In response to changing economic conditions, Lending Club announced that it has put a plan in place that will reduce its workforce by 460 employees.
That comes in addition to temporary reduced salaries for the company’s top executives including CEO Scott Sanborn who agreed to a 30% cut in his base compensation.
The company’s stock closed $7.39 on Tuesday, up from its April 3rd all-time low of $6.85.
The SBA finally released an individual PPP lender application for Non-Bank and Non-Insured Depository Institution Lenders on Wednesday.
Note that it doesn’t actually say “fintech” anywhere on it but that’s because fintech is a colloquial term. This Non-bank designation and the requirements therein are similar to the SBA guidance published on April 3rd that was widely believed to encompass fintech lenders.
As the coronavirus pandemic continues to disrupt the economy and affect small businesses as well as funders, deBanked will keep up with how various figures from the alternative finance sector are managing under the stresses of covid-19. Ranging from funders, to brokers, to those figures on the periphery of the industry, this series aims to highlight a variety of voices and we encourage you to reach out to deBanked to discuss how your business is doing.
One such voice this week was Shawn Smith, CEO of Dedicated Commercial Recovery. Specializing in debt recovery and legal enforcement, Smith told deBanked that his business has already seen a jump in demand, but that he reckons, for now, most demand will be for modifications on existing deals. According to Smith, many of his clients have explained to him that merchants have been requesting changes to the terms of the financing, either by tweaking the rates or length of repayment.
“Just in two weeks we can see an uptick, but by and large, it hasn’t majorly spiked. I think it’s spiking with the funders or the creditors right now. And we’ll be next on that … a major thing I’m hearing is a dramatic increase in inbound calls to our clients for modifications.”
In Smith’s view, this back and forth between merchants and funders is a better scenario than the alternative, making clear that honest communication is necessary in a crisis like this.
“Hopefully everybody’s working together through this, which does seem to be the case right now. I honestly think we’re past the point of some people calling this a hoax, or it’s not to be taken seriously. And I’m seeing a lot of rallying around the idea of ‘we’re in this together even though we can’t stand next to each other.’ A kind of American spirit of we’re going to beat this, we’re going to get through it.”
For Idea Financial, the idea of working together has manifested, just as it has for many companies across the world, digitally. CEO Justin Leto and President Larry Bassuk explained to deBanked that since their entire company is working remotely, the communication app Slack has stepped in for continual conversation between employees and Zoom is being used to check in with the team multiple times throughout the day.
“In many ways, our teams interact more now than they did when they were in the office together. We hold competitions, share personal stories, and really support one another. At Idea, the sentiment that we feel is that everyone appreciated each other more now than before, and we all look forward to seeing each other again in person soon.”
On Thursday, industry leaders took part in a webinar hosted by LendIt Co-Founder and Chairman Peter Renton. Various subjects relating to Covid-19 were up for discussion by Lendio’s Brock Blake, Kabbage’s Kathryn Petralia, and Luz Urrutia of Opportunity Fund, with the $2 trillion government bill being foremost among them.
Blake, who had been in touch with Senators Romney and Rubio, explained that most small businesses will be eligible for a loan out of the $350 billion fund that would be allotted to the SBA under the $2 trillion bill, saying that “a tsunami of loan applications is coming because almost all small business owners in America will qualify for this product.” The Lendio CEO also noted that business can expect to pay an interest rate of 3.75% on these loans, only a portion of each individual loan may be forgivable, and the max amount loaned out will be two and a half times the business’s monthly payroll, rent, and utilities combined.
Beyond the specifics of the 7(a) loan program, Blake expressed concern over the SBA’s bandwidth, saying that he was unsure whether or not the organization and the banks that it will partner with to deliver these loans will have the capacity to process them, a point echoed by Urrutia. “We’re talking about businesses that are going to need a ton of support,” the Opportunity Fund CEO said. “With these programs, the money doesn’t really get down to the bottom of the pyramid.”
Collectively, the group hoped that the SBA would open up their channels and allow non-bank lenders to use some of the $350 billion to fund small businesses, citing that neither government agencies nor banks have the technology nor processes to hastily deal with the amount of applications that will come. In other words, the SBA is working with “dinosaur technology,” as Blake called it.
One point of concern that continually arose during the conversation was the situation lenders will find themselves in as the pandemic continues. With Blake saying that an estimated 50% of non-bank lenders on his platform have hit the pause button on new loans, each of the other participants expressed worry about lenders being wiped off the map during and in the aftermath of this crisis.
As well as this, Petralia explained that funders can expect to encounter increased rates of fraud during this time: “In times like this, the bad guys come out in force … criminals are very creative and smart, so I promise you they’ll come up with new ways to fraud the system.” Discussing how they are dealing with this, the group mentioned that they were incorporating additional revenue and cash balance checks, as well as social media checks to see whether the business announced that it had closed due to the coronavirus.
Altogether, the conversation was one of uncertainty, but also one of hope to keep the wheels of the industry turning as more and more small business owners look for financing to keep their payroll flowing. As Renton said closing the session, “This is our time to shine, this is fintech’s time to show what it’s been working on for the last decade.”
As the market cheers the upcoming passage of a $2 Trillion stimulus bill that is intended to provide much needed support to small businesses, industry insiders are beginning to raise concerns about the SBA’s infrastructural ability to process applications in a timely manner.
In a webinar hosted by LendIt Fintech yesterday, Opportunity Fund CEO Luz Urrutia estimated that conservatively, it could take the SBA up to two months to even begin disbursing loans offered by the bill. Kabbage President Kathryn Petralia offered the most optimistic estimate of 10 days, while Lendio CEO Brock Blake thinks that perhaps it could take around 3 weeks.
Blake followed up the webinar by sharing a post on LinkedIn that said that small businesses were reporting that the SBA’s website was so slow, so riddled with crashes, that the SBA had to temporarily take their site offline.
Most skeptics raising alarms are not referring to the SBA’s staff as being unprepared, but rather the systems the SBA has in place.
A March 25th tweet by the SBA reported that the site was undergoing “scheduled” improvements and maintenance.
— SBA (@SBAgov) March 25, 2020
This all while the demand for capital is surging. Blake reported in the webinar that loan applications had just recently increased by 5x at the same time that around 50% of non-bank lenders they work with have suspended lending.
Some informal surveying by deBanked of non-bank small business finance companies is finding that among many that still claim to be operating, origination volumes have dropped by more than 80% in recent weeks, mainly driven by stay-at-home and essential-business-only orders issued by state governments.
It’s a circular loop that puts further pressure on the SBA to come through, none of which is made easier by the manual application process they’re advising eager borrowers to take on. The SBA’s website asks that borrowers seeking Economic Injury Disaster Loan Assistance download an application to fill out by hand, upload that into their system and then await further instructions from an SBA officer about additional documentation they should physically mail in.
Perhaps there’s another way, according to letters sent to members of Congress by online lenders. 22 Fintech companies recently made the case that they are equipped to advance the capital provided for in the stimulus bill.
“We seek no gain from this crisis. Our only aim is to protect the millions of small businesses that we are proud to call our customers,” the letter states.
Members of the Small Business Finance Association made a similar appeal in a letter dated March 18th to SBA Administrator Jovita Carranza. “In this time of need, we want to leverage the experience and expertise we have with our companies to help provide efficient funding to those impacted in this tough economic climate. We want to serve as a resource to governments as they build up underwriting models to ensure emergency funding will be the most impactful.”
How fast things come together next will be key. The House is scheduled to vote on the Senate Bill today. If a plan to distribute the capital cannot be expedited and the crisis drags on, the consequences could be dire.
“Hundreds of thousands of businesses are going to be out of business,” Urrutia warned in the webinar.
Members of Financial Innovation Now (FIN) have called on senior members of Congress to play a role in supporting small businesses with capital support and by loan distribution. Among their suggestions are:
- To direct Treasury to provide conditional capital to alternative lenders
- Permit these non-bank lenders to disburse loans, including via partnership with financial institutions
- Allocate a portion of funds for distribution via these lenders
FIN’s members include Amazon, Apple, Google, Intuit, PayPal, Square, and Stripe.
The organization also said:
An emergency Treasury facility will get funding to small businesses in a timely manner. FIN welcomes Congressional efforts to dramatically streamline Small Business Administration loans and include alternative lenders in this process as well.
The Canadian Lenders Association has announced its establishment of a covid-19 working group to support its members’ response against the coronavirus. The group will act as an advisory committee and resource for CLA members, while also serving as a lobbyist group to various government entities.
“We presently are in an unprecedented period in Canadian business,” CLA President Gary Schwartz said in a statement. “In the weeks and months ahead, CLA members will have an important role to play in supporting small business and in providing much needed credit to consumers across Canada. The goal of this initiative is to engage with and advocate on behalf of all stakeholders across the innovative lending ecosystem to help mitigate the disruption that covid-19 create in Canada.”
The working group will engage Canadian policy makers on key issues relating to small business lenders and small businesses. In a call, CLA Board Member and Merchant Growth Partner CEO David Gens said that “there’s a lot that governments can do to bridge businesses through this, so that once this virus is over, life resembles, as much as possible, what it looked like pre-virus … I don’t think we have seen enough yet in terms of the government response as it relates specifically to mom and pop small businesses … And I think that those businesses, those local storefronts really do make up the fabric of communities.”
Members of the Marketplace Lending Association are taking steps to alleviate financial pressure facing borrowers during the recent crisis.
“This includes providing impacted borrowers with forbearance, loan extensions, and other repayment flexibility that is typically provided to borrowers impacted by natural disasters. During the time of payment forbearance, marketplace lenders are also electing not to report borrowers as ‘late on payment’ to the credit bureaus,” a letter to senior members of Congress signed by Exec Director Nathaniel Hoopes states. “Members are also waiving any late fees for borrowers in forbearance due to the COVID-19 pandemic, posting helplines on company homepages, and communicating options via company servicing portals.”
Members of the MLA include:
- Funding Circle
- Marlette Funding
- College Ave Student Loans
- Arcadia Funds, LLC
- Citadel SPV
- Colchis Capital
- Community Investment Management
- cross river
- Fintech Credit Innovations Inc.
- Laurel road
- SouthEast bank
- Victory Park Capital
This week, Kabbage released its latest product, Kabbage Insights, to the public. Having been available privately since February 10th, the service is now free to all Kabbage customers. Released a month after Kabbage Payments, Insights adds to Kabbage’s ecosystem of products by helping small business owners identify and prepare for cash flow deficits.
Acting almost like a virtual assistant, Insights links to and analyzes a business’s financial data, serving up a report of how the company has performed historically, how it’s doing currently, and what the projections for its future are looking like. While this may sound like standard business planning and budgeting, the time and resources required to provide in-depth financial analyses are usually only in possession of larger companies. Insights, according to Kabbage’s Head of Income Products, Abraham Williams, is an attempt to bridge this gap between what larger businesses have traditionally had access to and what small business owners have been unable to claim.
“Kabbage has, for a number of years now, used data science, modeling, and machine learning to come up with financial decisions on whether to give someone a loan, and we’re right a lot of the time.” Williams told deBanked over the phone. “With this, we’re able to bring this modeling to our small business customers.”
As well as providing a breakdown of a company’s financial history and future, Insights offers a threshold alert system wherein customers can set a desired low-balance amount and receive notifications when they are nearing it. And by pairing Insights with Kabbage’s Small Business Revenue Index, users will be able to compare their company against those of a similar size/location, so long as these businesses are Kabbage customers. The data used to make these comparisons will be aggregated and anonymous.
The public launch of Kabbage is part of the company’s plan to create a fintech ecosystem that completely eliminates waiting times, and is the culmination of Kabbage’s ten years of collecting and analyzing small business financial data.
Or, as Kabbage CEO Rob Frohwein said in a statement: “As a small business owner for many years, I spent many sleepless nights trying to figure out whether I’d have the cash to pay my various expenses, including payroll at the end of the month and it’s been a mission of mine to solve this ubiquitous problem for all small business owners ever since. Kabbage is pleased to launch Insights, taking on this burden for small business owners and providing them with cash flow analyses that large enterprises have at their fingertips. We will continue to level the playing field for the small business owner.”
Today Lendio announced that it raised $55 million as part of its series E funding round. This included $31 million in equity led by Mercato Partners Traverse Fund and a $24 million debt facility from Signature Bank.
“We think that we’re just getting started, that there’s a really large opportunity in front of us and we’re excited that this round will give us the fuel that we need to continue to grow,” Lendio CEO Brock Blake told deBanked in a call. “We have a few different reasons for pulling together the round, but primarily, it’s all around investing in organic growth through partnerships and different marketing channels.”
Asked where these funding rounds may continue in an F, G, and H, Blake was unsure, saying that “every time we raise a round we do it with the expectation that it will be the last round.”
The funds in part will be used to further develop Lendio’s integrated lenders services, which are a set of tools used to identify which loan product and lender are the best match for a business owner; as well as the expansion of Sunrise, the bookkeeping platform Lendio acquired in 2019.
Luxury Asset Capital, the Denver-based lender that secures financing against goods such as Ferraris and Rolexes, has announced this month that it has acquired Borro and will be relaunching borro.com. LAC did not disclose the purchase price.
The news comes after LAC had been in talks to acquire Borro for years, LAC CEO Dewey Burke told deBanked. The merger will see Borro’s New York office remain open for business as many of its staff will stay on. As well as this, LAC and Borro will now be offering loans on a wider range of goods, that start at lower minimum amounts, and which will make use of more flexible terms, Burke stated.
“This was a transformational acquisition for us because obviously the competitor was out of the marketplace, but it really pushed us further to the forefront of being the preeminent lender in our niche space.”
Other news to come from announcement is that LAC is now offering to store customers’ luxury assets in its company vault, allowing the users who choose to do so to access capital immediately via a phone call. LAC will also be retiring its Lux Exchange and Pawngo brands, in favor of replacing them with Borro, because, as Burke put it, “we just thought it was a brand that was stronger than the legacy brands that we had.”
Beyond the merger, LAC plans to continue forging corporate partnerships, like that of its preexisting one with WatchBox, a trading service for preowned luxury watches. The strategy here being to link with the luxury goods ecosystem, enabling convenient pathways for customers to collateralize their asset.
Today LendingClub announced that it has agreed to acquire Boston-based Radius Bank for a purchase price of $185 million, made up by cash and stock. Holding more than $1.4 billion in assets, the merger will enable LendingClub to offer checking accounts and save millions in bank fees and funding costs each year.
Coming one month after LendingClub settled to pay out $1.25 million to resolve allegations that it charged rates in violation of Massachusetts state law, now, more than ever, appears to be a good time for the company to be on its way to attaining a bank and all of the FDIC-approved measures that come with it.
Described as a “no-brainer decision” by LendingClub’s CEO Scott Sanborn, the news comes after the fintech had tried unsuccessfully to get a bank charter. Becoming a popular trend among online lenders and fintechs, with Square having applied for one recently and Varo Money getting approved last week, the merger is the first time that a fintech has actually bought a bank. “Adding the capabilities of a bank charter to the LendingClub mix really changes the game both in terms of what we can do for our customers and what we can do for shareholders,” Sanborn stated.
Having been in discussions with Radius for over a year, it is believed that the purchase was made with the opinion that buying a bank would be less time-demanding than getting approved for a bank charter. The federal banking regulatory approval process is expected to take between 12 and 15 months.
In October 2019, LendingClub VP & Head of Communications Anuj Nayar spoke to deBanked about the company’s future, noting its intentions to broaden its offerings and transition from a product-centric company to a platform-centric company.
“We talk about a customer journey, moving our customers to being visitors, where they basically came to us for a personal loan and then come back to the company a couple of years later for another personal loan, to being much more about lifetime value of the customer and our relationship with the customer.” Nayar said. “The customer experience over the next year is going to change pretty dramatically as we start with bringing some of these new learning products on board but we’ve also been making clear that we’re investigating broader banking services that we’re going to be offering our customers.
Originally valued at $8.5 billion, LendingClub had one of the biggest US tech IPOs in 2014. However the share price has fallen more than 88% over the previous 5 years.
We recently sat down with Todd Hamblet, Fundbox’s new Chief Legal Officer, and asked his thoughts about what legislative or legal issues would be shaping the fintech industry this year. Between presidents and precedents, decisions are coming down within the next 12 months that will have a significant effect on the way Fundbox and other fintechs do business. Here’s what Todd had to say:
Q: What key issues or predictions do you see when it comes to legal compliance in the fintech industry in 2020?
A: My basic view is that I expect to see continued efforts to regulate the financial services industry and fintech. These regulations are likely to focus on protection of consumer and commercial borrowers, privacy, or data protection. That said, I don’t think that innovation and regulation are incompatible. I think that there is sensible regulation that can achieve the goals of protecting consumers of financial services without completely stifling fintech innovation.
I think the outcome of the election will have a significant bearing on how active regulators are in the fintech space. In the absence of leadership from Washington, I’m concerned that we’re going to continue to see state-by-state legislation instead of a federal overlay. California and New York are two states actively working to fill this void. State versus federal regulation creates the challenge of needing to comply with 50 state requirements, which sometimes might be at odds with each other, as opposed to a more unified regulatory regime. You just have to spend a lot of resources in researching, staying up to date, and modifying what in many cases is a fairly streamlined product offering to comply with different state laws.
I worry that too disparate of a regulatory regime can, in fact, stifle innovation. It won’t stop innovation, but it can make it more challenging. I am certainly not opposed to sensible regulation, but sometimes the best intentions can lead to anomalous outcomes. You always have good actors and bad actors, and in our space, for example, we’re trying to disrupt a very traditional way of underwriting and lending in a commercial space that just hasn’t been compatible with or user friendly for small businesses.
The small business community is under-served, in part because you’re talking about smaller dollars than your traditional banks are even willing to underwrite. You’ve started to see community banks and credit unions step in a bit, but even in those cases, the lending model is still paper-heavy. It’s not optimized for all the data that’s out there, the ability to use technology, or alternative data sources. I think that fintech companies like Fundbox are serving and filling a niche that is really valuable for small businesses. Think about a mom-and-pop shop. They need to be able to run their business. They don’t need to spend all their time going back and forth with their bank, trying to get a loan. They need quick access to capital that may be just to solve a short-term problem. It may be to meet payroll during a slow month. That’s the problem we’re trying to solve, and also doing it in a way that is bringing it into the 21st century. This means using alternative data sources and machine learning, not relying exclusively on credit reports or FICO scores, and using other metrics to look at the credit worthiness of an enterprise.
I find it really exciting. It’s really satisfying to know that we’ve helped a lot of small businesses at the heart of our economy. So I think additional regulation is inevitable, but I hope it’s reasonable and sensible, and that it serves the purpose of protecting the borrower but doesn’t impose so many requirements or obligations that it makes it impractical for a fintech company to try to serve that population.
Q: Is there anything else you see happening in the realm of compliance?
A: I think we’re going to continue to face additional regulation in the areas of privacy and data protection. In California, we have the California Consumer Privacy Act (CCPA) that came online on January 1st. This is a good example of how, in the absence of federal action, states are going to take up their own legislation. California is the first to have enacted a comprehensive privacy act that companies are now trying to deal with. It impacts not just California companies but any companies dealing with California residents.
We’re tracking legislative developments in other states who are looking to implement their own privacy acts. Absent some sort of harmonized federal overlay (such as the GDPR in Europe), if you have 50 states with disparate privacy regulations, it just becomes very challenging. Of course, we will do everything we can to be compliant, but we have limited resources—we’d love to dedicate our resources to developing and improving products for our customers, instead of worrying about whether we’re tripping up a novel requirement of a particular state’s privacy law. So a federal framework would be really helpful. I already mentioned regulation in the context of the next election, and I think whether there is interest in Washington with a federal privacy law will depend on that outcome.
Q: Aside from the 2020 election, what other issues is the fintech industry keeping an eye on?
A: There have been some interesting cases out there in the fintech space. There’s one case in particular that has created some uncertainty and confusion: the Madden case. Although the case was decided a few years ago, it looks like federal regulators are trying to take steps to clarify the ruling. I hope that 2020 brings better visibility into what’s going to happen there, since the uncertainty is impacting the financial services industry and fintechs.
Generally, Madden is a case that dealt with the “valid when made” concept. When a bank makes a loan, there are various usury laws that can be applicable, depending on the state in which the loan was originated. Under federal law, an FDIC-insured state chartered bank can originate a loan using the maximum rate of interest permitted in the home state of the bank and then “export” that rate into another state, regardless of the state where the borrower is located. Some states have higher usury rates than others, so the maximum rate can vary. It is well settled that when that loan was initially made by the bank, it was “valid when made.” But what happens if that bank decides to sell off that loan to a third party in another state? The Madden case (read broadly) calls into question the “valid when made” doctrine. It said that if the loan had an X percent interest rate when it was originated, but it was sold to a third party in a state that had a usury rate lower than X, that original interest rate may not be valid anymore because of the transfer. Studies have shown that this ruling has led to a decrease in the availability of credit in the states affected by the decision.
Banks have to rely on being able to originate and sell loans—this is a well-settled concept. The question is whether the Madden case is distinguishable enough from the traditional practice that it applies only to a particular scenario (a sale of debt) or whether it is calling into question the broader concept. The reason this impacts fintechs is because a lot of us rely on bank partnerships in order to serve customers in all 50 states. Through these partnerships, fintechs may acquire the receivables on loans originated by partner banks. The question for fintechs in the context of Madden is: when the fintech acquires a receivable, does the interest rate originally offered by the bank partner continue to be valid…or because the fintech is a third party, does some other interest rate cap apply depending on where the borrower is located?
Congress and some other federal regulators are working to clarify that the Madden case should be limited to a narrow set of facts, and that it should not serve as a precedent for disrupting the traditional understanding of “valid when made”. This would be welcome relief to the entire financial services industry, including fintechs. We hope to have this clarification in 2020.
The battle is on between lenders and brokers in the mortgage space as middlemen try to out-compete push-button loan technology.
Quicken Loans ran a Super Bowl Commercial that featured Game of Thrones Actor Jason Momoa aka Khal Drogo and its Rocket Mortgage product. The theme, that of being super comfortable in your home, is a complete 180 from the controversial route the company took during a previous year’s Super Bowl that prompted a negative response from regulators and viewers. Even if you’re not in the market for a mortgage, Momoa revealing “his true self” is pretty humorous.
But not everyone is a fan of what online direct lenders are selling. FindAMortgageBroker.com criticized “playing with rockets” when it comes to mortgages and advocated working with an independent local mortgage broker instead. Why work with a broker they say? Because brokers work with various lenders instead of just one. The company goes as far as saying that brokers are faster, easier, and more affordable and they sign off with the hashtag, #brokersarebetter.
Check it out…
A study released by Smarter Loans this week indicates that the Canadian alternative finance industry has grown since last year’s iteration of the report. Titled ‘The State of Alternative Lending in Canada 2019,’ the report highlights how the market has developed in regard to the age and gender of its customers, the level of trust in online lenders compared to financial institutions, as well as the levels of satisfaction felt by Canadians dealing with alternative funders.
The first of these, regarding aspects of the customers’ identities, demonstrates that generational gaps are as wide as they’ve ever been amongst customers. Each age bracket questioned by the study showed differing priorities when seeking a loan. Generation Z, fitting in between those aged 18-24, paid attention to funders’ track records and reputation when looking for funding; whereas millennials (25-34) sought speedier applications and approvals. Generation X (45-54) however appeared more money-minded, with the priority being placed on terms and interest rates; and Baby Boomers (55-64) demonstrated a desire for having someone to talk to, putting customer service at the top of their list.
Vlad Sherbatov, Smarter Loans’ President and Co-founder, told deBanked that these differences can be summed up as the values each generation has developed through experience. Explaining that Gen Z is “all about the personal brand,” Sherbatov said, “People that are younger now really associate with the company they work for, they ask, ‘Am I aligned with or would I be embarrassed supporting this brand?’” While the Millennials’ response indicates a greater desire for results, “as the age progress the intent increases.” Gen X is “more educated and experienced people,” who appear to place the greatest importance on money; and Baby Boomers, the least digitally fluent group, just want the online applications to go smoothly and to have ready access to assistance.
As well as age, gender appeared to divide customers, with women more likely to spend more time researching loan providers than men; and more men saying that they were interested in approaching a traditional financial institution for a loan in the future, with half of them being of this opinion compared to just 39% of women. As well as this, it was found that women are more likely to find the application easier, but are less likely to be approved than men.
Regarding trust and transparency, roughly 70% of Canadians believe alternative finance to be a safe way of getting a loan. With 80% of customers feeling that they are informed enough of the industry’s practices and 69% saying that they believe online loan providers are transparent about their fees, interest rates, terms, and conditions.
According to Sherbatov, “this is a trend that’s been moving in a positive direction” over the years. With the 2018 version of this study emphasizing the need to build trust with Canadians to reduce that 30% which is holding out on, Sherbatov maintains the need to do more. “The more transparency from lenders, the more trustworthy it’ll be, the further the industry will advance.”
Customers appear to be mostly satisfied with the service they received from alternative lenders in 2019, with the average rating taken from the 2,415 respondents being 3.4 out of 5. This being a 0.2 bump up from last year’s score. Interestingly, one of the sectors reporting the highest levels of satisfaction were those customers who received payday loans, noting that they appreciated the speed with which they were approved.
Altogether, the report paints a picture of the Canadian scene as a market still in flux, where growth is happening, albeit slight, and both the customers and the lenders still have much to learn from each other.
The Canadian Lenders Association’s largest annual event brought together hundreds of executives from the fintech and lending industries. It was hosted at MaRS, a dedicated launchpad for startups in Downtown Toronto that occupies more than 1.5 million square feet and is home to more than 120 tenants, many of which are global tech companies.
After OnDeck Canada CEO Neil Wechsler was introduced as the new chairman of the association, the day kicked off with a presentation by Craig Alexander, the Chief Economist of Deloitte Canada. Alexander explained that after some major warning signs sounded off late last year and early this year, Canadian growth and positive economic indicators have returned. He opined that politics in Canada and the United States will play a strong role in the economic outcomes of both countries going forward.
Panels on a variety of topics dominated the rest of the day with an interlude keynote from author Alex Tapscott who spoke about the financial services revolution.
The sessions concluded with an award ceremony focused around the Top 25 Company Leaders in Lending and the Top 25 Executive Leaders in Lending. The Canadian Lenders Association will make videos of the sessions available online. deBanked was in attendance.
Lending Club originated $3.3B in loans in q3 and reported a minor net loss of $400,000. That loss was a $22.4M improvement over the same period last year, mainly due to an increase in “net revenue” and a decrease in class action and regulatory litigation expense. One of those class action lawsuits against them was dismissed on October 31.
Lending Club is the number one provider of personal loans in the country and is continuing to grow their marketshare, CEO Scott Sanborn said during the earnings call. One analyst asked if their continued lead on that could be due to the market’s declining emphasis on growth as a performance metric. Sanborn responded by saying that the competition had not let up at all on marketing and that direct mail marketing and competition is still at operating at an extremely high level.
The annual Canadian Lenders Summit produced by the Canadian Lenders Association will take place on November 20th in Toronto. Registrants can use promo code: debanked40 for 40% off the ticket price.
When Direct Lending Investments (DLI), one of the largest online lending hedge funds, went bust, many were surprised to learn that the fund had discreetly gambled heavily in the international telecom market.
At present, a company called VOIP Guardian Partners I owes DLI $203 million. There’s a problem with recovery in that VOIP declared Chapter 7 bankruptcy this past March with little hope to repay because it itself re-loaned out DLI’s funds to telecom companies around the world and were supposedly never paid back.
VOIP is wholly owned by an individual named Rodney Omanoff, a former Hollywood talent agent. There is currently a criminal investigation into Omanoff for money laundering and “other criminal claims,” DLI’s receiver stated in a recent October report. Tens of millions of dollars potentially recoverable by DLI from VOIP are currently in the custody of The Netherlands while the investigation is being conducted.
Meanwhile, deBanked previously determined that VOIP had made bad loans of $158 million to companies purportedly in Hong Kong and United Arab Emirates, funds that came from DLI. The websites for both companies, Telacme Ltd. and Najd Technologies, Ltd, have gone offline.
The bizarre telecom investments in what was perceived to be a hedge fund focused almost entirely on the US online lending market, are not alone. DLI recently revealed that it also loaned millions to a company that put up the mineral rights for 6 oil and gas wells as collateral. It also loaned more than $25 million against a distressed commercial real estate property and a note backed by a VC investment in a cloud-based billing service company.
DLI’s receiver is not confident that it will collect the par amount of receivables on its books.
“Without providing individualized loan/portfolio assessments, the Receiver’s general assessment as of the date of this Report is that recoveries on the remaining loan/investment portfolio are likely to be far less than the $672.5 million in par value stated on the receivership books and records as of September 30, 2019. In fact, in connection with the filing of the 2018 tax returns the Receiver recorded a write down for tax purposes in the approximate amount of 40% of the par value of assets at December 31, 2018.”
Separately, the receiver wrote that most of DLI’s outstanding loan and investment portfolios are in “some form of financial distress or subject to disputes that may affect the timing and extent of recoveries on those portfolios.” It has attempted to keep the identity of those investments confidential so as not to cause any outside interference in those companies’ ability to repay.
Google is implementing new rules for consumer lenders who have apps in the Google Play app store. And they’re pretty strict. If a lender offers loans that exceed 36% APR, their app will be banned. If the repayment period of the loan is 60-days or less, the app will be banned.
It doesn’t matter what lenders call these loans, at least according to Google’s updated policy. “Peer-to-peer loans” were used as just one example of a loan category subject to the new rules.
Despite the new rules and a WSJ story announcing that payday loans had been shut out of the platform, deBanked determined that hundreds of payday loan apps are still available for download. This includes Nas-backed Earnin which is under investigation by regulators in multiple states.
Google banned payday loan ads from its search result pages in 2016. The move was viewed in some circles as hypocritical since Google’s VC arm, Google Ventures, had just invested in a payday lender (LendUp) that offered loans in excess of 400% APR. However, LendUp was also affected by the ban, a move that LendUp’s then-CEO Sasha Orloff embraced. Orloff blogged about the irony, writing, “If effectively enforced, Google’s ban will push the payday loan marketing competition away from ads and toward natural search, where safer alternatives with quality content can shine.”
Perhaps Google aims to achieve a similar objective with its app store.
The full text of Google’s new personal loan rule for its app store is below:
We define personal loans as lending money from one individual, organization, or entity to an individual consumer on a nonrecurring basis, not for the purpose of financing purchase of a fixed asset or education. Personal loan consumers require information about the quality, features, fees, risks, and benefits of loan products in order to make informed decisions about whether to undertake the loan.
- Examples: Personal loans, payday loans, peer-to-peer loans, title loans
- Not included: Mortgages, car loans, student loans, revolving lines of credit (such as credit cards, personal lines of credit)
Apps for personal loans must disclose the following information in the app metadata:
- Minimum and maximum period for repayment
- Maximum Annual Percentage Rate (APR), which generally includes interest rate plus fees and other costs for a year, or similar other rate calculated consistently with local law
- A representative example of the total cost of the loan, including all applicable fees
We do not allow apps that promote personal loans which require repayment in full in 60 days or less from the date the loan is issued (we refer to these as “short-term personal loans”). This policy applies to apps which offer loans directly, lead generators, and those who connect consumers with third-party lenders.
High APR personal loans
In the United States, we do not allow apps for personal loans where the Annual Percentage Rate (APR) is 36% or higher. Apps 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 apps which offer loans directly, lead generators, and those who connect consumers with third-party lenders.
In 2013, Borro, an innovative online lending company that was poised to disrupt pawn shop lending forever, invited me to their stylish offices at 767 Third Avenue in Manhattan. It wasn’t for a story per se, but rather to learn more about each other’s place in the world of online lending. deBanked was still called Merchant Processing Resource and Borro, well they were beginning to take a shine to the idea that business owners could be a good source of potential customers. Framed as a “luxury asset-backed lender,” deBanked would eventually cover the concept two years later as Borro and other lenders like them took off.
A then-executive of Borro explained the model as follows, “People don’t want to put their house at risk when they need capital. They’d rather lose the Maserati or a lovely piece of art than the house.” Ferraris, fine wine, rolexes, whatever, they would take it and make loans as low as $20,000 to as high as $10 million. Borro made $50 million worth of such loans in 2013 and doubled that number in 2014. Founded in the UK, the company’s expansion into the US was indicative of untapped demand and sky high potential. Big name investors got behind it including Victory Park Capital, Canaan Partners, Eden Ventures, and Augmentum Capital, eventually tallying up to more than $200 million raised.
But less than two years after deBanked ran its story, Borro went into administration, the UK’s version of bankruptcy.
Zelf Hussain, Partner at PwC, had to answer that question in his position as joint administrator of BGH Realisations (2017) Limited, a Borro holding company. Hussain retells the tale in a 2018 Companies House report. It is as follows:
In February 2014, Victory Park Management LLC (VPM) entered into a £67 million credit facility with a number of Borro companies which was guaranteed, inter alia, by the Company. The VPM loan was intended to allow Borro to expand its portfolio and make larger value loans to clients.
Following the VPM loan, Borro’s loan book increased in size and it moved into property lending. This was not a successful move and several loans went into default. In addition, Borro was unsuccessful in selling the underlying properties of defaulted loans in a timely manner. These issues exacerbated its cash flow issues due to carrying costs and the cost of interest due to VPM.
Following a review of the Borro business, it was decided that the property lending side of the business would be closed down. In addition, VPM became aware of other customer loans that were in arrears and these lead to further cash flow issues and a depletion of Borro’s working capital.
In an effort to raise additional capital, Borro instructed investment advisors to run a sales proces. No bids were received which would serve to fully repay VPM or provide any equity value beyond the debt obligations to VPM.
In light of the failed sales process, PwC was engaged by the Company to assess its options. Following discussions, VPM offered to purchase the business and assets of the Company, including its share in Borro Limited (BL) and therefore indirectly the shares in other Borro group companies.
On 15 November 2017 the Company directors resolved that placing the Company into administration to facilitate the transfer of ownership of BL to VPM was in the best interests of all stakeholders and, in particular, the Company’s creditors. VPM would be a well-capitalised and supportive owner, with a long term plan for the business.
We were appointed as administrators on 15 November 2017, and effected the sale of the business and assets to VPM in a pre-packaged transaction on the same day.
Since then, Borro trudged along, but earlier this year the company stopped making new loans.
The news was cheered by one of the same pawn shop lenders that Borro was supposed to disrupt. Jordan Tabach-Bank, a board member of the National Pawnbrokers Association and CEO of a family owned pawn shop business, used the company’s downfall to promote the benefits of doing business offline. “Our clients like the personal touch of a face-to-face loan, particularly when entrusting us to safeguard their most precious and expensive personal possessions,” he wrote in a release.