Marketplace Lending
Is Lending Club Going to Become a Balance Sheet Lender?
July 29, 2016
An email that Lending Cub sent out to many of their investors yesterday was also published on their blog. In it, CEO Scott Sanborn addressed the following questions, ones they’ve been hearing more frequently these days:
“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,” Sanborn wrote in response, “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.”
The industry around them however, is changing. Goldman Sachs, for example, is expected to introduce a non-marketplace consumer lending division this Fall to compete against companies like Lending Club.
Sanborn also wrote that there may be times that they use their balance sheet. “One example would be to enable test programs. Another situation would be to bridge imbalances on the platform,” he wrote. “In plain English, this means that if there is a timing mismatch resulting in more borrower demand for loans than available investor capital, we’ll consider investing in and holding the loans with the plan to sell them to investors in short order.”
So the answer is no, Lending Club is not becoming a balance sheet lender.
With Goldman Sachs’ Entry Into Online Lending Looming, Peer-to-Peer Lending is Deader Than Dead
July 28, 2016
When I first started writing about Lending Club and Prosper years ago, I was intrigued by the ability for everyday average Americans to have the opportunity to earn the yield of a credit card company. It was peer-to-peer or close enough anyway, and the allure was that you became the judge, jury and underwriter of people applying for loans, plopping down amounts as small as $25 at a time, hoping it’d come back plus interest.
There was a social movement that latched on to it too. When I attended the 2014 LendIt Conference, for example, I met people who were there for no other reason than to connect with other like-minded peers, whether it was to compare investing strategies, share free tools or just hang out. Those days are over. And with the looming arrival of Goldman Sachs into online consumer lending, people have asked me if I’m excited about what it means for “the industry.”
What industry? I wonder.
If Goldman truly begins making consumer loans online, they would certainly be competing with Lending Club and Prosper. But the fact is they’d also be competing with Discover, Bank of America and every other financial institution in the nation that makes consumer loans. And while it might be an odd market for Goldman to enter, they’re not really going to be part of “the industry” unless you’re defining the industry as traditional banking. Most of today’s online lenders rely on offline marketing like direct mail. Discover does the same for its personal loans and Goldman will inevitably follow suit. But there will be no peers on Goldman’s platform. Therefore with them being a bank, making loans “online” or on a “platform” doesn’t make them part of any special revolution, it just makes them modern and quite boringly so. There’s nothing sexy about a bank making loans to consumers. It’s a 20th century headline masquerading as 21st century innovation because the word “online” is in it.
Cynical I might be in my view here, but the movement that once was, is all but gone. The little guy’s opportunity to earn yield like a Wall Street bank has been replaced with actual Wall Street banks. And companies like Lending Club, who were the marketplaces fueling the flames of social revolution, have been caught engaging in shady Wall Street shenanigans like manipulating loan data. And if that somehow still didn’t mark the end of an era, surely the arrival of the most powerful bank on Wall Street makes it final.
Peer-to-peer lending became marketplace lending and marketplace lending will now become Goldman Sachs lending.
Exciting for an industry, you say?
You know nothing Jon Snow.
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.
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.
CommonBond Raises Equity, Debt and Acquires Personal Finance Startup, Gradible
July 19, 2016
Did someone say trouble in (online lending) paradise?
CommonBond has raised $30 million in equity, $300 million in debt and acquired a personal finance startup, Gradible.
The New York-based online student loan lender that specializes in higher education loans raised $30 million in series C equity round from new investor Neuberger Berman along with existing investors August Capital, Tribeca Venture Partners, Social Capital, Nyca Partners and Victory Park Capital. Individual investors in the round included finance veterans like former Citigroup CEO Vikram Pandit, former Thomson Reuters CEO Tom Glocer and former Barclays Private Wealth CEO Tom Kalaris.
The company plans to use the funds towards hiring folks in finance, sales and technology, building new technology platforms and scaling its loan operations. Founded by Wharton graduates David Klein, Michael Taormina, and Jessup Shean in 2012, CommonBond started as many startups do, with a founder’s problem of lack of affordable graduate student loan options. Today the company has crossed $500 million in funded loans and provides MBA loans, refinances student loans and offers personal loans.
Non-bank student loan providers make up just a sliver of the market, says CEO David Klein. “Over 99.99 percent of the student loan market is driven by the federal government and private banks and the the tiny piece of the market is made up by CommonBond and SoFi,” he said. “And as big as that sounds, relative to the largesse of the market, we don’t even make up a percent of that.”
The Gradible acquisition should answer some of that for CommonBond, giving it access to 40 million students and a network of employers. It plans to build a portal for employers who can contribute directly to their employees’ monthly student loan payments, through a student loan contribution platform similar to a 401(k) matching program.
CommonBond competes with rivals like SoFi which has made news for everything from being offensive, offering dating services, selling mortgages and its purported plans to become a bank. And CommonBond isn’t shying away from other loan products either. “Our long term vision is to provide our customers with their evolving needs and we are well positioned to provide other products and services over time.”
In terms of its lending operations, CommonBond uses a hybrid model of funding by holding half of the originated loans on its balance sheet and selling the other half on a marketplace. “To weather any storm, it’s important to diversify capital sources and we think the hybrid model will end up being the only option,” Klein said.
Lending Club Hires BlackRock’s Patrick Dunne to Head Investor Group
July 18, 2016Lending Club has a new chief capital officer.
The company hired Patrick Dunne who headed iShares Global Markets and Investments at BlackRock. With 25 years of industry experience, Dunne has overseen 700 investment products with over $1 trillion assets under management.
As the resurging online lender looks to amend investor relations, as the new chief capital officer, Dunne will manage Lending Club’s Investor Group which spans individual investors, strategic partnerships with retail distribution partners, banks and other institutional investors including asset managers, pensions, foundations, and endowments. “Patrick will play a key role in reaffirming our continued commitment to our investors,” CEO Scott Sanborn said in a statement.
After founder and initial CEO Renaud Laplanche exited the company on May 9th, Lending Club has been playing musical chairs with its management team while slashing 179 jobs. At the company’s last annual shareholder meeting held last month, Scott Sanborn was named CEO while executive chairman Hans Morris was appointed chairman of the board.
The challenge for most online and marketplace lenders in this credit environment lies in diversifying their capital sources and roping in more investors to buy their loans. And, lenders are turning to investment bankers for this purpose. Last week, UK P2P lender Funding Circle roped in Nomura’s European head, Jeremy Bennett as chief financial officer who designed and ran UK’s Asset Protection Scheme, which insured risky assets of big banks like Royal Bank of Scotland.
Lack of deposits as a capital source has led non-bank lenders to depend on securitization and retail and institutional investors. The road is long and the trudge is harder. Will the new crop of hires lead the way?
Are Retail Investors Really The Secret to Marketplace Lending Stability?
July 18, 2016
One anecdotal lesson that marketplace lenders seem to be circulating in 2016 is that outside institutional capital alone isn’t enough to succeed long term, at least on the consumer lending side where the yield spreads are typically narrower. Retail investors are crucial, some of them say, to achieve balance. In late March for example, a group of industry captains predicted there would be a return to the industry’s peer-to-peer roots, partially because of the assumed loyalty that retail investors offered. That was before several players stumbled, reported weak loan volumes and announced layoffs. So are we now seeing a return to the retail investor?
That assumes that they were a part of the industry’s capital structure to begin with. And that’s never really been the case. For Lending Club, about 20% of their loans were funded by self-managed individual investors in 2015. 47% came from individuals through investment vehicles or managed accounts. For Prosper, individual investors only made up about 5% of loan funding. And then that’s about it. Everyone else relied on wealthy accredited investors and institutions from the start.
“Retail investors are more loyal to a specific platform,” said Fundera’s Jared Hecht during that March panel. But he probably assumed, to his credit, that the platform wouldn’t do anything to jeopardize that trust. Lending Club, of course, is a good example of what happens when that trust is violated after the CEO resigned in a scandal that included the manipulation of loan data.
And here’s how retail investors reacted, according to a Morgan Stanley report: 24% of retail investors that were aware of the scandal and DOJ investigation said they would no longer be making new investments on the platform. Another 24% said they would stop temporarily. Only 16% of those aware said they wouldn’t be changing the amount of new investments they make. But that’s for those aware. Many retail investors haven’t any idea that something happened.
“82% of investors (not primed with information about the investigation) planned to invest more or the same amount on the platform,” they reported, which may speak more to why retail investors would be a more stable capital base than anything else, the fact that they may be more likely to be blissfully unaware or detached from what’s happening to the platform they’re investing on. That’s a frightening thought but perhaps not much different than some investors who don’t pay any attention to their equity investments so long as the dividend checks keep coming.
How many people cashed out their mutual funds after Brexit, for example? I know I didn’t. It never even entered my mind despite my portfolio losing about 4% in a few days. It of course came right back up. Contrast that with Lending Club investors who haven’t lost anything as a direct result of the investigation.
And in that sense, it probably all comes down to the relationship a retail investor has with the platform. Do they feel that it’s safe enough that they can just let it roll in the background of life to generate steady returns like a mutual fund? Or do they consider it a speculative investment where they’re in today for some yield but out tomorrow at the first sign of danger? The former would indeed be the sweet spot for a platform looking for a stable capital source, but their long-term ability to tap into this group will depend on whether or not they can prove to regulators, particularly the SEC, that they will not violate the privilege bestowed on them to do this.
After all, Lending Club and Prosper for a long time were the only platforms to have obtained special SEC approval to solicit retail investors. StreetShares is another company that has recently joined them, but their ability to tap into this investor class is made possible under a different law, the JOBS Act’s Regulation A+. Under that, they can only raise a maximum of $50 Million, an amount too small for the likes of companies like SoFi or OnDeck if they were to seriously consider making retail investors part of their capital base.
Therein lies the conundrum about retail investors being a key component of long term capital sustainability, few platforms can even access them. And with regulatory skepticism starting to creep in, the window to pursue that as a realistic channel might already be closed. Which means that any platform that was totally reliant on Wall Street to begin with, might forever be stuck with them and their volatile whims.
One doesn’t need look any further than to see the consequences of that realization than the rumors that SoFi may consider becoming a bank to guarantee its long term survival, the company whose actual slogan is “Don’t Bank.” Dependent on raising evermore outside capital, the lender seems to have recently reached the ceiling of institutional investor appetite for its products, according to the WSJ. And this at a time when their loans are performing well and the economy is still expanding. The WSJ reported that SoFi CEO Mike Cagney might be seeking regulatory approval for a state banking charter in Utah and with that the ability to offer credit cards and deposit accounts. The story states that the deposits wouldn’t be used to fund the loans themselves. If true, they would still accomplish another objective by doing that, diversifying the company out of the one-dimensional rat race of having to make evermore loans even when the market can’t tolerate them anymore.
For marketplace lending, the peers in peer-to-peer may only offer stability if you can access them. For everyone else, there’s another set of retail roots that platforms could over time head towards, deposits. Banks figured that out a zillion years ago. And to that end, marketplace lending might be known by a more fitting name in the not-to-distant future, banking. That will mean tighter controls and stricter regulations but in the end ensure long term stability. And if that’s what a platform is really trying to achieve, then maybe they’re heading to an ironic end.
The industry could return to its retail roots then after all, but a retail level far more simple and basic. Stability may just mean a teller window and an ATM machine…
Fintech Hearing Summary (7/12/16)
July 13, 2016
A hearing about marketplace lending put on by the House Subcommittee on Financial Institutions and Consumer Credit covered a wide array of topics on Tuesday. From merchant cash advance to business loans to consumer loans, the witnesses tried to help members of Congress understand the circumstances in their respective industries.
Parris Sanz, the Chief Legal Officer of CAN Capital, explained the differences between a receivable purchase and a loan, a distinction that needed to be made in order to answer some of the questions from Missouri Congressman Lacy Clay.
The questions were generally exploratory and broad. For example, Georgia Congressman David Scott wanted to know what made consumer loans different from business loans. Sanz answered by saying that commercial loans power the economy and that their application was for creating jobs and growing businesses. More to the point, he added that these weren’t hobbyists calling themselves businesses because their average customer has been in operation for at least 13 years and does $1 million to $2 million in revenue a year. These are sophisticated users of capital, he said.
Missouri Congressman Blaine Luetkeyemer, who first read comments he obviously disagreed with that were made by CFPB Director Richard Cordray, repeated the question about the differences between the two. Rob Nichols, the CEO of the American Bankers Association, responded by saying that he didn’t believe the lines were blurred. Cordray had previously said that he believed the lines were indeed blurred, which created some fear in the commercial finance community
Where they might be blurred is in regards to data collection as mandated by Dodd Frank’s Section 1071, something that was only touched upon lightly. Ms. Gerron Levi, Director of Policy & Government Affairs, National Community Reinvestment Coalition, said that we don’t know a lot about marketplace lenders because the data isn’t being collected yet.
While there was some skepticism by the Members over how data was being used by fintech companies to make decisions, it appeared to be early days for a lot of the subjects such as the potential for creating a limited federal charter and whether or not these customers are truly underserved or are just being acquired by marketplace lenders because there is a degree of regulatory arbitrage occurring.
The tone of the hearing was overall neutral in nature.
