Business Lending

The CFPB is Pretty Busy With Actual Consumers

It’s often theorized by industry insiders that the Consumer Financial Protection Bureau (CFPB) will play a role in business to business transactions. But when you actually talk to those employed by the government agency, it seems very unlikely. The CFPB is already very busy playing the role of Better Business Bureau, albeit a nationalized version.

There is currently no categorical option to report business loan or merchant cash advances on their website and the complaints lodged by consumers pertain to very basic consumer problems, such as issues with their credit cards or student loans.

Here’s an example of a CFPB complaint:

2009 XXXX XXXX, XXXX XXXX Thursday of every month I got pulled from class to get a new loan for my living and tuition expenses. I was at XXXX for one year and if I didn’t go to sign the papers for my new loan every month I wouldn’t be able to continue my classes to XXXX. I missed out on important class information and had to make them up on my own time. Homework and other hands on tasks became more difficult to accomplish if I didn’t make up the lost time going to sign loan papers. I was told a rough amount that my school loan would be. About {$15000.00}. I started paying {$120.00} a month for my loan agreement then Genesis Lending increased it to {$190.00}. I called to ask why the increase in payment amount each month. I was told they saw i had a higher income so they adjusted the payment accordingly. Is that legal? I’ve been paying this amount for 6 years and still owe {$13000.00}. I called Genesis Lending and come to find out they have been rolling over all the interest I pay on the loan every year. So all I’m paying is interest basically for the last 6 years. I don’t think I ‘m being treated fairly or legally.

Many complaints are just like this, where consumers are not actually reporting illegal activity but instead using the CFPB to vent their frustration. In this situation, the victim was busy with homework and wasn’t sure how their student loan worked so they filed a complaint with the federal government…

The end result was that the lender responded by saying it wasn’t really their problem, the borrower didn’t dispute this response and the CFPB marked the case as closed. Seems like a great use of everybody’s time.

In the handful of presentations I’ve attended by the CFPB, they said they often find themselves redirecting complaints to the business that the consumer is complaining about much like the BBB would do.

You can view the full complaint database here

OnDeck Stock Pummeled in Run Up to Lockup Expiration

OnDeck (ONDK) hit a new low on Tuesday, bottoming out at $13.94 in intraday trading. It closed at $14.03. Absent any recent company news, the trend downward was likely a side effect of downward pressure on Lending Club (LC) as their lockup period expired. Lending Club closed at $16.97 near its all time low.

The OnDeck drop may have also been caused by the recent story that appeared in Barrons that labeled the company and the industry they operate in, risky, saturated, and overpriced.

On Deck is a different business. Its profits come from using its own balance sheet to make risky, high-interest rate loans to small businesses. With rivals as large as Goldman Sachs gathering around these companies’ shallow high-tech moats, the competition for quality borrowers will make it tougher for On Deck to keep growing loan originations near a triple-digit pace without loosening underwriting standards. Even in today’s benign conditions, On Deck charges off more than 12% of its loans annually, while its yields on those risky loans have declined for nine straight quarters. It’s a subprime lender in dot-com clothing.

Barrons, 6/6/15

Barrons laid out the case that OnDeck is a lender. OnDeck has always taken the position that they are a tech company. The conflicting market perceptions have made their stock price very chaotic.

OnDeck’s lockup period expires on June 15th.

Broker Business Planning – Selecting the Right Lenders

Continuing The “Year of the Broker” Discussion

2015 is certainly the “Year of the Broker,” as the low barrier to entry into our space, in conjunction with various recruiting advertisements promising lucrative pastures, is attracting a variety of individuals with various levels of professional backgrounds. Some entrants have prior experience as a mortgage broker, insurance agent or banking specialist, while others are less familiar with professional sales and are under the belief that our space welcomes a lucrative introduction. Nevertheless, I believe that new broker entrants must be reminded that this is an entrepreneurial pursuit, rather than a get rich quick procedure, and efficient business planning will play a major part in the success or failure of your venture. A part of this efficient business planning, other than the basics of good resources for accounting, legal, marketing, market research, and financing, is the strategic selection of your lender partnerships. The right partnerships will grow, develop and sustain your business, but the wrong partnerships could add your entrepreneurial pursuit to the list of business startup failures.

The selection of your lender partnerships will depend on your unique value proposition (UVP). No entrepreneur should begin a pursuit without a well-defined UVP, for your UVP is the foundation of all of your business planning and return on investment forecasts. Your UVP should answer this question:

Understanding my market segment, what is it specifically that I will bring to the segment that isn’t already being provided by the current crop of solution providers?

The question includes three main components that must be addressed:

• The identification of a market segment
• The characteristics of all services within your industry, being sold to that market
• The services that you will uniquely provide to said market and their unique characteristics

Once your UVP is set, now it’s time to look into the selection of your Lender Partnerships.

To begin, let’s say that you decide to come into the industry and target start-up retail/restaurant businesses, that is, those with less than 1 year in operation. Because you are selling working capital solutions, you would research all available working capital options to this market segment which include sources such as nonprofit loans, business credit cards, personal savings, loans from retirement accounts, friends and family, equipment leasing, and merchant cash advances. To serve this market segment efficiently, you would choose to offer merchant cash advances and equipment leasing.

Next, you would scroll through all of the direct lending sources in the country that provide the working capital solution you have decided to lead with, but who also specialize or at least “serve” the target market you are seeking. Many equipment leasing companies do not fund businesses with less than 2 years in business, and many cash advance companies do not fund companies with less than 1 year in business. Your goal would be to find these lenders and create that network, negotiate pricing, workout your commission schedules, and verify all aspects of said partnership to make sure that it’s beneficial for your clients and your office. It should be a win-win-win partnership, a win for your clients as they find a source for working capital that they didn’t know existed, a win for your partner as they obtain “feet on the street (or telephone)” reps without having to pay their overhead, and a win for your office as you are allowed to serve your market and be paid well in doing so.

Due Diligence Is Key

When finalizing your lender selections, make sure all forms of due diligence are completed on the lender(s) to verify their credibility and competency. These forms of research include all of the following:

(( Structure and Legality ))

• The lender should be a licensed direct lender (in states where necessary).
• The lender shouldn’t be a start-up, but instead a proven entity with at least 2 years of operation.
• The lender should have at least directly funded volume in the eight digits (over $10,000,000).
• The lender should have a full staff of employees rather than just one person.
• The lender’s customer service and support departments should be easy to reach.
• The lender should have some sort of press or news media releases on its establishment.
• The lender should specify if they are going to do advances or loans or both.
• The lender’s funding agreements should specify if the transaction will be an advance or loan.

(( Online Presence ))

• The lender should have a fully functional business website, registered for at least two years.
• The lender should have a business email from their business website domain.
• The lender should be BBB Accredited (www.BBB.org) with at least an A rating.
• The lender should be a part of business associations with logo(s) displayed on their website.
• The lender should be included on basic online business directory listings.

(( Broker Respect ))

• The lender should provide a comprehensive Broker Agreement full of legal provisions.
• The lender’s Broker Agreement should spell out all provisions of the relationship.
• The lender’s Broker Agreement should spell out any quotas.
• The lender’s Broker Agreement should spell out new/renewal deal commission structure.

This is a rough introduction and surely there are other criterion that are important in selecting your lender partnerships. However, these recommendations will surely give you a head start as you head into one of the most competitive industries in financial services.