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
Chicago Resumes Call for Protection of Small Business Owners Against Predatory Lenders
February 12, 2016
Chicago City Treasurer Kurt Summers has picked up where Rahm Emanuel left off a year ago. During a January 25th Illinois Senate Financial Institutions Committee hearing named, Small Businesses, lack of access to capital, and predatory lending practices, Summers called for new legislation to protect small business owners from misleading and dishonest predatory lenders.
OnDeck we mean you
Spencer M. Cowan, Senior Vice President for Research, Woodstock Institute, also testified during the hearing and referenced OnDeck specifically. “The terms do not, without calculations that few people can make, let the borrower know that the loan will take a full year to repay with an effective interest rate of just under 70 percent,” he said. Cowan’s position was that banks need to lend more so that small businesses don’t need such alternatives. “If businesses do not have access to loans from banks, then they are probably going to resort to the same types of strategies as consumers who can’t get small loans from banks,” he said.
Cowan cited a report he prepared 18 months ago that examined the relationship between banks and the racial makeup of the small business owners they lend to. The sources he cited about alternative lending were blog posts written by industry critic Ami Kassar.
Treasurer Summers meanwhile recommended the following measures be included in draft legislation to protect small business owners:
- Require loan terms to be clear and unequivocal. Loan terms should be clearly stated using straightforward language and the interest rate should be clearly disclosed as an annualized interest rate or an annual percentage rate (APR).
- Loans should be free from traps. Borrowers should not be hit with new fees on existing principal if they refinance or modify a loan. Borrowers should not be charged interest or periodic costs for the remaining period of the loan if they pay it off early.
- Lenders should be required to display information about the results of their previous loans. This information could be anonymous and in the aggregate, but would give borrowers important data points as they determine whether or not to use a particular lender. If borrowers are able to see that a lender has a pattern of providing loans that are not paid back or have caused businesses to fail, they will be more likely to choose a more reputable lender.
- Conflicts of interest should be disclosed to borrowers. Borrowers should know what types of incentives are driving the lender and whether the broker will receive higher fees for using certain lenders or types of loans.
- Because many of these loans are made online, lenders must take substantial steps to protect the data privacy of loan applicants. Borrower data should not be allowed to be sent to third parties without the written consent of the borrower and lenders should be required to take steps to ensure that the data is encrypted and protected from breaches.
Unsurprisingly, the Illinois Bankers Association (IBA), who was not even invited to the hearing, felt compelled to issue a public statement. In a letter addressed to Chairperson Jacqueline Collins, the IBA was rather protective of their own interests. “We share the Committee’s concern with the proliferation of these under-regulated lenders, sometimes known as ‘fintech’ companies,” they stated. “This relatively new ‘shadow banking’ industry — unlike traditional financial institutions — is in many respects unregulated. Consequently, some bad actors are engaging in predatory lending practices with repayment terms that too often are forcing small business customers into cycles of debt.”
However they tapered down the rhetoric and made a technology-forward plea. “We do think it is important for lawmakers to preserve the benefits of lending innovations, and to ensure that mainstream financial institutions are not prevented from adopting technologies that result in better customer service,” they said. “For example, mobile lending interfaces and faster loan approvals, with appropriate safeguards, provide many potential benefits and match changing customer needs and expectations. We should seek to preserve these innovative solutions that benefit entrepreneurs and small businesses, while at the same time curbing abusive lending practices.”
A public digital transcript of the hearing is not currently available.
Lending Club Borrowers Are Paying Off Really Early – And There’s Something Weird About It
February 11, 2016
This week I surpassed more than 500 lifetime early note payoffs on Lending Club. Considering that loans on the platform are either for a fixed term of 36 months or 60 months, I was quite surprised to see that the average early payoff was happening just 10 months in. My portfolio is too young for even the first loans I ever bought to have reached maturity so the data isn’t entirely statistically relevant. But to put what I’ve experienced so far in perspective, out of every note I’ve ever bought on this platform up to and including today, 17% of them have already paid back early in full.
One borrower paid back their 3-year loan in just 8 days!
Of the 145 5-year notes I bought just 20 months ago in May 2014, 36% of them have already paid back in full. This is astounding, but apparently old news. A PeerCube analysis conducted two years ago revealed that 80.6% of all fully paid loans were pre-paid in full before reaching maturity.
At face value, these statistics could be used to boost investor confidence. The loans are so affordable that just look at how many people are paying off early! But according to Anil Gupta at PeerCube, these borrowers might not be paying these loans off at all. Lending Club might be refinancing the loans with a new loan, which cashes out the original investors early in the process. As said in his analysis:
A PeerCube user who is also a borrower on Lending Club mentioned that he has been receiving requests from Lending Club to refinance his loan. Such offers are very attractive to borrowers whose FICO score may have gone up since taking the first loan. In this case, the second loan may come with lower interest rate due to improved credit score. Moreover, there is no deterrent in the form of pre-payment penalty for borrowers to refinance the loan. Lending Club benefits from a borrower refinancing an existing loan by charging additional origination fee from the second loan, i.e. more revenue.
Lending Club’s website says that to be eligible for a second loan, borrowers have to have made 12 months of successful, on-time payments on their existing Lending Club loan. “Sometimes,” however, they “identify customers who are eligible for an additional loan before those 12 months and ask them to apply.” That’s the policy for having two active loans at once, not for refinances specifically.
Lending Club’s quarterly earnings reports make no clear mention of repeat borrowers and there’s no way for an investor to know if the debt consolidation loans they’re taking risks in are really just refinances of existing Lending Club loans. But even if they were, that wouldn’t necessarily make them a bad thing.
Would you rather invest in a borrower who has already proved 12 months of positive payment history OR somebody brand new? But then again, would you rather invest in a refinance of a loan that was originally taken to refinance a credit card?
There’s a downside to loans being paid off early. If an equal reinvestment opportunity does not exist to immediately replace the paid off loan, then the investor loses. If they are no longer reinvesting anyway, then an early payoff deprives the investor of the interest to offset future chargeoffs from the remaining loans that will go bad. And worse yet, investors are forced to pay a penalty to Lending Club for any loan that pays off early after the first 12 months in the form of a 1% fee on all outstanding principal. Seriously, investors are penalized for early payoffs for which they have no control over and are not allowed to know why or how the borrower paid off earlier.
Sounds very weird to me…
Yirendai Gets Smoked on Global P2P Lending Fears
February 10, 2016
The market has turned overwhelmingly bearish on tech-based lending companies lately, but no company has perhaps felt the brunt more than Yirendai, a Chinese company listed on the New York Stock Exchange. Since their IPO less than two months ago, the price has already dropped by more than 60%. Investors seem to be basing that judgment on one thing, the general fear of that business model in China.
And who can blame them? Only a week ago, Ezubao, one of China’s largest peer-to-peer lenders, was revealed to be a $7.6 billion Ponzi scheme. More than 900,000 investors were impacted. The CEOs of more than 250 similar companies there are in hiding after experiencing failures of their own.
On February 3rd, Yirendai announced a framework agreement with China Zheshang Bank Co., Ltd and CreditEase Pucheng.
“I am pleased to announce the cooperation between Yirendai and Zheshang Bank in the field of microloan lending and consumer finance,” said Ning Tang, Yirendai’s Executive Chairman. “This cooperation illustrates Zheshang Bank’s recognition of our strong online operation capabilities. It will provide the opportunity for individual borrowers to receive lower cost funding. ”
The news fell flat and the stock dipped down that day. The company closed at $3.83 yesterday, a new all-time low on no news.
CFPB (and others) Not Amused By Quicken’s Push-Button Mortgage Ad
February 9, 2016Is Quicken in the right place at the wrong time?
Imagine a world where you could get a mortgage at the push of a button. And then imagine like literally pushing that button while you’re sitting in a dark auditorium watching a magic show. As the magician saws a woman in half, you agree to a $400,000 loan payable over 30 years. That pivotal moment, according to Quicken’s vision for American prosperity, will lead to a “tidal wave of ownership” that will flood the country with new home owners.
Consider the implications of that commercial on its own merits (or watch it below of course) and then imagine watching it after you’ve just seen The Big Short in theaters. Given that the movie is a true story about the build-up of the housing and credit bubble in the 2000s that led to a near catastrophic global collapse, a mortgage “tidal wave” might not be the best way to describe your new mobile app.
After Quicken’s push-button mortgage commercial aired during the Super Bowl, the Consumer Financial Protection Bureau responded on twitter:
When it comes to #mortgages, take your time, ask questions and #knowbeforeyouowe. https://t.co/UUaGyWDbzk
— consumerfinance.gov (@CFPB) February 8, 2016
While the mortgage process shown on TV looked overly ambitious, a Quicken customer service rep who I chatted with while posing as a borrower, said that it really can be all done online, even if the mortgage was for like $600,000. When I inquired about what documents I’d need to provide through that process, I was told all I needed to do was state the address of the home.
A no-doc process?
According to the Wall Street Journal, “borrowers can authorize Quicken to access their bank and other financial information directly, eliminating the need for sending pay stubs, bank statements and tax returns back and forth.” So there’s still documents, they’re just electronic and retrieved via APIs.
Having scanned the process, there is clearly more than just one button to push (I counted 9 steps), but it may actually be possible to get a mortgage while watching a magic show. Apparently a lot of people on twitter don’t think that’s a good thing:
Thanks Rocket Mortgage for thinking the '08 housing crisis needed a sequel
— Wyatt Rasmussen (@Wyatt_Rasmussen) February 8, 2016
Let's start another financial collapse. #RocketMortgage https://t.co/7CkBTGJRPD
— Turney Duff (@turneyduff) February 8, 2016
My kid was playing with my phone and bought 7 houses. I can return those right? #RocketMortgage #SB50
— Tim Murphy (@TimMurphy104) February 8, 2016
Rocket Mortgage: explaining the 2008 financial crisis in one commercial
— Rahul Vedantam (@RahulVedantam) February 8, 2016
This commercial is making an excellent case for a massive real estate bubble. It worked awesome in 2007. #RocketMortgage
— Ben Shapiro (@benshapiro) February 8, 2016
Meanwhile, Rana Foroohar, Assistant Managing Editor and Columnist for Time and Global Economic Analyst for CNN, argued that the backlash is unfounded. “No, the Rocket Mortgage Ad Is Not the Sign of Another Financial Apocalypse,” was the headline of her Time story published on Monday. Her evidence? Nobody can afford a mortgage anyway so there’s nothing to worry about, she basically says.
Private equity firm Blackstone has become the largest buyer of single family homes in the country over the last few years. […] Most ordinary Americans need mortgages to buy real estate; at current housing prices and incomes, it would take a typical family more than twenty years to save even a 10% down payment for a home plus closing costs. But they can’t get the loans, because in our post-crisis world, banks are still keeping credit tighter than usual. Besides, many individuals simply don’t have the secure employment, nest egg, and increasingly high credit scores needed to obtain a mortgage these days.
– Rana Foroohar
http://time.com/4212259/rocket-mortgage-super-bowl-ad/
See? There can’t be a bubble brewing because nobody can possibly qualify.
So when Quicken makes wildly provocative sales pitches like this:
Push Button. Get Mortgage. https://t.co/UzOXYFF25C#RocketMortgage 🚀🚀🚀
— Quicken Loans (@QuickenLoans) February 8, 2016
What they’re really apparently trying to say is that the process for those that qualify is supposedly more transparent and therefore better for borrowers:
.@CFPB We agree. No better way than #RocketMortgage for full transparency into mortgage options & info needed to make the right decision.
— Quicken Loans (@QuickenLoans) February 8, 2016
Of course, it probably doesn’t help when their legal help page is titled “legal mumbo jumbo.”
Quicken CEO Bill Emerson tried to clarify the message of the commercial to the WSJ. “What we’re saying is that a strong housing market filled with responsible homeowners is important to the economy,” he said.
Don’t worry about the mumbo jumbo folks, just push button, get mortgage.
—
What do you think? Is Quicken walking down a slippery slope?
Former Bizfi Manager is Making a Splash in Delaware State Senate Contest
February 7, 2016
A former Bizfi manager is underwriting a new kind of 4-year deal. Thirty-two year old James Spadola, who lives in Wilmington, is bringing an impressive resumé to the Delaware state Senate contest for District 1.
The world knows him as #HugACop after an outreach campaign he spearheaded for the Newark, Delaware police department went viral and inspired a new era of positive policing. Spadola has served as an officer there for more than 7 years.
He attended the University of Delaware, an experience that was interrupted when he was called up by the U.S. Army Reserve to take a tour of duty. Deployed in March 2003 for a year, he served as a prison guard and as his battalion commander’s gunner and driver in Iraq. He received the Combat Action Badge when his convoy was hit with an IED.
After returning home and graduating, Spadola moved to New York City and got a job at a hot new fintech startup named Merchant Cash and Capital (MCC). That was in February 2007, making him one of the company’s first ten employees. MCC Changed their name to Bizfi in September of 2015.
As an underwriter, Spadola was tasked with evaluating working capital applications submitted by small businesses. He was quickly promoted to Team Leader and later to Underwriting Manager, a senior departmental position.
Spadola told deBanked of his time there, “I had a great experience at Bizfi and learned an enormous amount about the private sector and the troubles and challenges that small business owners deal with everyday.”
Bizfi General Manager Seth Broman, said of him, “having worked closely with James for several years, it was apparent to me and all those around him that James has a knack for helping those in need.”
After almost two years there, he moved to Delaware to join the Newark Police Department, where he’s been ever since. He still managed to find the time to get his MBA from Wilmington University in 2014.
Today, Spadola is underwriting a new kind of challenge, competing against incumbent state legislator Harris McDowell who has been in office since 1976. Running as a Republican in a blue state, Spadola thinks it’s time for new blood.
“I look forward to putting those business lessons, coupled with what I’ve learned through my other professional experiences, into practical application down at Legislative Hall,” he told deBanked.
Visit his campaign Facebook page.
E-mail james@jamesspadola.com for further information.
How the FDIC Defines Marketplace Lending
February 5, 2016Marketplace lending is one of this year’s hottest buzzwords but its meaning is not very intuitive. According to a recent Federal Deposit Insurance Corporation (FDIC) report, “marketplace lending is broadly defined to include any practice of pairing borrowers and lenders through the use of an online platform without a traditional bank intermediary.” This might sound similar to peer-to-peer lending and that’s because it’s the same thing, the FDIC explains. “Although the model, originally started as a ‘peer-to-peer’ concept for individuals to lend to one another, the market has evolved as more institutional investors have become interested in funding the activity. As such, the term ‘peer-to-peer lending’ has become less descriptive of the business model and current references to the activity generally use the term ‘marketplace lending.'”
Voilà, marketplace lending is what you get when peers are replaced by private equity firms, pension funds, and hedge funds. Additionally, there is a general assumption that the intermediary platform is also underwriting and grading the loans.
The FDIC separates marketplace lenders into two categories, the “direct funding model” and “bank partnership model,” both of which are illustrated below:
In both circumstances, investors are actually buying securities, rather than participating in the loans themselves.
The FDIC says that marketplace lending can encompass unsecured consumer loans, debt consolidation loans, auto loans, purchase financing, education financing, real estate loans, merchant cash advance, medical patient financing, and small business loans.
For even more information, read the official report.
The Ghost of Second Source Funding Has Lost a Desperate Court Battle
February 4, 2016The notorious company returned from the dead for one last final stand
For many veterans of the merchant cash advance business, the Second Source Funding name is something they’d rather forget. They were perhaps the largest funding ISO in the industry between 2006 and 2008. And as plenty of ex-employees will tell you, the story ends badly.
Meir Hurwitz, a co-founder of NY based Pearl Capital, immortalized the Second Source years through a Bloomberg exposé about how his own company rose and sold for $40 million. In his tale, he claimed that Second Source founder Sam Chanin still owed him $2 million for the work he performed there. For Hurwitz, the falling out set the stage for the company he would go on to start. For other employees, it was the beginning of a grudge that would stick around for almost a decade.
Chanin has gone so far as to admit on his blog that he became known as “the guy who ripped them off and didn’t pay their residuals.” According to him, it wasn’t his fault. Court records do show Second Source Funding filing a complaint against Cynergy Data back in 2009 for $60 million in damages. Cynergy was the processor behind their lucrative merchant services operation and ultimately where the residuals they paid out to sales agents originated from. The case was dismissed in October of that year because Cynergy declared bankruptcy.
Effectively shuttered by the circumstances, the only reminder of what had once been, was another lawsuit filed by Second Source in September 2012 against a company (and more than 30 co-defendants) that acquired Cynergy Data’s assets. In October of 2009, Cynergy’s assets were reportedly sold to The Comvest Group for $81 million. In the complaint, Second Source sought at least $50 million from them in damages.
It has been approximately seven years since Second Source’s days ended, sources estimate. Users on industry forums were already speaking of the company in the past tense as far back as early 2009. The Second Source website no longer even exists. While ex-employees have long urged old peers to move on from those days, others have been forced to confront their demons.
THE GHOST OF MERCHANT CASH ADVANCE PAST
In September of 2014, the very same Second Source Funding emerged through a complaint filed in the Supreme Court of New York against Yellowstone Capital, LLC, 8 named co-defendants and 25 John Doe defendants. Seeking damages in the astounding amount of $360 million, Second Source alleged that Yellowstone’s co-founders stole their “revolutionary business model” of which they describe as using “Independent Sales Offices to leverage economies of scale in marketing and selling a bundle of financial services, including credit card processing and cash advances.” As a result of that and other claims, they were allegedly the reason for “Plaintiff SSF going out of business.”
The ensuing battle was probably one of the most contentious litigations the industry has ever experienced, at least from what can be seen on the docket. In one publicly filed exhibit introduced by Yellowstone, was the draft of a complaint that the plaintiffs had allegedly sent them that named more than 40 defendants. It reads like a yearbook of the merchant cash advance industry in 2009.
Other exhibits are packed with plenty of Second Source era nostalgia, including copies of the entrance exams given to new hires. One test question embodies the culture of the time, when it asked applicants:
What movie is this quote from, “Put the coffee down, coffee is for closers?”
While motions and cross motions at times appear to venture into the arena of insanity, especially considering Second Source went out of business a long time ago, deBanked has learned that Yellowstone was vindicated this week in a decision that dismissed all the claims with prejudice. That means they can’t have a do-over. The suit lasted 17 months.
deBanked has been quietly following the docket for over a year. We did not ask either party to comment on the decision for the reason being that Second Source may be considering an appeal, or at least they alluded to that in the court transcripts.
In the meantime, the ghost of Second Source reminded a few people in the merchant cash advance industry that the antics of 2006-2008 were more than just tall tales told by grey beard Wall Street guys. Back then the coffee was still for closers only. And back then, the game was so different that some people would still be feeling the effects of it a decade later.
THEN AND NOW
Yellowstone Capital was one of the first merchant cash advance companies to experiment with the ACH payment method. Today, they originate nearly a half billion dollars a year in funded deals.
If you want to see just how much has changed since the Second Source days, check out this answer to the Second Source exam in 2008.
Q: If a merchant is getting an advance from MCA and can’t switch processors, what can the agent offer this merchant?
A: Lock box
It’s amazing to think that ACH was inconceivable at the time. Touched by ghosts indeed…
Ponzi Scheme Threat Hangs Over Marketplace Lending
February 3, 2016
What if all the notes you bought on a peer-to-peer or marketplace lending platform were tied to loans that didn’t exist?
Such a scenario has not only happened but is a recurring theme over in China. The recent $7.6 billion fraud that was allegedly perpetrated by the management of Ezubao (a Chinese-based P2P lender) affected more investors than Bernie Madoff. Approximately 900,000 investors were impacted, according to CNBC.
But it gets worse, way worse. If you can believe this, the bosses of 266 other Chinese peer-to-peer lenders have fled and are in hiding. And that’s just in the last six months. Ratings agency Moody’s has said that 800 platforms have already failed or were recently facing liquidity issues.
In the case of Ezubao, there’s little doubt about what happened. Company executive Zhang Min told Xinhua news agency, “Ezubao is a Ponzi scheme.”
Lend Academy’s Peter Renton, who has witnessed the peer-to-peer lending industry in China firsthand wrote in his blog today that it’s too easy to start a platform there. “You need just US$1,000 to create a smartphone app, then obtain a very inexpensive business telephone license and you can be up and running,” he wrote.
Unsurprisingly, another Chinese peer-to-peer lender that just recently joined the New York Stock exchange, Yirendai (NYSE: YRD), was collateral damage to the Ezubao bombshell. Shares of the company dropped nearly 21% Tuesday to $4.88, down more than 50% from their IPO price.
Does the threat exist in the US?
Here at home, industry insiders are hardly worrying about China. “Could this level of fraud happen in the US?” Renton asked in his blog. “I think it is highly unlikely. There is a well-developed ecosystem in the US for both consumer and small business credit and appropriate lending licenses need to be obtained in most states before a company can begin operations.”
Renton is partially right. Most of the well-known platforms in the US are operating under watchful eyes. But there is a surging over-the-counter (OTC) marketplace that most outside investors don’t even know exists. Enter the syndication market where commercial finance brokers and investors can co-invest in loans or merchant cash advances through private marketplaces that may or may not have a website. With alluring yields of up to 100% a year or even more, it’s the perfect environment to pull off a scam if one maliciously intended to do so. [note: most are not scams at all]
The OTC market for these investments rely almost entirely on trust. There is little to no transparency into how investor funds are actually used. deBanked has received tips over the last twelve months that some companies have co-mingled investor funds with operational cash flow, with the result sometimes being a total loss of investment. Several lawsuits have been filed against these alleged fraudsters, deBanked has discovered, but none compare to the scope of damages taking place in China.
The last major Ponzi scheme to grip the commercial side of the industry for instance, involved Agape Merchant Advance (AMA), a Long Island based company that was part of a wider fraud conducted by sister company Agape World Inc. According to the 2012 complaint, “the defendants actually ran a Ponzi scheme, paying returns to Agape and AMA investors not from any profits earned on investments, but rather from existing investors’ deposits or money paid by new investors.”
In a report published by the FBI that explained how it worked, they wrote, “the defendants received an e-mail from Agape’s loan underwriter informing them that the interest rate that a bridge loan borrower had agreed to pay Agape was only 16 percent for one year, at the same time the defendants had promised to pay their investors 12 percent for 60 days for this investment, or 73 percent for the year. The defendants raised approximately $32.5 million for this bridge loan, although the loan was never made.”
The fraud, carried out mainly by its chief executive Nicholas Cosmo, was captivating enough to earn it a spot on CNBC’s American Greed series.
At the time Agape was operating, such yields should’ve raised an immediate red flag for investors, at least that’s the moral the TV show tried to communicate to viewers. In the real world today, those yields could be considered too low since actual commercial bridge financing transactions can pay out up to 40% over 90 days. And therein lies the danger. When legitimate deals are transacting for incredible premiums, how do you resist considering an investment?
It’s easy to chalk up China’s peer-to-peer lending fraud woes to China being China. But the pervasiveness and ease with which such scams have been carried out should send a strong message to marketplaces in the US.
Do you trust where your money is going? Are they using it exactly how they said they will?
Next on American Greed…
