p2p lending
Real Estate Lender Patch of Land Sells $250 Million in Loans
February 11, 2016
Real estate lending platform Patch of Land announced that it signed a $250 million agreement with an east coast based credit fund to purchase its loans in a forward flow arrangement.
The reluctance to name the city or state of the fund suggests that in doing so would too easily reveal who it is.
Patch, an LA-based lender which uses a data-driven underwriting model, promises investors a risk adjusted return with extensive available data to support the underlying credit decision on each loan.
The company founded in 2013 had raised a million in seed funding and $125,000 in debt in 2014, followed by $23 million in Series A funding last year. And it has funded more than 200 projects, with an average blended rate of return to investors of 12 percent
This is continued evidence of institutional interest in loans generated by marketplace lenders. JP Morgan Chase bought loans worth a billion dollars from Santander Consumer USA Holdings Inc earlier this month. The bank also partnered with OnDeck in December of last year to facilitate the underwriting of the bank’s small dollar small business loan program.
In an interview with Bloomberg, Funding Circle’s CEO Sam Hodges said that it’s the first of many such partnerships to come where big banks will realize the potential of fast-growing fintech startups.
Lending Club nets $4.3 million in Q4 profits
February 11, 2016Wants to buyback shares for $150 million.
Online lending marketplace Lending Club earned $4.3 million in profits in Q4 last year and facilitated loans worth $8.4 billion to small businesses and consumers in 2015.
The San Francisco-based P2P lender’s revenue grew in Q4 grew by 93 percent to $134.5 million compared to $69.6 million in the comparable period a year ago. Loan originations also grew to $2.58 billion from $1.41 billion in 2014.
The company, which was the first P2P lender to register its offerings as securities with the SEC is gung ho about its growth prospects. “We have earned the trust of 1.4 million customers,” said founder and CEO Renaud Laplanche. “We have considerable room to grow our existing products, and intend to continue to expand both our product line and addressable population going forward.”
The company which announced that it will also buyback shares worth $150 million through open market operations or in private transactions in compliance with Securities and Exchange Act Rule 10b-18.
This comes amidst doubts raised about the company’s algorithm-based lending model. A Bloomberg report last week questioned Lending Club models with data to show that its actual defaults (7 to 8 percent) were higher than forecasts (4 to 6 percent). The company responded to the report explaining the data and reassuring investors that the loan performance is within expectations.
Lending Club Borrowers Are Paying Off Really Early – And There’s Something Weird About It
February 11, 2016
This week I surpassed more than 500 lifetime early note payoffs on Lending Club. Considering that loans on the platform are either for a fixed term of 36 months or 60 months, I was quite surprised to see that the average early payoff was happening just 10 months in. My portfolio is too young for even the first loans I ever bought to have reached maturity so the data isn’t entirely statistically relevant. But to put what I’ve experienced so far in perspective, out of every note I’ve ever bought on this platform up to and including today, 17% of them have already paid back early in full.
One borrower paid back their 3-year loan in just 8 days!
Of the 145 5-year notes I bought just 20 months ago in May 2014, 36% of them have already paid back in full. This is astounding, but apparently old news. A PeerCube analysis conducted two years ago revealed that 80.6% of all fully paid loans were pre-paid in full before reaching maturity.
At face value, these statistics could be used to boost investor confidence. The loans are so affordable that just look at how many people are paying off early! But according to Anil Gupta at PeerCube, these borrowers might not be paying these loans off at all. Lending Club might be refinancing the loans with a new loan, which cashes out the original investors early in the process. As said in his analysis:
A PeerCube user who is also a borrower on Lending Club mentioned that he has been receiving requests from Lending Club to refinance his loan. Such offers are very attractive to borrowers whose FICO score may have gone up since taking the first loan. In this case, the second loan may come with lower interest rate due to improved credit score. Moreover, there is no deterrent in the form of pre-payment penalty for borrowers to refinance the loan. Lending Club benefits from a borrower refinancing an existing loan by charging additional origination fee from the second loan, i.e. more revenue.
Lending Club’s website says that to be eligible for a second loan, borrowers have to have made 12 months of successful, on-time payments on their existing Lending Club loan. “Sometimes,” however, they “identify customers who are eligible for an additional loan before those 12 months and ask them to apply.” That’s the policy for having two active loans at once, not for refinances specifically.
Lending Club’s quarterly earnings reports make no clear mention of repeat borrowers and there’s no way for an investor to know if the debt consolidation loans they’re taking risks in are really just refinances of existing Lending Club loans. But even if they were, that wouldn’t necessarily make them a bad thing.
Would you rather invest in a borrower who has already proved 12 months of positive payment history OR somebody brand new? But then again, would you rather invest in a refinance of a loan that was originally taken to refinance a credit card?
There’s a downside to loans being paid off early. If an equal reinvestment opportunity does not exist to immediately replace the paid off loan, then the investor loses. If they are no longer reinvesting anyway, then an early payoff deprives the investor of the interest to offset future chargeoffs from the remaining loans that will go bad. And worse yet, investors are forced to pay a penalty to Lending Club for any loan that pays off early after the first 12 months in the form of a 1% fee on all outstanding principal. Seriously, investors are penalized for early payoffs for which they have no control over and are not allowed to know why or how the borrower paid off earlier.
Sounds very weird to me…
Yirendai Gets Smoked on Global P2P Lending Fears
February 10, 2016
The market has turned overwhelmingly bearish on tech-based lending companies lately, but no company has perhaps felt the brunt more than Yirendai, a Chinese company listed on the New York Stock Exchange. Since their IPO less than two months ago, the price has already dropped by more than 60%. Investors seem to be basing that judgment on one thing, the general fear of that business model in China.
And who can blame them? Only a week ago, Ezubao, one of China’s largest peer-to-peer lenders, was revealed to be a $7.6 billion Ponzi scheme. More than 900,000 investors were impacted. The CEOs of more than 250 similar companies there are in hiding after experiencing failures of their own.
On February 3rd, Yirendai announced a framework agreement with China Zheshang Bank Co., Ltd and CreditEase Pucheng.
“I am pleased to announce the cooperation between Yirendai and Zheshang Bank in the field of microloan lending and consumer finance,” said Ning Tang, Yirendai’s Executive Chairman. “This cooperation illustrates Zheshang Bank’s recognition of our strong online operation capabilities. It will provide the opportunity for individual borrowers to receive lower cost funding. ”
The news fell flat and the stock dipped down that day. The company closed at $3.83 yesterday, a new all-time low on no news.
How the FDIC Defines Marketplace Lending
February 5, 2016Marketplace lending is one of this year’s hottest buzzwords but its meaning is not very intuitive. According to a recent Federal Deposit Insurance Corporation (FDIC) report, “marketplace lending is broadly defined to include any practice of pairing borrowers and lenders through the use of an online platform without a traditional bank intermediary.” This might sound similar to peer-to-peer lending and that’s because it’s the same thing, the FDIC explains. “Although the model, originally started as a ‘peer-to-peer’ concept for individuals to lend to one another, the market has evolved as more institutional investors have become interested in funding the activity. As such, the term ‘peer-to-peer lending’ has become less descriptive of the business model and current references to the activity generally use the term ‘marketplace lending.'”
Voilà, marketplace lending is what you get when peers are replaced by private equity firms, pension funds, and hedge funds. Additionally, there is a general assumption that the intermediary platform is also underwriting and grading the loans.
The FDIC separates marketplace lenders into two categories, the “direct funding model” and “bank partnership model,” both of which are illustrated below:
In both circumstances, investors are actually buying securities, rather than participating in the loans themselves.
The FDIC says that marketplace lending can encompass unsecured consumer loans, debt consolidation loans, auto loans, purchase financing, education financing, real estate loans, merchant cash advance, medical patient financing, and small business loans.
For even more information, read the official report.
Ponzi Scheme Threat Hangs Over Marketplace Lending
February 3, 2016
What if all the notes you bought on a peer-to-peer or marketplace lending platform were tied to loans that didn’t exist?
Such a scenario has not only happened but is a recurring theme over in China. The recent $7.6 billion fraud that was allegedly perpetrated by the management of Ezubao (a Chinese-based P2P lender) affected more investors than Bernie Madoff. Approximately 900,000 investors were impacted, according to CNBC.
But it gets worse, way worse. If you can believe this, the bosses of 266 other Chinese peer-to-peer lenders have fled and are in hiding. And that’s just in the last six months. Ratings agency Moody’s has said that 800 platforms have already failed or were recently facing liquidity issues.
In the case of Ezubao, there’s little doubt about what happened. Company executive Zhang Min told Xinhua news agency, “Ezubao is a Ponzi scheme.”
Lend Academy’s Peter Renton, who has witnessed the peer-to-peer lending industry in China firsthand wrote in his blog today that it’s too easy to start a platform there. “You need just US$1,000 to create a smartphone app, then obtain a very inexpensive business telephone license and you can be up and running,” he wrote.
Unsurprisingly, another Chinese peer-to-peer lender that just recently joined the New York Stock exchange, Yirendai (NYSE: YRD), was collateral damage to the Ezubao bombshell. Shares of the company dropped nearly 21% Tuesday to $4.88, down more than 50% from their IPO price.
Does the threat exist in the US?
Here at home, industry insiders are hardly worrying about China. “Could this level of fraud happen in the US?” Renton asked in his blog. “I think it is highly unlikely. There is a well-developed ecosystem in the US for both consumer and small business credit and appropriate lending licenses need to be obtained in most states before a company can begin operations.”
Renton is partially right. Most of the well-known platforms in the US are operating under watchful eyes. But there is a surging over-the-counter (OTC) marketplace that most outside investors don’t even know exists. Enter the syndication market where commercial finance brokers and investors can co-invest in loans or merchant cash advances through private marketplaces that may or may not have a website. With alluring yields of up to 100% a year or even more, it’s the perfect environment to pull off a scam if one maliciously intended to do so. [note: most are not scams at all]
The OTC market for these investments rely almost entirely on trust. There is little to no transparency into how investor funds are actually used. deBanked has received tips over the last twelve months that some companies have co-mingled investor funds with operational cash flow, with the result sometimes being a total loss of investment. Several lawsuits have been filed against these alleged fraudsters, deBanked has discovered, but none compare to the scope of damages taking place in China.
The last major Ponzi scheme to grip the commercial side of the industry for instance, involved Agape Merchant Advance (AMA), a Long Island based company that was part of a wider fraud conducted by sister company Agape World Inc. According to the 2012 complaint, “the defendants actually ran a Ponzi scheme, paying returns to Agape and AMA investors not from any profits earned on investments, but rather from existing investors’ deposits or money paid by new investors.”
In a report published by the FBI that explained how it worked, they wrote, “the defendants received an e-mail from Agape’s loan underwriter informing them that the interest rate that a bridge loan borrower had agreed to pay Agape was only 16 percent for one year, at the same time the defendants had promised to pay their investors 12 percent for 60 days for this investment, or 73 percent for the year. The defendants raised approximately $32.5 million for this bridge loan, although the loan was never made.”
The fraud, carried out mainly by its chief executive Nicholas Cosmo, was captivating enough to earn it a spot on CNBC’s American Greed series.
At the time Agape was operating, such yields should’ve raised an immediate red flag for investors, at least that’s the moral the TV show tried to communicate to viewers. In the real world today, those yields could be considered too low since actual commercial bridge financing transactions can pay out up to 40% over 90 days. And therein lies the danger. When legitimate deals are transacting for incredible premiums, how do you resist considering an investment?
It’s easy to chalk up China’s peer-to-peer lending fraud woes to China being China. But the pervasiveness and ease with which such scams have been carried out should send a strong message to marketplaces in the US.
Do you trust where your money is going? Are they using it exactly how they said they will?
Next on American Greed…
JP Morgan Deal With Santander Shows Nothing To Fear From Lending Club Loans
February 2, 2016
After Santander Consumer USA Holdings Inc. [NYSE: SC] announced they were trying (almost desperately it seemed) to shed $1 billion worth of Lending Club [NYSE: LC] loans from their balance sheet, investors weren’t sure if was the loans themselves that were a problem or if there was something else going on.
Santander CEO Jason Kulas said back in October that, “although the personal lending portfolio is performing well, we no longer intend to hold these assets for investment.” The rationale was that they would refocus their efforts on subprime auto lending. The market didn’t take the news well and rewarded Santander by gutting the share price from $22.10 on October 28th down to $10.10 by February 1st.
In a report put out last week by Chris Donat, a company analyst at Sandler O’Neill & Partners, it was intimated that the Lending Club loans Santander was still holding may have contributed to the fourth-quarter loss of $232 million that they reported last week on its unsecured personal loan portfolio. “In light of the damage that the personal loan portfolio inflicted on Santander’s income statement in 4Q15, we will be relieved when Santander is out of this business,” Donat wrote.
But fears of possible toxic Lending Club loans subsided on Monday when the WSJ announced that JP Morgan Chase was acquiring Santander’s portfolio and at a “premium.” The average FICO score of those loans is reportedly around 700. “The sale was being closely watched by credit markets as an indicator of the health of the market for online personal loans,” the WSJ said.
Lending Club’s share price closed up 3.12% on the news, but is still stuck near its all time low.
SoFi to Air Super Bowl Commercial (Watch it here!)
January 29, 2016“great loans for great people,” the narrator says after zooming in on several young urban professionals. Humorously, the TV commercial, which will air during the Super Bowl, labels some people as “not great” and therefore ineligible to join a rather exclusive club of people who can get great loans. Watch the video below:
NOTE: SoFi has modified their ad to be less controversial by removing the last spoken line from it. The “you’re probably not [great]” ending apparently received some PR backlash. The updated ad is below:
Credit card companies use a similar technique of appealing to consumers by bestowing them with some kind of status. With labels such as Diamond Preferred, Platinum, Platinum Advantage, Platinum Prestige, Gold, Premium and World Elite, it’s an attempt to make the borrower feel like they are part of an important club.
SoFi however, may be the first to showcase borrowers who are just not good enough to be in their club, with the obvious intent that the commercial will be something to talk about. People are probably more likely to share something that is controversial than something that is plain vanilla. With 30 second slots going for $4.5 million this year, SoFi probably can’t afford to go unnoticed.
As part of a promotional campaign, SoFi has been selling their vision of a bankless world through a dystopian online video:
SoFi CEO Mike Cagney has consistently cast himself as the anti-banker, and once joked that his whereabouts are monitored by friends at all times to limit the opportunities for bankers to kidnap him.
What do you think about the SoFi commercial. Is it great?
