedly promises 1 cent profit (before the 1% Lending Club fee) if it works out. According to the borrower’s payment schedule however, they’re apparently only supposed to make one last payment of 76 cents, 7 cents less than the remaining principal officially stated on the account. If that’s correct, then a buyer’s best outcome is a loss of 6 cents (7 cents after the 1% Lending Club fee) and a worst case loss of 82 cents. It’s not uncommon for investors to notice and complain about these weird discrepancies (sometimes chalked up as rounding errors), but that’s the nature of the market. Confusing information is part of the trade.
To FOLIOfn’s credit, there is one cardinal rule, CAVEAT EMPTOR. The following is prominently displayed on top of the platform:
Notes are highly risky and only limited information is available about them. They are suitable only for investors whose investment objective is speculation. You could lose most or all of the money you invest in them. Folio Investing has no role in the original issuance of the Notes and is not responsible for and does not approve, endorse, review, recommend or guarantee the Notes or the accuracy, reliability, or completeness of any data or information about the Notes. See the Important Disclosures page for additional important information.
In the FOLIOfn loan bazaar, the numbers don’t always add up and the borrowers and traders are anonymous. Welcome to lending’s real marketplace, where it’s really hard to know much of anything.
Luckily, beginners only need bring pennies to start trading.
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There’s actually something called The Penny Note Strategy (AKA The Toilet Note Strategy). You can read about it on Peter Renton’s blog.
Without Scalia, Media Outlets Reporting Marketplace Lenders Supposedly Doomed With Supreme Court Case (They’re Wrong)
February 18, 2016
Without Antonin Scalia, marketplace lending is apparently doomed, according to news outlets reporting on the matter. A high profile case (in the banking world anyway) known as Madden v Midland, is pending before the U.S. Supreme Court. Midland Funding seeks to reverse an appellate court ruling that said that interest rate preemption under the National Bank Act did not apply to them and thus they were subject to New York State’s usury laws.
According to BankRate.com’s reporting on the Scalia angle, “The U.S. Supreme Court has been asked to review a lower court decision that prevents marketplace lenders from getting around state usury laws by hooking up with banks headquartered in states that don’t have those rules.” But that’s not true at all. The case isn’t about marketplace lenders and the appellate court’s ruling isn’t currently preventing marketplace lenders from doing anything.
Midland Funding is a debt collector. Saliha Madden, a New York resident, obtained a bank issued credit card with an interest rate of 27% APR, racked up charges and didn’t pay them. The debt got written off and the bank sold the debt to Midland Funding. Midland continued to assess interest on the credit card debt while it attempted to collect. Saliha Madden sued on the basis that Midland was violating New York State usury laws. Midland Funding won and Madden appealed. Then a weird thing happened. The United States Court of Appeals for the Second Circuit held that in order “[t]o apply NBA preemption to an action taken by a non-national bank entity, application of state law to that action must significantly interfere with a national bank’s ability to exercise its power under the NBA.”
And from there began the somewhat justifiable panic in the marketplace lending industry. If a collector buying a charged-off debt from a bank can’t continue to enforce the terms as originally contracted, then could you make the same argument for loan platforms that buy newly issued loans? The answer is simply that you could make the argument. It’s not definitive. It’s one of those things that would likely have to be challenged in court by a borrower confident that a case involving a debt collector and a bank issued credit card somehow related to the matter between a marketplace lender and a borrower.
But there’s another problem in trying to make that link.
The Madden v Midland case involved a national bank and preemption under the National Bank Act. Many marketplace lenders such as Lending Club are not even conducting their business with national banks but with state-chartered banks. Their preemption ability falls under the Federal Deposit Insurance Act.
Lending Club did not shut their business down after the appellate court ruling and they didn’t stop lending in the states in which the Second Circuit has jurisdiction (New York, Connecticut and Vermont). Lending Club’s CEO Renaud Laplanche even expressed little worry about how it would impact their business when asked about it during their 2015 Q2 earnings call.
American Banker reported that “Scalia’s Death Is a Setback for Online Lenders in Key Court Fight.” But it’s really only a setback in the sense that a loss would peel away just one layer of the onion. Marketplace lenders weren’t going to suspend their operations regardless of whether or not the Supreme Court heard the case and regardless of whether or not Scalia was there to dissent.
Consider also that exporting home state interest rates using national and state chartered banks is only one system available to marketplace lenders. Square’s working capital program for example, is actually structured as a purchase of future receivables. There is no bank, no loan, and no preemption. An unfavorable Madden v Midland ruling would have no impact on that model or the dozens of merchant cash advance companies that offer similar products.
There’s also state by state licensing, which while costly and time consuming to set up, would at least allow marketplace lenders to lend in many states without relying on a bank or preemption. “I think the stronger business model is the state licensing model, as opposed to partnering up with a bank,” said Richard Eckman, a lawyer at Pepper Hamilton, to American Banker.
Even further distanced from this case are commercial marketplace lenders since state lending laws are generally less burdensome for business-to-business transactions.
And even if all else failed, a choice-of-law provision in a loan agreement can potentially decide which state’s law applies. Lending Club’s Laplanche said as much last year. “We continue to operate in the Second Circuit district where that decision was rendered, exactly as we did before and are relying on our choice of law provisions,” he said during an earnings call.
Scalia’s absence is at most a bummer for marketplace lenders. A win would only serve to tie up loose ends and finally put an end to bank charter model naysayers. Madden v Midland became so famous because the ruling was just so shocking. It practically begged the industry to take a look and wonder, what if? If this, then why not that? And if that, then who’s to say not this then? Even on deBanked, we’ve explored the nightmare scenario in which a well established system totally unravels and the world ends. The real world holds much more promise.
The real losers in an unfavorable Supreme Court ruling would be national banks and credit card companies. And that’s because if debt collectors can’t enforce their loan agreements, then they’re not going to buy that debt to begin with. And if debt collectors won’t buy that debt, then banks are going to have to figure out a better way to collect on their own, else they make even less risky lending decisions.
Something tells me though that banks would find a creative work-around for that anyway. Because if they didn’t, Madden v Midland would end up being a massive boon for marketplace lenders.
Imagine that.
DBRS Gives Marketplace Lenders High Marks
February 17, 2016After it was announced that new-age student lender Earnest had securitized $112 million worth of notes, another name returned to the forefront, DBRS. Founded in 1976 as Dominion Bond Rating Service, DBRS is a smaller ratings agency than Standard & Poor’s, Moody’s Investors Service and Fitch. Nonetheless, they rated Earnest’s senior notes an “A” which indicates they are of a “good” credit quality.
DBRS is a big name in the marketplace lending industry’s securitizations and they’ve historically doled out optimistic reports. In the case of SoFi for example, several tranches received AAA ratings in 2015, putting them on par with the United States Government in terms of safety.
Below is a list of some of the ratings stamped on new securitizations:
| Date | Company | Amount | DBRS Rating |
| 5/28/14 | OnDeck | $156,680,000 | BBB |
| 5/28/14 | OnDeck | $18,320,000 | BB |
| 10/20/14 | CAN Capital | $171,000,000 | A |
| 10/20/14 | CAN Capital | $20,000,000 | BBB |
| 2/10/16 | Earnest | $34,710,000 | A |
| 2/10/16 | Earnest | $70,240,000 | A |
| 2/10/16 | Earnest | $7,050,000 | BBB |
| 11/19/15 | SoFi | $154,903,000 | AAA |
| 11/19/15 | SoFi | $334,778,000 | AAA |
| 11/19/15 | SoFi | $46,691,000 | BBB |
| 8/4/15 | SoFi | $136,500,000 | AAA |
| 8/4/15 | SoFi | $250,800,000 | AAA |
| 8/4/15 | SoFi | $30,300,000 | BBB |
| 6/9/15 | SoFi | $146,676,000 | AA |
| 6/9/15 | SoFi | $235,445,000 | AA |
| 6/9/15 | SoFi | $29,780,000 | BBB |
| 2/3/15 | SoFi | $151,500,000 | AA |
| 2/3/15 | SoFi | $162,300,000 | AA |
| 11/10/14 | SoFi | $105,700,000 | AA |
| 11/10/14 | SoFi | $197,500,000 | AA |
| 7/15/14 | SoFi | $125,500,000 | A |
| 7/15/14 | SoFi | $125,500,000 | A |
| 12/24/13 | SoFi | $151,800,000 | A |
In the case of Earnest, the securitized loans represent borrowers with an average FICO score of 775 and an average annual income of $143,535. The average borrower is 32-years old. 81% of them have a graduate level degree.
Since Earnest launched two years ago, they’ve never had a loan go more than 60 days delinquent. That’s out of 5,580 borrowers which represents about $400 million in loans.
“100% of the pool contains refinancings of existing student loan debt,” the DBRS report says. “Loans are used to prepay a borrower’s existing eligible educational loan debt.”
While similar to SoFi’s prime customer base, DBRS explains that among Earnest’s weaknesses are their limited operational history and lack of data to gauge how their loans would perform during a recession.
Prosper Has Increased Its Estimated Loss Rates
February 15, 2016“Effective today, Prosper has increased its estimated loss rates and the price charged for risk on the loans originated through the platform,” said an email to investors on Monday. “We believe this move ensures that our borrower payment dependent note and whole loan products remain competitive for our investors in the current turbulent market environment that we have witnessed since the beginning of 2016.”
Prosper is one of only two marketplace lending platforms in the US that is open to retail investors. Founded in 2005, the company has made over $5 billion in loans. They were surpassed by Lending Club in the race to dominate the market after being nearly destroyed by both the Great Recession and a class action lawsuit that claimed they sold unqualified and unregistered securities in violation of the California and federal securities laws. The suit was settled in 2013.
The going forward rate increase affects one category of high risk borrowers by as much as 199 basis points. Meanwhile, even prime borrowers will experience increases of up to 29 basis points.
These are the changes according to Prosper:
Estimated Aggregate Impact to Prosper Portfolio of Loss and Price Changes
Proposed Pricing Modifications for the Week of 2/15
Last week, the company also refaced their entire site. As a Prosper investor, the new user interface greatly improves the user experience.
Federal Usury Caps Unlikely After CFPB Statements
February 15, 2016
Business lenders and merchant cash advance companies can breathe a little earlier since David Silberman, the CFPB’s acting deputy director, said at a House hearing that federal usury caps were off the table for the nation’s most controversial form of lending, payday loans. “We will not establish a usury cap and interest-rate limits on these or any other lending product,” Silberman said. “We have not contemplated doing so and we will not do so.”
This should quell speculation that CFPB involvement or regulatory activity in other areas of lending, will eventually include interest rate caps at the federal level. The Dodd-Frank act actually bars the CFPB from setting rate caps but that hasn’t stopped lenders from thinking it might still happen otherwise.
Two years ago, Barney Frank, a co-sponsor of the Dodd-Frank act, said on the record that he himself was against federal interest rate caps when asked if they should exist in business lending.
Meanwhile, presidential candidate Bernie Sanders has proposed a nationwide usury cap of 15% APR. How exactly he would make that a reality, especially since it is unlikely to gain congressional popularity, is uncertain.
California Lending License Process Isn’t Easy, State Painfully Slow on Paperwork
February 15, 2016
Quarterspot recently became a licensed lender in California. And it wasn’t quick, according to Quarterspot’s EVP Mike Green. It took much longer than a year, he says. Their CFLL license # is “603-K646”, but you can’t confirm that with California’s registry because the database hasn’t been updated in 42 days.
Welcome to the State that apparently has an abundance of resources to launch inquiries into marketplace lenders, but little time to work with the ones eager to operate in full compliance.
California attorney Paul Rianda told deBanked back in December that it can take months just to get a reply on a lending license application. And when they do reply, they’re sticklers over details. “I have experienced a situation where the examiner rejected an application because the name of the company was incorrectly spelled on the application,” Rianda wrote. “The name of the company was submitted on the application with ‘Inc’ instead of the complete ‘Inc.’ at the end of the company’s name.”
Yellowstone Capital’s Isaac Stern said it took them 15 or 16 months to get their license and required a lot of legal help from law firm Hudson Cook LLP. The cost, including lawyers’ fees came to about $60,000. “Man, it was like pulling teeth to get that license,” Stern told deBanked last year.
Tom McCurnin, an attorney for Barton, Klugman & Oetting LLP, disagrees. In an op-ed he wrote for Leasing News to counter a story published by deBanked, McCurnin wrote, “I would point out that the process of obtaining a California license is awfully easy, and involves a small filing fee and a bond.”
But for those not from the leasing industry, “easy” is not a word that comes to mind. “They’ll take away your license if you even sneeze the wrong way,” Stern previously told deBanked.
Worse, a change in the law regarding the payment of referral fees has led to a flurry of questions from lenders and commercial finance brokers alike. Law firm Hudson Cook LLP and Patrick Siegfried of the Usury Law Blog, both even had to weigh in on the issue. (See: Can California Lenders Pay Referral Fees to Unlicensed Brokers? | California Finance Lenders Push Legislative Agenda in Response to Growth of Alternative Small Business Finance Industry)
And even more confusing, is whether or not a license can be transferred. In February of 2015 for example, LoanMe Inc was ordered by the Department of Business Oversight to stop using what they claimed was another company’s lending license. But then a month later, the order was paused upon receiving “additional information” and then withdrawn.
As it stands with the State’s marketplace lending inquiry, 14 lenders have to respond by March. Among them is Kabbage Inc., Prosper Marketplace Inc., Avant Inc., On Deck Capital Inc. and Social Finance Inc., according to the Wall Street Journal.
Neither Kabbage or OnDeck are licensed California lenders from what deBanked could ascertain. But both would be legally eligible to make loans in the State through their chartered bank relationships.
“These online lenders are filling a need in today’s economy, and we have no desire to squelch the industry or innovation,” said DBO Commissioner Jan Lynn Owen in a December announcement.
In the meantime, being a licensed lender in the state is being perceived as a competitive advantage. Quarterspot for example, wants brokers to know that they can do loans in California now. Of course, after having waited painfully long to become licensed, it’s disheartening for them to see that the state hasn’t even updated their records since January 4th.
deBanked attempted to reach out to the California Department of Business Oversight a week ago to find out why their data was so slow to be updated. Nobody responded.
Lending Club TurboTax Integration Attempts to Solve Marketplace Lending’s Tax Problem
February 15, 2016
Lending Club’s retail investors scored big on February 12th when they announced an integration with TurboTax software. The complexity of marketplace lending from a tax perspective has historically been one of the most prohibitive cost barriers for retail investors. Unlike savings accounts which issue a standard 1099-INT, Lending Club (and Prosper) issue both a 1099-OID and a 1099-B.
According to the IRS, the 1099-OID should “state the excess of an obligation’s stated redemption price at maturity over its issue price. Original Issue Discount (OID) on a taxable obligation is taxable as interest over the life of the obligation. If you are the holder of a taxable OID obligation, generally you must include an amount of OID in your gross income each year you hold the obligation.”
For the average person, explanations like these are enough to warrant the help of an accountant. But that’s a problem for people that are investing a small amount. For example, if $10,000 invested in Lending Club notes generated $700 in income for the year, it wouldn’t be practical to pay an accountant $500 to help you figure it all out. Between that and the actual taxes owed, an investor could easily end up losing money.
Lending Club tries to make it all as easy as possible for investors with their step-by-step tax guide, but it can still feel a little confusing. One problem to consider is that investors can only deduct up to $3,000 of their losses if they don’t have any other capital gains.
While an integration with TurboTax is a win for retail investors, marketplace lending had long been a thorn in the side for TurboTax. Complaints about the software not being “peer-to-peer friendly” have haunted Intuit’s help pages for years.
