Loans
More Loans, More Fraud? Lenders Are the Victims
October 30, 2016
Funders and lenders might want to review a TransUnion study that revealed borrowers who take out a second loan within 15 days are four times more likely to be later identified as fraudsters. Taking out a third loan in that time period raises the likelihood to ten times.
Telis Demos of the WSJ reported on the subject in a brief titled, Borrower or Fraudster? Online Lenders Scramble to Tell the Difference, but one statistic really stands out. “On average, 4.5% of borrowers take out more than one personal loan on the same day,” according to TransUnion. “While only some forms of loan stacking are fraudulent, the practice can be costly when inauthentic borrowers apply for multiple loans from multiple lenders within a short timeframe.”
TransUnion SVP Pat Phelan wrote that loan stacking can be a lucrative crime. “In 2015, our study of lenders in the FinTech industry reported that stacked loans represented $39 [million] of $497 million in charge-offs. Depending on how fast each lender does their due diligence, it’s possible they won’t know about other loans and applications until it’s too late.”
The analyses are notable in that they attribute stacking behavior to mischievous borrowers. It’s the lenders that are being victimized.
“It’s likely the same applicants with malicious intent who apply for multiple loans are also applying for multiple credit cards or a number of short-term or personal loans at other financial institutions as well,” Phelan wrote.
Morgan Stanley Backs Online Lender Affirm with $100 Million in Debt
October 13, 2016Consumer lending startup Affirm aims to replace credit card purchases with personal loans and has found a backer in Morgan Stanley.
Founded by former PayPal CTO and entrepreneur Max Levchin, Affirm secured a $100 million credit line from Morgan Stanley to expand its lending capacity. This latest round of financing totals the company’s fundraising to about $525 million in cash and debt financing with a $800 million valuation.
Affirm’s consumers are typically immigrants and recent college grads who do not own credit cards and have no credit history, who take out loans for big dollar online purchases like high end furniture, jewelry and gym equipment.
Affirm partners with ecommerce and internet service companies like Expedia, Casper Sleep and Eventbrite to offer personal loans (10-30 percent APR to be paid back within 12 months) to buyers at checkout.
The San Francisco-based company’s loans are funded by Cross River Bank and its investors include marquee Silicon Valley names like Lightspeed Ventures, Khosla Ventures and Andreesen Horowitz.
“The financial industry has managed to avoid significant disruptive innovation since the mid-90s, and we are working hard to change that. Our first goal is to bring simplicity, transparency, and fair pricing to consumer credit,” says Levchin on the company website. Is replacing credit card debt with personal loans a way to go about it?
Payday Loan King Scott Tucker Loses FTC Fight: Must Pay $1.3 Billion
October 2, 2016
Deceptive payday lending has come at a steep price for one Scott Tucker, who was briefly an accomplished professional race car driver. On Friday, September 30th, United States District Judge Gloria M. Navarro ordered a judgment be entered in favor of the FTC in the amount of $1,301,897,652. That concludes a case that had carried on for four years.
The $1.3 Billion judgment is no doubt a bad omen for Tucker as he awaits his criminal trial in New York. He was arrested earlier this year in February and charged with multiple counts of conspiracy, collection of unlawful debts and false TILA disclosures. In that case, US Attorney Preet Bharara seeks a forfeiture of at least $2 Billion. An initial accounting of his assets subject to forfeiture are his ferraris, porsches, a private jet, homes and more than a dozen bank accounts, according to the indictment.
That should be a big blow to Tucker considering that an asset freeze has forced him to rely on court-appointed attorneys in the criminal case. However, the FTC alleged last month that Tucker was still managing to live a lavish lifestyle that included steakhouses, country clubs, and spa visits. Documents filed in the FTC case show that as recent as July 22nd, the court was still ordering newly discovered bank accounts related to Tucker to be frozen. Given the billions sought in damages, one local newspaper in Kansas City, named The Pitch, questioned back in May where all of the money went.
We may soon find out. The judge’s order in the FTC case not only banned Tucker and his co-defendants from participating in consumer lending for life but also ordered that he must identify all business activities for which he performs services whether as an employee or otherwise and any entity in which he has an ownership interest in. The FTC was also awarded the authorization to obtain additional discovery without court consent and the permission to pose as a consumer, supplier, or other individual or entity to the defendants or any individual or entity affiliated with the defendants without the necessity of identification or prior notice.
The judgment was entered in case number 2:12-cv-00536.
Google Payday Loan Ad Ban Conspiracy Theory Gains Steam: It Was The CFPB
September 28, 2016
This past May, Google told the world that they were the good guys.
That’s when they banned payday lending ads from their search results to “protect [their] users from deceptive or harmful financial products” all the while brushing aside the fact they were significant investors in LendUp, a payday loan company.
But LendUp wasn’t just any payday company. They were disrupting the entire game, according to a 2013 story that appeared in TechCrunch that hyped up how they were all about helping borrowers with poor credit improve their credit scores so that they could move up the ladder.
Less than three years later, LendUp CEO Sasha Orloff was still preaching the same principles. “Everything has to be transparent. There is no fine print. No hidden fees. And everything has to get someone to a better place,” Orloff insisted.
But that wasn’t true, according to a Consent Order published by the CFPB and settlement agreement released by the California Department of Business Oversight, in which the company agreed to pay millions in refunds and penalties. LendUp miscalculated APR and for years did not even report the payment history of many eligible borrowers to credit agencies. In fact no loan information was even reported to any credit bureau at all up until February 2014. They also weren’t transparent about their fees.
“Many of the benefits Respondent advertised as available to consumers who moved up the LendUp Ladder were, in fact, not available,” the CFPB asserts in its September 26th order. “Although it advertised all of its loans nationwide, from 2012 until 2015, Respondent did not offer any loans at the Platinum or Prime levels outside of California. In many states Respondent still does not offer such loans.”
Not that they did any better in California, where the DBO charged them with violating basic state laws through expedited funding fees, extension fees, and the condition that they buy other goods or services in order to get a loan.
LendUp told the WSJ that the settlements “address legacy issues that mostly date back to our early days as a company, when we were a seed-stage startup with limited resources and as few as five employees.”
But LendUp may just be a pawn in a bigger game between the CFPB and Google.
I fingered the CFPB as being the likely culprit behind Google’s payday loan advertising ban back in May 2016, when it was very likely that a CFPB investigation of LendUp was currently taking place. That theory was even picked up by The New Yorker. Today it looks awfully likely.
The CFPB mentioned LendUp’s use of facebook advertising and Internet search results advertising in its Order against the company. “Respondent used online banner advertisements appearing on Facebook and with Internet search results (emphasis mine) that included statutory triggering terms, but Respondent failed to disclosed in those advertisements the APR and whether the rate could be increased after consummation.”
Internet search results were used to carry out the deceptive practices, they allege? Sounds like Google had a potential problem on their hands.
Let’s recap:
- November 2013 and January 2016: Google Ventures invested in LendUp which promoted itself as a disruptively transparent and educational short term lender whose mission was to help consumers move up the ladder
- May 2016: Google suddenly bans payday loan ads from their search results seemingly out of nowhere
- September 2016: The CFPB and California DBO announce settlement orders over LendUp’s deceptive practices, wherein it was alleged that LendUp did not exactly do what it advertised and their ads in Internet search results violated TILA and Regulation Z
Was a CFPB investigation the real reason that Google had a change of heart about its lucrative payday loan advertising revenues?
It’s hard to ignore the evidence.
Alt Finance Companies Secure Place on Inc. 5000
August 29, 2016If the story of alternative finance has been major growth, Inc. has quantified the latest statistics through its Inc. 5000 2016 list. Here’s a handful that you might recognize:
| Rank | Company | Growth Rate (3 years) |
| 155 | Capital Advance Solutions | 2328% |
| 176 | Channel Partners Capital | 2074% |
| 183 | Kabbage | 2027% |
| 335 | Lighter Capital | 1144% |
| 346 | Quick Bridge Funding | 1114% |
| 368 | Swift Capital | 1047% |
| 705 | Credibly | 558% |
| 763 | Square | 523% |
| 912 | Reliant Funding | 439% |
| 1259 | Blue Bridge Financial | 307% |
| 1260 | loandepot | 307% |
| 1392 | InterMerchant Services | 276% |
| 1576 | Fora Financial | 240% |
| 1726 | National Funding | 215% |
| 1928 | Tax Guard | 193% |
| 2096 | Bankers Healthcare Group | 177% |
| 2227 | Bizfi | 164% |
| 3113 | Envision Capital Group | 109% |
| 3569 | Cashbloom | 88% |
| 4217 | CAN Capital | 65% |
| 4691 | Capify | 50% |
Goldman Sachs Unveils Online Lending Venture, Marcus
August 22, 2016
Updated: Goldman Sachs’ online lending venture Marcus launched on Thursday.
The investment bank had earlier planned to call it ‘Mosaic’ and its aimed at borrowers with high credit scores (above 660) looking to consolidate debt.
Notably, it’s invite-only for now, meaning the only people who can apply are those who receive a special code from them in the mail. Might that potentially be Lending Club’s customers?
The bank is coming out swinging by promoting their no-late-fee, no-origination-fee, no-fee-of-any-kind-outside-of-interest-charges platform, something no marketplace lender can compete with.
Goldman has been laying the groundwork for Marcus since the beginning of the year. The bank made several key hires for the project including former Consumer Financial Protection Bureau attorney, Mitch Hochberg who was roped in to head compliance for the unit. The venture will be lead by Harit Talwar, former head of card services at Discover Financial and executives from American Express and Lending Club.
As deBanked commented earlier, Goldman’s foray in the crowded online lending universe could be too little, too late with a me-too product. It’s quickly-processed consumer loans might have to compete not only with incumbents like Lending Club, Prosper Loans and Avant but also with other bigger banks like Discover and Chase.
Google’s Payday Loan Ad Ban References The Truth in Lending Act (TILA)
August 15, 2016Did the government pressure Google?
Payday loan ads have mostly disappeared from Google’s search results after they banned ads for personal loans where the Annual Percentage Rate (APR) is 36% or higher. In a May 12th post, shortly after the proposed ban was announced, I speculated that the sudden change was likely due to government intimidation, rather than the come-to-Jesus moral reckoning claimed by Google’s Director of Global Product Policy, David Graff.
Google’s official Adwords policy regarding personal loans now cites the Truth in Lending Act, hinting that compliance with the policy is really about compliance with federal law.
Advertisers for personal loans in the United States must display their maximum APR, calculated consistently with the Truth in Lending Act (TILA).
This policy applies to advertisers who make loans directly, lead generators, and those who connect consumers with third-party lenders.
The TILA regulations can be found at 12 CFR Part 1026. The description of which charges are included and excluded from the calculation of “Finance Charge” is found in Section 1026.4. The APR calculation for “Open-End Credit” is found in Section 1026.14. The APR calculation for “Closed-End Credit” is found in Section 1026.22.
The timing of this change is suspicious since just one month before Google announced the ban, the owners of an online payday loan lead aggregator were hit with a lawsuit by the Consumer Financial Protection Bureau (CFPB). Among the allegations is that the defendants ran a lead aggregation business that did not attempt to match consumers with the best loan for their needs, as consumers were led to believe by some lead generators.
“In particular, consumers are likely to be steered to lenders that charge higher interest rates than lenders that comply with state laws, that do not adhere to state usury limits, or that claim immunity from state regulation and jurisdiction,” the complaint says.
The company the defendants ran, T3Leads, was also sued by the CFPB in a separate action.
Google too, as master aggregator, arguably does not attempt to match consumers with the best loan for their needs, nor have they likely been continuously vetting their lending advertisers for legal compliance. While Google has not been sued or accused of any wrongdoing, the CFPB seemed to be laying the groundwork for such a challenge in the future. And as a blanket hedge or perhaps after a direct threat, they’re now applying certain federal loan laws as if they were already subject to them.
You can see an example of the before-and-after of Google’s search results HERE.
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.
