Srividya's work has appeared in publications like Money magazine, Advertising Age, FirstPost and The Economic Times. She has also dabbled in business intelligence solutions, and holds a Masters degree in Business and Economic Reporting from NYU. Articles by Srividya Kalyanaraman
Marlette Closes Proprietary Securitization Deal Worth $205 Million
August 3, 2016After a personal-loan bond sale last month, marketplace lender Marlette Funding closed its first proprietary securitization worth $205 million. “MFT” consists of Best Egg collateral financed via three classes of Notes and one class of Certificates.
Best Egg is Marlette’s personal loan platform with $2 billion in originations since 2014. This transaction, done through Goldman Sachs was the second securitization of unsecured consumer loans originated by Cross River Bank on the platform. In July, Marlette securitized personal loan bonds worth $180 million in Single A notes rated by Kroll Rating Agency.
This news comes at a time as online lenders and marketplaces alike feel the need to diversify sources of capital. “Accessing the securitization markets represents the third major component of a diversified funding plan, which also includes building strong relationships with institutional investors and developing on-balance sheet asset backed credit facilities,” said Paul Ricci, CFO of Marlette Funding.
Hold The Loans Or “Marketplace”? It Depends
August 1, 2016
At the risk of stating the obvious, the motivation to keep loans on balance sheet or sell them off through a marketplace is related to the type of lending one does. But even then, opinions on the best strategy varies. Is there a winning formula?
Not all online lenders are marketplaces. Some consumer lenders like Affirm, for example, hold all the loans they issue on their balance sheet. Avant, another consumer lender, has either held all or some of the loans on its balance sheet, making it a kind of hybrid.
But for companies like Lending Club, long considered to be the definition of marketplace, their May debacle showed the weakness that model can have, at least with those lending to consumers.
Interest rates, terms and risk profiles associated with businesses are different from those for retail consumers. According to Fora Financial co-founder Dan Smith, this changes the economics of the game since consumer loans are typically longer (3-5 years) compared to business loans where the weighted average term could be as short as under 12 months. This, not only makes consumer lending a lot more capital-intensive it also begs for diversification of sources.
“When I started the business, I had one lender in 2007 and they said they couldn’t work with us. Today, my credit facility has eight different lenders,” said Stephen Sheinbaum, founder of Bizfi which buys future receivables with its balance sheet in addition to running a loan marketplace. “We are undoubtedly seeing a shift from the B2C side. Any model that has sources of funds concentrated in one area is risky.”
Relying on your own balance sheet can lead to handsome returns, sources say. Sheinbaum, said that his company can make twice as much by holding than gains on sale. For companies engaged in consumer lending, that margin can be anywhere between 5 percent to 20 percent depending on borrower profiles and the type of loans, said student lender CommonBond CEO David Klein.
The unit economics of assuming risk can be higher if risk is assessed well. “If you do it well, balance sheet lending provides better unit economics,” said Fora Financial’s Smith. “You have to have the right capital structure, a low cost of capital and need to be able to underwrite effectively so it can scale.”
Smith however warned that this is not prescriptive and consumer lending companies like Lending Club might be forced to take a multi-pronged approach given the barriers to entry and the regulation around balance sheet lending for consumer loans. “There is clearly a more significant regulatory environment to get into on balance sheet consumer lending and that might be a barrier to entry.”
Often referred to as ‘having skin in the game,’ balance sheet lending potentially forces companies to assess risk better and be scrupulous about underwriting. But marketplaces whose prerogative may be seen as trying to make as many loans as possible, will inevitably be scrutinized over perceived conflicts of interest in their underwriting.
There are arguments to be made for each of the models but a better case is made for hybrid models which aims to take the best of both. Klein of CommonBond, said that his company leans heavily on balance sheet at times and the marketplace at other times. “Unless your investors are broad in profile and deep by type, then it is possible for a loan sale purchaser to walk away.” Klein said. “It all comes down to control. If you have more of it, there’s less risk.”
While more consumer lenders gravitate towards hybrid models, Lending Club at the end of Q2 held only 2 percent of the loan volume on balance sheet and CEO Scott Sanborn is very clear about the company operating purely as a marketplace.
“Some of our investors have observed the funding environment and asked: Are you going to become a balance sheet lender, just like a regular bank? Has Lending Club’s business model changed?”
“Let me be very clear: Lending Club is committed to the marketplace model and we do not plan to become a balance sheet or ‘hybrid’ lender. Our mission of connecting borrowers and investors has not changed,” wrote Scott Sanborn in a letter to investors.
The letter reiterated that the limited use of balance sheet does not affect Lending Club’s Notes. And while the company soldiers on, Lending Club’s story has taught many lessons to other lenders.
“In the wake of Lending Club’s news, you realize that if you have a hiccup on the way, it’s good to control some of your capital and assets because if you are truly marketplace, a hiccup in investor confidence can meaningfully change their trajectory,” said Klein who believes that for a pure marketplace player to survive, it needs to have more retail investors than institutional investors.
And there seem to be more people who agree than disagree. “The B2C model of selling 100% to a secondary market will cease and fault,” said Sheinbaum. “If buyers go away, your entire model is jeopardized. In a perfect world you want options. You see whichever way the wind is going and you try to go with it.”
The challenge then is in telling which way the wind will blow and be prepared for a storm.
Non-prime Lender Elevate Expands Credit Facility to $545 Million
July 26, 2016Texas-based online lender Elevate expanded its credit facility by $100 million with Chicago-based alternative credit investment firm Victory Park Capital, reaching $545 million in total.
Elevate lends to non-prime borrowers with products like ‘Rise,’ an unsecured personal loan and ‘Elastic,’ a bank-issued line of credit in the US and ‘Sunny,’ a short-term loan product in the UK.
The company has originated more than $3 billion in nonprime credit to 1.4 million consumers to date and plans to use the funds to expand its suite of online credit products. The lender delayed its IPO in January this year where it planned to raise $79 million in a public offering, thanks to a down market. Nevertheless, it has grown originations by 80 percent annually to $189 million in Q1 this year.
Victory Park Capital’s other prominent investments in this sector includes Kabbage, Avant, CommonBond, LendUp and Orchard.
National Funding Deploys $1.5B, Beefs up Automated Underwriting
July 26, 2016California-based small business lender National Funding said that it has deployed $1.5 billion in capital, funding small businesses with short-term working capital loans.
The 17-year-old company funded $152 million in loans in the half of 2016, up 45 percent from the same period last year. The company’s customers include general contractors, medical services and trucking companies that average about $1 million in sales annually.
While 80 percent of the loans are for working capital, the company has seen demand for equipment leasing slowly resurge after the financial crisis. “After 2008, the market turned negative in LA and we had to shrink our company,” said CEO Dave Gilbert.
The company is also preparing for a technology overhaul, trying to get access to data pools to automate underwriting. “We need to be tech driven,” he said. “As deals get smaller, we need to automate them to make it affordable.”
National Funding generates 25 percent of its loan volume through brokers. “Given everything that’s happening in the industry, a lot of lenders will be forced to become balance sheet lenders,” he said.
The company hired Geoff Howard from Intuit to lead its technology efforts and aims to automate underwriting for 40 percent of its deals, doubling up from its present rate of 20 percent.
The average size of its loans is $50,000 and the company also plans to launch its first long-term loan product later this year.
This Startup Wants to Turn Student Lending to Student Investing
July 26, 2016
What if colleges sold education like a service you could pay for based on the value you receive?
The state of student debt begs for alternatives and there is a growing consensus that education should be a tool for employment, and deriving monetary value be based on outcomes. Virginia-based Vemo Education is hoping to convert that thought into a market. The startup provides income-based financial solutions to colleges and universities.
While a crop of alternative student loan lenders like Commonbond and SoFi attract borrowers with cheaper loans and refinancing options, Vemo’s promise is to begin at the start with pricing college better. It is one of the few companies to offer income share agreements to students via colleges. Income Share Agreements (ISA), as the name suggests is a financial instrument where an individual pays a percentage of income for a fixed number of years instead of paying the sticker price of tuition upfront. “When colleges choose to price tuition as a percentage of future income to graduates, the way college is priced changes,” said CEO Tonio DeSerrento.
The concept was first propounded by economist Milton Freidman in his 1955 essay called ‘The Role of Government in Education,’ in which he described ISAs as an ‘equity investment’ in a person’s future, making the lender an investor. He wrote, “Investors could ‘buy’ a share in an individual’s earning prospects: to advance him the funds needed to finance his training on condition that he agree to pay the lender a specified fraction of his future earnings.”
Sounds kind of similar to a merchant cash advance, doesn’t it? It sort of is. ISAs do not have interest rates either, but they do have a time-bound repayment contract, a feature unlike MCA. An individual agrees to pay a fixed percentage of income over a prescribed amount of time irrespective of the principal amount. That means the total cost remains uncertain until it’s fully paid.
The idea is to reduce the risk of a college education by focusing on employment rather than the process of education, which might be more valuable in reducing the barrier to entry and the risk associated with defaults. It also encourages students from picking nontraditional areas to study instead of popular lucrative fields. ISAs also have room for income exemptions where a student does not owe anything below a certain income. And that is what differentiates the 11-month-old startup from a SoFi or a Commonbond, according to DeSerrento, who is actually SoFi’s former deputy general counsel. “CommonBond and SoFi come into the picture after a student has graduated and employed and they help winners of that make more money,” he said. “By the time SoFi comes in, college is already paid for and the value they can add is as a cheaper substitute for federal loans.”
Vemo is led by a bunch of folks with industry experience, including some that have worked at Sallie Mae. The company’s first client was Purdue University which launched the first ISA initiative in the country. Its ISA fund, ‘Back A Boiler,’ will supplement federal loans and private student loans. According to its terms, juniors and seniors are eligible for loans starting at $5,000 factoring in expected future income to be repaid over nine years. Vemo also works with for-profit colleges like coding bootcamps where employment is the end goal. “We work with coding bootcamps where 100 percent of the tuition is paid through vemo as a percentage of their incomes,” he said. “They owe nothing unless they graduate and get a job and tuition price is unknown until you get a job.”
ISAs are different from loans but not always for the better. While ISAs appear to be less discriminatory, whether the legal framework of anti-discriminatory laws apply to ISAs, is to be determined. Secondly, lack of transparency in pricing could fluctuate payments and since repayment is bound by time, one could potentially end up overpaying for a degree. Consumer protection laws around ISAs are also unclear at this time. Seth Frotman, student loan ombudsman for the Consumer Financial Protection Bureau warned that unknown upfront costs make it imprecise and difficult to understand the risks involved with such an instrument. Moreover, since repayment is based on income, there is also a fear of ‘creaming’ the best students from elite colleges.
In April 2009, US Senator Marco Rubio proposed a bill titled ‘Investing in Student Success Act’ to institutionalize ISAs as an alternative to student loans. That legislation remains in limbo. But DeSerrento isn’t waiting. Since Vemo’s clients are mostly colleges, his concern with the bill only goes so far as to make ISAs legitimate.
Vemo is venture backed by Fast forward, GS2, University Ventures and Learn Capital who invested $2 million in seed funding last year.
Amazon and Wells Fargo Shake Hands on Student Loans. Who is Surprised?
July 22, 2016Some might have seen this coming eventually but Amazon is dipping its feet into student loans with Wells Fargo.
Through Amazon Prime Student, the online retailer will offer discounts on student loans when they apply for a Wells Fargo private student loan. The bank will shave half a percentage point off the interest rate for referrals from Amazon.
“We are focused on innovation and meeting our customers where they are – and increasingly that is in the digital space,” said John Rasmussen, Wells Fargo’s head of Personal Lending Group.
Wells Fargo is banking on this multiyear agreement to reach millions of potential borrowers. Five of the largest private student lenders, including Sallie Mae, Wells Fargo and Discover Financial Services Inc., distributed $6.46 billion in loans between July 2015 and March 2016, up 7% from the same period a year earlier, the Wall Street Journal reported.
While the federal government is still the primary student loan lender, banks and other private lenders are steadily increasing their market share. Earlier this week, New York-based private student loan lender CommonBond raised $30 million in equity and $300 million in debt and acquired a startup that opens the gate to employers. San Francisco-based lender SoFi also has similar partnerships with employers for their student loan refinancing product.
“Over 99.99 percent of the student loan market is driven by the federal government and private banks and the tiny piece of the market is made up by CommonBond and SoFi,” said David Klein, CEO of CommonBond to deBanked earlier. “And as big as that sounds, relative to the largesse of the market, we don’t even make up a percent of that.” The ilk of alternative lenders are tilling away at establishing such partnerships to widen their net but will the banks let them?
Brief: Lending Marketplaces Bizfi and Lendio Forge New Partnerships
July 21, 2016Online lending marketplace Lendio has partnered with digital marketing company Townsquare Media to tap into its customer base and offer loans to small businesses.
The two companies will collaborate on cross-promoting appropriate products and services and marketing Lendio’s platform with 75 lenders and its loan products to businesses.
Meanwhile, another marketplace lender Bizfi got together with The National Directory of Registered Tax Return Preparers & Professionals to reach a wider net of small businesses to fund for products like lines of credit, equipment financing, invoice financing and mid-term to long-term loans.
Jefferies revisits Lending Club Deal, Marlette Completes Second ABS
July 21, 2016Another capital source you say? Online lenders are ready with an answer and this time it seems to be securitization.
Time and again we have had heard industry folks harp on about diversification of capital being the need of the hour. Well, that hour is here, it seems like.
Things are looking up for Lending Club with some much needed respite. Jefferies said that it will revive the lender’s stalled bonds albeit marketing it to a few chosen investors, Reuters reported.
The roughly $140 million bond was put on hold in May after the resignation of Lending Club’s CEO Renaud Laplanche who had overseen the $22 million loan sale to Jefferies with manipulated documentation.
Another happy clam in this pool is Marlette Funding which securitized its second personal loan bond sale and priced its top $149 million Single A notes rated by Kroll Rating Agency.
Some challenges remain to be resolved — Slow returns, rising defaults, jittery investors and ambiguous regulation are some headwinds online lenders have to tackle. But for now, any good news is welcome.
