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THE ALTERNATIVE LENDING REPORT Volume 1, No. 2 May 4, 2017
input/output CAN ALTERNATIVE DATA SOLVE ONLINE LEGAL & REGULATORY LENDERS’ ‘ALGORACISM’ PROBLEM? MCA Funder 3 Leaf Capital Called a Fraud by Partner ...... 3 By Tim Lloyd STRATEGY A March 2017 letter written by Con- Beyond the prevalence of high costs, Online Commercial Lending: gressman Emanuel Cleaver, II (D-Mo.), double dipping, hidden fees, misaligned How it’s Changing the Landscape...... 4 to Consumer Financial Protection Bureau sales incentives and stacking, the HBS Live Oak Cuts Risk, Woos Director Richard Cordray raises fresh con- paper opines that new algorithms could Women in Business ...... 5 cerns about “algoracism” tainting the credit- “create unfair or discriminatory access to FINANCE risk-scoring models used by online lenders. credit.” This problem disproportionately Online Lending Associations Rep. Cleaver’s suspicions draw heav- affects black, Hispanic and women-owned Targeting Fintech and Education...... 6 ily from a 2016 Harvard Business School businesses, in addition to entities that NEW TECHNOLOGY paper titled the “State of Small Business operate in low-income neighborhoods. & PRODUCT LAUNCHES Lending,” which addresses digital disrup- Biased algorithm design can occur if Platform announcements, new tion’s impact on regulation. Cleaver’s let- engineers code data correlation parameters software and services, and notable ter highlighted five predatory practices with attributes that make inadvertently product releases...... 7 cited by the HBS paper as pervasive in the discriminatory assumptions, which could INDUSTRY NEWS “Wild West” of online lending and alleges be violating the Equal Credit Opportunity A recap of recent news of that risk-scoring algorithms may be Act. ECOA prohibits creditors from dis- importance to lenders, brokers, designed to discriminate against minority- criminating against borrowers on the basis and service providers...... 8 owned, small business borrowers. of race, color, religion, national origin, sex, LOAN TAPE Minority-owned businesses comprise marital status, age or because they receive Banks & Companies with Exposure roughly 15% of the 28.8 million small income from a public assistance program. to Small Business Loans...... 10 businesses in the United States, according But it’s difficult to identify biases in M&A + Partnerships & New Investments.... 11 to a 2016 Small Business Administration fintech credit-scoring models due to regu- Indices/Funds of Interest/SBA Activity...... 12 report. latory uncertainty about lenders’ obliga- Credit Conditions/Indicators...... 13 Turn to ‘Algoracism’ on page 14
ALR’S RESEARCH ACTIVITY REPORT April 18-May 2 STATE OF THE MARKETPLACE LENDING SECTOR 184 Daily news items published By Brian O’Connell (Note: This is the first in a two-part series on the future of marketplace lending. 1,200 Part 2 will appear in the next Alternative Lending Report.) Companies researched for the Small The sugar rush may be over for the online lending sector, as 2017 is Business Lending Directory starting to look a lot like 2016, which saw industry angst after layoffs, scan- dals, and financial underperformance. 2,540 OnDeck lost $36 million in the fourth quarter of 2016, and lost $86 mil- People researched for the Small lion for the year. Business Lending Directory Lending Club, reeling from a data-tampering scandal that triggered the ouster of company CEO Renaud Laplanche, saw loan originations fall 23%, 16 to $1.99 billion in the fourth quarter of 2016 and has seen its stock price Datasets researched move sideways ever since. Chicago-based online lender Avant shed workers in 2016, reportedly Turn to ‘Marketplace Lending’ on page 16 Have questions? Call us (516) 876-8006. For use by original recipient only. It is illegal to forward or otherwise distribute without permission.
THE ALTERNATIVE LENDING REPORT Commentary
EDITORIAL Editor & Publisher Steven Dresner ADDRESSING THE LACK OF TRANSPARENCY Contributing IN SMALL COMPANY LENDING Editor Steve Lord By Steven Dresner Contributing People who take news reporting seri- thresholds to define the scope of the Writers ously consider the “Five W’s” principles to small company lending market. We Steve Evans live by. According to the Five W’s, infor- do not cover consumer lending, except Grant Harvey mation can only be considered complete where we believe information in that Tim Lloyd if you’ve answered the questions of who, segment would be useful to our readers. Brian O’Connell what, when, where, and why. And so I A final note about our coverage: Gary Stern thought it would be fitting to introduce While we publish information about you to The Alternative Lending Report by developments globally, our primary focus Production Editor Gary Newman answering these questions. is on the United States. Who’s the publisher? DealFlow Why are we doing this? There’s very Operations Financial Products (a/k/a “DealFlow”), little transparency in this market. With- Lenny La Sala is the publisher of The Alternative Lend- out government-mandated loan report- ing Report. As a company, we have con- ing, or public aggregation of data, there’s Technology Tarun Gupta siderable experience providing news, simply not enough information for peo- information, and analysis across a variety ple to make good business decisions. of deal markets. Since 2003, our team Our call-to-action at DealFlow has has worked to make capital markets always been to make markets more
THE ALTERNATIVE LENDING REPORT more efficient by offering unique insight efficient through information and data. to thousands of clients of our publica- That’s what we’re aiming to do in the DealFlow Financial Products, Inc. P.O. Box 122 tions, events, and database services. small company lending segment. Syosset, NY 11791 If you’re a lender, broker, or service What’s our publishing frequency? T (516) 876-8006 provider, we’re working for you – and Our first product, Small Business Lend- F (516) 876-8010 The Alternative Lending Report is meant ing Daily, is a free electronic newsletter [email protected] to serve as your trade publication. that’s published Monday through Friday www.smallbusinesslending.io What does the report cover? The and delivered to your inbox. We cover a The Alternative Lending Report™ is published on the first and third Thursday of every month, Alternative Lending Report is dedicated broad swath of topics in our Daily email except the second Thursday of August and the second to covering the small business lending such as “traditional” bank lending and Thursday of December. Subscription rate: $995 per year for 22 issues, delivered electronically. ecosystem including alterative investment we aggregate original articles, research All rights reserved. © 2017 DealFlow Financial structures, online and marketplace lend- reports, and news releases. Products, Inc. Photocopy permission is available ing, and non-bank financing structures The Alternative Lending Report is pub- solely through DealFlow Financial Products. Copy- ing, distributing electronically by email, or duplicat- such as factoring, invoice financing, mer- lished in PDF on the first and third Thurs- ing this publication in any manner other than one permitted by agreement with DealFlow Financial chant cash advance, and revenue-based day of each month. As we enhance our Products is prohibited. Such actions may constitute financing. As the flag on the cover of this website, new information will be updated copyright infringement and leave perpetrators sub- ject to liability of up to $150,000 per infringement report suggests, we’re focused on innova- daily on SmallBusinessLending.io. (Title 17, U.S. code). The Alternative Lending Report tions in finance and technology, legal and In the near future, we will also be and The Alternative Lending Conference™ are trademarks of DealFlow Financial Products. regulatory dynamics, and strategy within launching innovative webcasts, live events The Alternative Lending Report is a general-circula- the alternative lending segment. and training programs, and subscription- tion publication. No information herein should be construed to be recommendations to purchase, Regarding the borrowers we’ll cover, based analytics. As these products and retain, or sell securities, or to provide investment we are using criteria based on the size services come online, we’ll notify you and advice of the companies mentioned or advertised. No fees are accepted for publishing any editorial of a loan (approximately $1M credit keep an open channel for your feedback. information. DealFlow Financial Products, Inc., its or below) and/or the size of the com- In the meantime, we hope The Alternative subsidiaries, and its employees may, from time to time, purchase, own, or sell securities or other pany (approximately $20M in revenues Lending Report meets your expectations. investment products of the companies discussed or or below). Academic whitepapers and If you’d like to subscribe to the report, call advertised in this publication. industry experts commonly use these us at (516) 876-8006.
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THE ALTERNATIVE LENDING REPORT Legal & Regulatory
MCA FUNDER 3 LEAF CAPITAL CALLED A FRAUD BY PARTNER Wingfield Capital, Prestige Investment, First Choice Payment Systems, and Burgis Sethna Named in Lawsuit By Steve Evans
Another week, another RICO lawsuit tal was set up as an LLC in November MCAs were made mainly to small between New York cash-advance lenders 2015, with an eye toward making MCAs business owners in the New York bor- and financiers. under $500,000. The complaint claims oughs, although the suit lists borrowers Brooklyn-based Capital 7 Funding defendants never provided their agreed- scattered throughout the country. Most claims former business partners stole upon investment of $2.5 million, draw- of the MCAs were made for less than more than $1 million over the last year ing exclusively on the infusion from $130,000 and according to the suit many in a shell game that funneled money to Capital 7, instead. By October 2016, as were under $50,000. phantom individuals and accomplices. Capital 7’s demands for a full accounting While overseeing 3 Leaf, Sethna Capital 7’s lawsuit alleges Burgis Seth- intensified, Sethna allegedly removed allegedly hired dozens of employ- na and his Wingfield Capital Com- Capital 7 as signatories to the partners’ ees “none of whom ever were able to pany siphoned off the money through bank accounts and shut off their access close a sale or attract a customer,” the fake customers and diverted the funds to the business, threatening Capital 7 suit says. “Defendants never intended for personal use as well as kickbacks to representatives with trespassing. these employees to make any sales but accomplices who posed as borrowers. Capital 7 also claims Sethna wrote rather saw them as potential sources of Prestige Investment Associates and First checks off a 3 Leaf account to pay for income.” Choice Payment Systems, companies “phony independent sales organization Sethna “extorted money from 3 allegedly controlled by Sethna, are also fees” that went to a phantom broker, and Leaf ’s employees by threatening vio- named in the 48-page complaint (see used some of the funding that had suppos- lence against them and their loved ones complaint: bit.ly/2qoPqou). edly gone to loans to make bogus repay- if they would not turn over a portion of Capital 7 says it and Wingfield agreed ments. Sethna refused to disclose the their wages to Sethna,” Capital 7 further to invest $2.5 million each for the cre- broker’s identity, Capital 7 says, claiming alleges. ation of 3 Leaf Capital, which would pro- all ISO fees went to Sethna or his own Sethna and a 3 Leaf customer vide small businesses with merchant cash business. Each ISO fee amounts to 10 named in the suit as Eddie Batiz alleg- advances in exchange for a cut of their points on every MCA outlined in the suit. edly threatened to beat 3 Leaf employ- daily credit card receipts. Instead, Capi- Fake MCA repayments were designed ees with a golf club in July 2016 if the tal 7 says it never saw any money out of to prop up 3 Leaf and create the appear- employees didn’t stop asking about pay- the 3 Leaf arrangement. Its investment ance of legitimate business activ- ments due. was used “as seed capital” for a fraudulent ity, according to the suit. In other cases, Brooklyn attorney Gary Tsirelman, scheme, the company says. accomplices with actual businesses would the lawyer for Capital 7, said he does “The defendants orchestrated an receive an MCA and quickly default. The not know if criminal charges were ever ongoing shell game through which they accomplices would then get a kickback, filed in the threatened assault alleged in identified a potential customer that, the suit alleges. Capital 7 also accuses the suit. He declined to comment on the in reality, was simply an alter ego of Sethna of altering MCA agreements with case itself, saying while he hoped for a Defendants or a co-conspirator, trans- borrowers so his own business, Wingfield settlement he believes that outcome “is ferred money to the bogus customer, and Capital, would receive the repayments, unlikely.” Tsirelman said defendants have then split the funding proceeds with the not the 3 Leaf partnership. yet to respond to the suit filed April 20. bogus customer without any intention Such sham payments were made to As of April 28, every page of Wing- of returning any proceeds to 3 Leaf,” the 3 Leaf from phony borrowers “in order field Capital’s website displays only a complaint states. In other examples of to conceal the extent of their scheme,” “cash application” form. There is no fraud claimed in the suit, the defendants Capital 7 says in the suit. Capital 7 also information on the website about the allegedly made loans to legitimate cus- accuses Sethna of altering MCA agree- company, its officers or how to contact tomers, then transferred any payments to ments with borrowers so this his own them. accounts under their sole control. business would receive repayments, not Capital 7 is suing for treble damages, According to the suit, 3 Leaf Capi- the 3 Leaf partnership. plus costs.
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THE ALTERNATIVE LENDING REPORT Strategy
WHITEPAPER REVIEW & ANALYSIS ONLINE COMMERCIAL LENDING: HOW IT’S CHANGING THE LANDSCAPE By Gary M. Stern
A research paper, “When Markets esting now is that companies are gener- ALR: How do online lenders mini- Quake: Online Banks and Their Past, ating a lot of data that can be crunched, mize risk? Present and Future,” written by two without paying high salaries. People can Lux: It’s pretty risky to lend to start- Harvard Kennedy School fellows, look over each file individually and that’s up businesses. If a business has been Marshall Lux and Martin Chorzempa, changing the game. In the past, banks operating for a year, that’s a pretty good describes how online lending is trans- weren’t particularly interested in small time frame. Online lenders take the forming the consumer loan segment. business lending. time to know their customer. These guys In this interview with The Alternative ALR: So how is it transforming the know jewelry companies and restaurants Lending Report, the authors discuss how industry? and know a good restaurant from a bad the industry is also disrupting loans Lux: Financial institutions are recog- restaurant. They’ll visit them, ask the to small and medium-sized business- nizing that there is simply a better way right questions and use the right algo- es. Lux is an advisor to Boston-based to serve customers. Millennials, in par- rithms to figure it out. Thomas H. Lee Partners, a private ticular, expect a different level of service ALR: You suggest in your white paper equity firm, and Chorzempa is a visit- from an online experience. Banks are that new regulations may be appropriate. ing fellow at the Peterson Institute for going to have to develop these models Concerning commercial lending, what do International Economics, a Washing- themselves, which is difficult, or find you recommend? ton, D.C.-based think tank. ways of working together. Chorzempa: We don’t think this is ALR: In a general context, what’s the ALR: You also suggest that online an unregulated space. We have enor- impact of online lending? lending is having an indirect effect on mous regulatory apparatus. Any bank is Lux: Probably, the most dramatic lending from traditional banks. In what regulated, depending on what it does, by area you see is its effect on the mortgage ways? the FDIC, OCC, the Fed, and the state space, where seven of the top 10 mort- Lux: I think the expectation for qual- in which they operate as well. We don’t gage lenders are online lenders. If you ity service, speed and being customer- think there are such large holes in the look at the impact they’re having on the centric will increase. Increasing service current regulatory framework. customer experience, in the past it would quality will be a much bigger differen- ALR: Your paper also looks into the take 60 days to get a mortgage. And now tiator. future. What more could be done with you can do it in as little as 15 days. Peo- ALR: Small businesses, particularly in online lending for small and medium ple are striving for 10 days. I talked to their fledgling years, were denied loans by sized businesses that isn’t being done cur- a CEO of a financial services company most banks. How are online lenders f ill- rently? yesterday, and they’re spending $3 billion ing the void? Lux: If I were them, I’d team up with on technology of which $1 billion will be Lux: I think that while a number of community banking associations and spent on online lending. banks advertise small business as the affinity groups. They could also team ALR: Online lending is also exerting a cornerstone of their strategy, they’re up with the SBA and with all sorts of major influence on small business lending. simply not. The people who are lend- trade groups. It would be marvelous to How so? ing [money for] pizza ovens were com- provide the back-office services for com- Chorzempa: It’s very similar to what munity banks. It was basically artisanal munity banks and that’s beginning to we’re talking about in the consumer lending. They knew the pizza owner’s happen. They might also team up with space. These technologies are making it father. Online lenders now have better banks themselves. There’s a ton of room economical to lend money to popula- algorithms and are more sophisticated for entrepreneurship. tions that didn’t make sense for banks in vertical industries. Some specialize in The complete whitepaper, “When Mar- in the past. It costs a bank the same for jewelry companies and others in restau- kets Quake: Online Banks and Their a $10,000 small business loan as it does rants. They do more innovative practices Past, Present and Future” can be found at for a million-dollar loan. What’s inter- with their money. this link: bit.ly/2oTR6W1
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THE ALTERNATIVE LENDING REPORT Strategy
LIVE OAK CUTS RISK, WOOS WOMEN IN BUSINESS By Steve Evans
Live Oak Bank has seemingly tapped Oak has whittled its risk on these prod- line of credit and a mobilization loan, a into a winning formula for small busi- ucts to a minimum. bridge loan. They pay us back over typi- ness lending by reducing risk while ele- SBA 7(a) loans are three times as cally 12 months.” vating their corporate image. likely to be approved for women-owned Mobilization and bridge loans are easy- One of the Wilmington, NC bank’s companies, says Live Oak managing to-sell products since it typically takes latest strategies includes launching new director Erin Andrew. “This is the fast- 45 days to three months from the date loan products to women-owned busi- est growing segment of our business,” a contract is awarded to a small business nesses just as National Women’s His- she says. until the Fed pays on the first invoice. The tory Month was getting underway. As a Already 50% of Live Oak borrowers bank’s risk is minimal since borrowers result, the bank enjoys a boost in com- are women-owned businesses, says Pat- repay Live Oak straight from their receiv- munity relations while underwriting rick Kelly, Live Oak’s VP of strategy, and ables, which are predictable based on the loans with minimal risk: Live Oak lends the bank is looking to do more. contract with the government. The Fed to women with federal contracts, with More than 9.8 million women-owned requires third-party vendors to file with a guarantees through the SBA. businesses operate in the U.S. today, up liable bank-controlled account. Small business federal contractors nearly 27% since 2007, according to data “Obviously it’s not lost on me there’s must give certain preferential treatment from the U.S. Census Bureau. Women- talk of a possible government shutdown, to women-owned businesses. Because owned companies generate $1.4 trillion so there can be risks,” Kelly says. “How- the loans are backed by the SBA, with in annual receipts. ever, historically the full faith and credit contractually obligated payments from Before joining Live Oak, Andrew of the federal government means some- the government to the business, Live worked in the Women’s Business Devel- thing. If you land that contract you have opment Center at a pretty reasonable expectation of doing the SBA. well with that contract.” “When I came Live Oak also promotes purchase to the SBA in order financing, debt financing and 2010, women had helps with M&A deals so women- less than 5% of all owned companies can expand to a size Bank/Alternative federal contracts,” that qualifies them for certain federal she says. “Today, contracts. women have The bank reported first quarter net Lender Strategic exceeded that goal, earnings in April of $6.1 million, up but women can do from $4.7 million for the year-ago peri- Partnership Summit even more work od. Overall loan originations are up 65% with the federal year-over-year, fueled primarily by small Focusing on Pro table Growth government if they business borrowing. Total nonperform- have the financing ing loans decreased to $22.5 million in in Small Business Lending support they need.” the first quarter of 2017 from $23.8 mil- Live Oak is also lion at the end of 2016. May 10-11, 2017 pursuing small In guidance to investors, CEO James business owners Mahan said the bank is on track to hit The Princeton Club in general who are its goal of $1.8 billion to $1.9 billion in New York, NY trying to break into loan originations this year. federal contracting, Kelly says. “There’s explosive growth Have news that may be of interest to in it particularly readers? Please email us at Use discount code FMP328 for 15% o in cybersecurity. If [email protected] https://frallc.com/conference.aspx?ccode=B1049 they are bidding we can provide a SmallBusinessLending.io 5 May 4, 2017 For use by original recipient only. It is illegal to forward or otherwise distribute without permission.
THE ALTERNATIVE LENDING REPORT Finance
ONLINE LENDING ASSOCIATIONS Industry Trade Groups Targeting Fintech and Education By Brian O’Connell
In the last year, three separate online Key Members: Cross River Bank, exactly in agreement with that sentiment, lending trade groups have opened for Boston University’s Center for Finance, citing more business-focused concerns business – the Coalition for Respon- Law & Policy, RocketLoans. like improving customer service. sible Lending (CRBF), the Marketplace Mission: To ensure consumers ben- “The biggest issue in our space is how Lending Association (MLA), and the efit from the lower cost of credit and to scale to service more customers,” says Innovative Lending Platform Associa- increased, convenient access to capital Brett Crosby, COO and co-founder of tion (ILPA) (which just announced plans provided by marketplace lending while PeerStreet, a real estate loan marketplace. to morph into a new trade group with the supporting consumer protections and a New Sheriff in D.C. CRBF). And those are just the new kids strong financial system. on the block. Already in existence are the Common Goals Regulatory uncertainty is another big Responsible Business Lending Coalition, issue for companies, and is a big focus which got its start last year. The UK- While each group varies on the ini- for online lending trade groups. based Peer-to-Peer Finance Association tiatives they’re pushing, the common “Regulation that protects consumers and the Online Lenders Alliance have goal is to help consumers and businesses is obviously important,” Crosby notes. been around for years. find easier ways to obtain financing. “It can also be a valuable part of creating Here are the main players: For example, the ILPA is currently defensibility for companies that invest in Peer-To-Peer Finance Association touting the SMART Box Initiative figuring out a way to thrive within their (www.p2pfa.info) (Straightforward Metrics Around Rate regulatory framework.” The problem, Key Members: Funding Circle, and Total Cost), a way for small busi- Crosby says, is when there’s uncertainty Landbay, MarketInvoice, RateSetter, nesses to easily compare prices among around regulations. “That adds chal- Zopa. different online lenders. lenges to building businesses and help- Mission: Founded in 2011 by Zopa, In an email to The Alternative Lend- ing more people.” FundingCircle and RateSetter as a ing Report, the ILPA says that “new “Fortunately, we’re getting a lot of self-regulatory body to promote high members are encouraged to adopt the help on Capitol Hill to simplify the standards of conduct and consumer pro- SMART Box, which allows those mem- framework for startups and foster more tection. bers to further empower their small innovation in fintech, and that’s some- Innovative Lending Platform Asso- business customers to better assess and thing I generally applaud.” ciation (www.innovativelending.org) compare finance options.” Another main mission for trade asso- Key Members: OnDeck, Kabbage, In terms of leading industry issues, ciations is educating the professional CAN Capital, Breakout Capital, PayNet. the ILPA cites fintech as both an oppor- community on the best paths forward. Mission: Trade organization repre- tunity and a challenge. “Education and outreach is still a senting a diverse group of online lend- “Financial technology companies challenge for many online business lend- ing and service companies serving small are an important and growing source of ers,” says Eyal Lifshitz, CEO and found- businesses. capital for small businesses,” the ILPA er of BlueVine, which provides working Marketplace Lenders Association states. “The technological innovations capital through advances on outstanding (www.marketplacelendingassociation.org) championed by fintech companies invoices. Key Members: Lending Club, Pros- increase efficiencies in the payments, “There’s a big need for the industry to per, Affirm, PeerStreet, Avant, Upstart. lending, and funding processes, while reach out to more business owners and to Mission: To promote a transparent, also expanding access to capital for explain the benefits of different financ- efficient, and customer-friendly finan- underserved small businesses. How- ing solutions to them,” Lifshitz explains. cial system by supporting the responsible ever, existing policy and regulatory “Banks remain the preferred source of growth of marketplace lending, fostering frameworks never contemplated an financing for many entrepreneurs when innovation in financial technology, and internet- or mobile-based economy and available, but that’s changing. Online encouraging sound public policy. are failing to keep pace with such inno- lending is growing dramatically and get- Online Lenders Policy Institute vation.” ting more sophisticated thanks to high- (mplsummit.org/the_institute.html) Trade group member companies aren’t level data science and technology.”
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NatWest Entices SMEs With na-based subsidiary of Horizon Bancorp Lending Technologies Corp. Three-Minute Loan App to use the company’s proprietary cloud- Introduces Leads2Lend based lending technology. bit.ly/2p5ZroI CAM Solution NatWest, which has over $5 billion earmarked for SME financing, says it’s PayPal’s Small Business B2B fintech firm Lending Technolo- looking to position itself in competition Lending Tops $3B as Company gies Corp. announced a new marketing with alternative lenders through a new Launches New Tools platform for lenders called Leads2Lend, platform that will give small business providing a customer acquisition tool to borrowers a decision on their loan appli- After topping $3 billion in financing help lenders engage with new custom- cation in three minutes. bit.ly/2oVnBHt to over 115,000 businesses worldwide, ers. Agents can onboard clients, down- PayPal announced its plans for a new load leads, expedite credit decisions and Experian Aims to Make set of tools for small businesses labeled facilitate loan construction using the Debt Collection Easier the “Business in a Box.” This “toolbox” technology. bit.ly/2pxgEei with Two New Products will allow merchants access to a set of curated partners, including ecommerce nCino Enabling Financial Experian has launched two solu- platform WooCommerce and account- Institutions to Take tions, eResolve, and PowerCurve Col- ing firm Xero. These options will be on SME Loans lections, to give consumers an easier way available both a la carte or full-service. to resolve their debt and to streamline bit.ly/2pIdRiU Cloud banking firm nCino is broad- the management process for businesses. ening its Bank Operating System to eResolve is a self-service platform to Cathay Bank Introduces give financial institutions a customer- help consumers negotiate and resolve New Loan Program for friendly digital experience by adding past due obligations while PowerCurve Small Businesses online application, underwriting auto- Collections brings together data, deci- mation, and e-signatures alongside sions, and the collections workflow in a Los Angeles-based Cathay Bank integrated document prep tools. bit. single, unified system. bit.ly/2oV9Cl1 announced a new Smart Micro Loan pro- ly/2oY8c9y gram aimed at providing credit lines to Traxpay Reinvents Itself small businesses. Collaborating with local Powerlytics Expands Data as a Digital Lender organizations to craft the program includ- Analysis for Avant ing the Asian Pacific Islander Small Busi- After the failure of Traxpay’s original ness Program, PACE Finance Corporation Data analytics provider Powerlyt- B2B payment network that worked with and SDC Small Business Finance, busi- ics will provide income insights and companies like SAP-Ariba and Trade- nesses that sign up will be required to open data for online lender Avant in order shift, they are now pivoting to become a business checking account with Cathay to streamline their application process. a bank platform over pure payment soft- to “build a good financial relationship” By utilizing the zip+4 level of the Pow- ware. Looking to add value by connect- with the bank. bit.ly/2qFsNM erlytics platform, Avant can speed up ing ERP systems and networks to banks, income verification, while the data will they are currently being implemented by LexisNexis Small be used to augment Avant’s existing NordLB’s factoring business, to digitize Business Credit Risk automated income verification systems. the company’s manual-sheet invoice pro- bit.ly/2p98MNy3 cess. bit.ly/2p5LZ4w Tools Now Available Dianrong is Preparing for Thrive Platform to Power Data analytics firm LexisNexis released two updated small business Full Blockchain Integration Business Lending for assessment products: a new and improved The newly appointed CFO of P2P Horizon Community Bank 2.0 version of its Business InstantID tool lender Dianrong announced plans to and an updated Small Business Credit Fintech company Thrive, which is switch much of the company’s services to Score product. The new products help developing a lending infrastructure tool a blockchain. In a statement, Yawn Cui meet know-your-customer and ultimate focused on automation and real time said the company’s focus on transparency beneficial ownership requirements, allow- risk management, announced a multi- and compliance made a natural fit for a ing the ability to credit-risk assess small year licensing agreement with Horizon widespread use of blockchain technol- business clients through nontraditional Community Bank, allowing the Arizo- ogy. bit.ly/2oY2QuU data sources. bit.ly/2pI43p4
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THE ALTERNATIVE LENDING REPORT Industry News
U.S. Small Business the administrator contends that the tinue to trade at a significant discount Borrowing Stalls in March lawsuits do not present a federal ques- to net asset value. AdCock commented tion and thus fail to establish subject- on the fact that balance sheet assets Borrowing by small U.S. firms stalled matter jurisdiction. While a federal had performed better than marketplace in March, as business owners remained preemption defense to the enforcement loans. bit.ly/2qC3lH9 cautious about investing amid policy of state lending laws generally does not uncertainty, data released in early May present a federal question, the Supreme China Rapid Finance showed. The Thomson Reuters/PayNet Court has recognized a “complete pre- Announces Pricing of IPO Small Business Lending Index for emption” exception to that rule where March registered 134, down 1% from a national bank raises the defense. bit. China Rapid Finance (NYSE:XRF) last March. The index was up 4% from ly/2qqqpfM announced that its initial public offer- February, which had four fewer working ing of 10,000,000 American deposi- days. bit.ly/2qyKGwC McHenry Working with Senate tory shares was priced at $6.00 per ADS, Democrat on New Fintech Bill with a total offering size of $60 mil- Colorado Moves to lion. Each ADS represents one Class A Dismiss Suits Seeking Rep. Patrick McHenry (R-N.C.) ordinary share of China Rapid Finance. Bank-Originated Loans be said in a speech at the American Action Morgan Stanley, Credit Suisse and Jef- Exempt from State Laws Forum in Washington that he is work- feries are acting as joint bookrunners for ing with a Senate Democrat on a revised the offering. bit.ly/2pGe8CV Banks are asserting that Colorado’s “permanent beta test” bill to prod regu- lending laws are preempted by federal lators to foster fintech innovation. U.S. Bank Survey: Times banking statutes. In the Colorado case, McHenry introduced the Financial Are Good for Small the administrator moved to dismiss the Innovation Act in the House in 2016 for Business Owners banks’ actions on several grounds. First, what he said were discussion purposes. It did not advance Business owners are more optimistic last Congress. bit. than any time in the eight-year history ly/2qCrHkj of the U.S. Bank Small Business Annual Survey. Owners report revenue growth, VPC Specialty preparing for capital investments and Lending modestly adding staff, even though 61% Investments report having difficulty finding quality Reports employees. “Business owners are gain- ing confidence in the economy. For most Disappointing owners, the recession is long over and 2016 now they’re making plans to expand,” said John Elmore, vice chairman of VPC Spe- Consumer and Business Banking at U.S. cialty Lending Bank. bit.ly/2pVX2SD Investments PLC (LSE:VSL.L) Funding Circle is Looking released their 2016 to Build its U.S. Capital annual results last week and accord- Markets Team ing to Chairman Funding Circle is currently adver- Andrew Adcock, tising for a number of capital markets results contin- jobs, all based in San Francisco. Among ued to disappoint. the listed jobs is a newly created Head Shares in the spe- of U.S. Capital Markets role. A Fund- cialty investment ing Circle spokesperson told AltFi that fund that invests in Sachin Patel is now running capital a variety of online markets for the firm globally. Patel is lending assets con- reportedly looking to re-model the U.S.
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THE ALTERNATIVE LENDING REPORT Industry News
team to mirror its UK counterpart. bit. Equipment Leasing and like the Federal Trade Commission. bit. ly/2p6IrzH Finance Association Releases ly/2p6vZzT Survey of Economic Activity CFPB to Hold Hearing on Federal Regulator Ratchets Small Business Loans The Equipment Leasing and Finance Up Effort to Regulate Association’s Monthly Leasing and Tribal Lenders, Suing The Consumer Financial Protection Finance Index, which reports economic Four in California Bureau said that it will hold a public activity from 25 companies representing hearing May 10 in Los Angeles on small a cross section of the $1 trillion equip- The Consumer Financial Protection business lending, an area likely to spark ment finance sector, showed that new Bureau launched another salvo in its concern from bankers. The consumer business volume for March was $8.9 battle against the tribal lending indus- agency typically releases proposed rule billion, up 10% year-over-year from try, which has claimed it’s not subject to makings on the same day as a field hear- new business volume in March 2016. regulation by the agency. The regulator ing. bit.ly/2purS3a Receivables over 30 days were 1.40%, sued four online lenders affiliated with down from 1.50% the previous month GAO’s Fintech Report a Native American tribe in Northern and up from 1.20% in the same period California, alleging they violated fed- Highlights Data Security, in 2016. Charge-offs were 0.68%, up eral consumer protection laws by making Lack of Clarity on from 0.38% the previous month, and up loans with annual interest rates starting Regulatory Oversight from 0.51% in the year-earlier period. at 440% in at least 17 states. In a lawsuit bit.ly/2p3Lh7B filed Thursday in U.S. District Court in The study, which identifies four sub- Chicago, the bureau alleged that Golden sectors for the industry — marketplace Trump Reportedly Aiming Valley Lending, Silver Cloud Finan- lenders, mobile payments, digital wealth for Two-tiered Regulatory cial and two other lenders owned by platforms and distributed ledger tech- System for Banks the Habematolel Pomo of Upper Lake nology — and the risks involved with tribe violated usury laws in the states and each, comes one year after Congress During a meeting with over a hun- thereby engaged in unfair, deceptive and requested an update from the Govern- dred community bankers, Trump admin- abusive practices under federal law. bit. ment Accountability Office on the fin- istration officials said they favored a ly/2qwvIrd tech industry. The GAO last released a system with different rules for small report on fintech in 2011, but legislators and big banks. Community bankers S&P Releases Credit last year asked for updated guidance, have long sought so-called two-tiered Market Pulse Report since the industry was largely made up regulation, but policymakers are gener- of peer-to-peer lending in 2011 and has ally unwilling or unable to shake up the S&P Global Market Intelligence has since expanded. bit.ly/2p6JaAX existing system, which imposes many of published their April edition of Credit the same regulations across the spectrum Market Pulse. In this April issue, there’s CashCall Sues Attorneys of institutions. bit.ly/2qCh9Sb discussion around sovereign and regional for Malpractice, Claiming trends, political risk, industry shifts, $500 Million in Damages Republicans Look to Weaken changes in creditworthiness of some of CFPB’s Power, but Face Tough the biggest movers and shakers in the CashCall has sued law firm Katten Opposition from Democrats market, and post-mortems on recent Muchin Rosenman and a KMR part- defaults. bit.ly/2qyOs9C ner for malpractice, claiming damages According to the Financial Times, of more than $500 million, according to some of the proposed Dodd-Frank court documents. The complaint con- reforms include stripping the Consumer tends the law firm convinced CashCall Financial Protection Bureau of its super- to partner with a tribal lender to avoid visory powers, making its complaints state lending laws. Katten’s spokeswom- database private and creating an inspec- Have news that may be of interest to an said the claims by CashCall are with- tor general to watch over it, appointed readers? Please email us at out merit. bit.ly/2qwj2jU by the president. The new entity — [email protected] renamed the Consumer Law Enforce- ment Agency — would end up looking
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THE ALTERNATIVE LENDING REPORT Loan Tape
Select Banks with Significant Exposure to Specialty Finance Companies with Small Business Loans Exposure to Small Business Loans A cross-section of publicly traded community banks with at least 4% Publicly traded companies engaged in small business lending of assets in small business loans with outstanding principal of $1M or through commercial finance operations or BDCs, with at least less, according to FDIC Call Data. Market data as of May 2, 2017. $500M in market cap. Market data as of May 2, 2017. MKT. CAP CURRENT 12-MO. SMALL BIZ MKT. CAP CURRENT 12-MO. COMPANY TICKER ($M) PRICE CHANGE LOAN % COMPANY TICKER ($M) PRICE ($) CHANGE Farmers & Merchants Bank FMCB 509.48 630.00 15.6% 31.5% American Express Bank AXP 71,091.20 79.54 21.1% GrandSouth Bank GRRB 52.72 14.75 13.5% 23.6% Intuit Inc. INTU 32,205.93 125.91 23.2% Trinity Bank, N.A. TYBT 69.99 63.00 26.0% 21.5% Prospect Capital Corp. PSEC 3,359.42 9.35 25.8% CA Bank of Commerce CABC 115.45 19.65 45.5% 16.8% Pitney Bowes Bank PBI 2,844.50 15.27 (27.0%) Greenville Federal GVFF 18.34 8.75 2.9% 16.5% FS Investments FSIC 2,402.50 9.80 6.2% Signature Bank SBNY 7,381.97 137.51 (0.1%) 14.4% Main Street Capital Corp. MAIN 2,230.89 40.36 29.2% Community Shores Bank CSHB 10.54 2.57 10.3% 12.2% Hercules Capital, Inc. HTGC 1,282.44 15.49 29.1% Idaho First Bank IDFB 16.73 6.25 (3.8%) 11.4% TPG Specialty Lending TSLX 1,256.02 20.99 27.3% Mission Valley Bank MVLY 23.51 12.00 50.0% 11.2% Golub Capital BDC, Inc. GBDC 1,155.70 20.28 16.1% Community Bank of the Bay CBYA.A 21.61 5.00 9.9% 10.7% New Mountain Finance NMFC 1,110.54 14.85 18.9% Frederick County Bank FCBI 35.46 23.50 4.0% 10.6% TCP Capital Corp. TCPC 995.42 17.15 17.8% The Bank of South Carolina BKSC 102.72 20.70 31.8% 9.3% Solar Capital Ltd. SLRC 954.25 22.58 28.6% Bank First National BFNC 233.01 34.70 22.8% 9.2% Goldman Sachs BDC, Inc. GSBD 905.30 24.91 26.1% First Sentry Bank, Inc. FTSB 47.45 33.00 3.1% 9.1% Fifth Street Finance Corp. FSC 634.32 4.50 (16.0%) Southern First Bank SFST 248.43 34.60 35.% 9.0% PennantPark Investment PNNT 572.04 8.05 29.2% Clarion Cty. Community Bank CCYY 11.48 7.47 20.% 9.0% BlackRock Capital Inv. Corp. BKCC 537.32 7.38 (9.7)% Howard Bank HBMD 184.04 18.85 52.4% 8.9% American Riviera Bank ARBV 70.18 16.30 50.1% 8.8% US Metro Bank USMT 5.74 2.90 52.6% 8.6% Ojai Community Bank OJCB 29.10 13.00 116.7% 8.5% Online Lenders United American Bank UABK 17.10 18.00 (2.7%) 8.3% Publicly traded companies engaged in online lending to Pacific West Bank PWBO 8.12 11.50 13.9% 8.2% consumers as well as businesses. Market data as of May 2, BlueHarbor Bank BLHK 21.89 8.00 6.0% 7.9% 2017. Com. Bank of Santa Maria CYSM 20.13 10.20 29.9% 7.9% CURRENT 12-MO. New Resource Bank NWBN 34.26 5.88 17.7% 7.9% COMPANY TICKER LOAN TYPE PRICE CHANGE York Traditions Bank YRKB 38.97 18.00 52.5% 7.8% Consumer/ Lending Club LC Business 5.85 (26.2%) Macatawa Bank MCBC 334.36 9.85 43.6% 7.8%
Pacific Premier Bank PPBI 1,483.10 37.25 56.7% 7.7% OnDeck ONDK Business 4.68 (43.6%) Freedom Bank of Virginia FDVA 74.55 12.01 47.0 % 7.5% Consumer Pacific Mercantile Bank PMBC 183.07 7.90 4.9% 7.3% Yirendai YRD (China) 24.80 115.5% mBank (Mackinac Financial) MFNC 90.71 14.41 36.6% 7.1% Consumer Sunshine Bank SBCP 176.37 21.94 56.5% 7.1% Elevate Credit ELVT (U.S. & U.K.) 7.64 n/a German American Bancorp GABC 757.27 33.08 49.0 % 7.0% Ameris Bank ABCB 1,737.74 46.80 49.0% 6.8% Square SQ Business 18.81 34.4% United Community Bank UCBI 1,924.78 27.12 34.1% 6.7% Business (U.S. IOU Financial IOU & Canada) 0.17 (55.8%) Commonwealth Bus. Bank CWBB 139.16 15.30 44.5% 5.9% Consumer CBT Bank SNV 36.62 36.80 32.6% 5.4% China Rapid Finance XRF (China) 7.87 n/a Towne Bank TOWN 1,958.44 31.65 50.6% 4.3% Adirondack Trust Company ADKT 67.92 1698.00 8.5% 4.3% Sandy Spring Bank SASR 1,040.96 43.50 51.4 % 4.3%
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THE ALTERNATIVE LENDING REPORT Loan Tape
M&A + Partnerships (April 19 through May 2) During the period April 19 through May 2, 2017, M&A deal activity and strategic partnership announcements in the alternative lending and small business lending segments included the following companies/transactions. DATE COMPANIES STRUCTURE DEAL DESCRIPTION 4/19/17 Revolut, Trussle Partnership Through this partnership, Revolut customers will have access to Trussle’s mortgage broking service that has 90+ lenders available — all through the company’s app home screen. 4/20/17 Marlin Business Services, Partnership Marlin Business Services Corp., a provider of credit products and services to small businesses, announced it has entered NewTek an agreement with NewTek, Inc. Marlin will provide financing options for NewTek customers throughout the U.S. 4/20/17 AltaPacific Bank, Merger AltaPacific Bancorp announced that they have terminated the Agreement and Plan of Reorganization and Commerce Bank Merger, dated as of September 1, 2016 previously entered into with Commerce Bank of Temecula Valley. 4/20/17 United Community Merger United Community Banks, Inc. and HCSB Financial Corporation announced a definitive agreement for United Banks, HCSB Financial to acquire HCSB and its wholly-owned bank subsidiary, Horry County State Bank, in an all-stock transaction. 4/20/17 ApplePie Capital, Acquisition ApplePie Capital, an online lender solely dedicated to the franchise industry, announced the acquisition of Funding Solutions Funding Solutions, LLC, a national franchise lending consultancy that specializes in SBA, conventional and equipment finance loans. 4/21/17 Biz2Credit, Oriental Partnership Biz2Credit announced it has formed a partnership with Puerto Rico’s Oriental Bank to help develop a Bank digital lending platform for the bank’s commercial clients. 4/24/17 First Financial Bancorp, Partnership Cincinnati-based First Financial Bancorp is partnering with the Gayle & Bill Cook Center for Gayle & Bill Cook Center Entrepreneurship at Ivy Tech Community College Bloomington on a new micro-lending program benefiting for Entrepreneurship small business. 4/25/17 Powerlytics, Avant Partnership Powerlytics will provide income insights and data for Avant, the lending platform that is lowering the costs and barriers of borrowing for consumers. 4/25/17 SmartBiz Loans, Five Star Partnership SmartBiz Loans, the SBA loan marketplace and bank-enabling technology platform, today announced the Bank addition of Five Star Bank to the Company’s unique technology ecosystem. 4/27/17 OnDeck Canada, Partnership OnDeck Canada, an online lender to small businesses in Canada, and Lightspeed, a cloud-based point- Lightspeed of-sale platform for independent retailers and restaurants, have announced a partnership that will allow Lightspeed users to secure OnDeck loans. The new offering will be available to Lightspeed customers in Canada and the U.S. providing up to $500,000 term loans and $100,000 lines of credit. 4/28/17 Live Oak Bank, Reltco Inc., Acquisition Live Oak Bancshares Inc. bought two nationwide title companies in Tampa, Reltco Inc. and National National Assurance Title Inc. Assurance Title Inc. 4/28/17 Central Valley Acquisition Central Valley Community Bancorp and Folsom Lake Bank jointly announced that a definitive merger agreement Community Bancorp, has been signed by both parties. Under the terms of the agreement, Folsom Lake Bank, with three full-service Folsom Lake Bank branches located in Folsom, Rancho Cordova, and Roseville, will merge with Central Valley Community Bank. 4/28/17 BayCom Corp, First ULB Acquisition BayCom Corp announced the successful acquisition of First ULB Corp., headquartered in Oakland, Corp. California, by BayCom Corp and the merger of United Business Bank, FSB into Bay Commercial Bank, effective after close of business on Friday, April 28, 2017. 5/2/17 First Bancorp, ASB Acquisition First Bancorp announced the signing of a definitive merger agreement under which First Bancorp will Bancorp, Inc. acquire ASB Bancorp, Inc. in a cash and stock transaction with a total current value of approximately $175 million, or $43.12 per share based on First Bancorp's closing share price on April 28, 2017. New Investments (April 19 through May 2) During the period April 19 through May 2, 2017, new investment activity in issuers operating in the alternative lending and small business lending segments included the following companies/transactions. DATE COMPANY BUSINESS DESCRIPTION AMOUNT STRUCTURE USE OF PROCEEDS INVESTORS 4/20/17 DadeSystems DadeSystems, LLP develops payment $2,000,000 Venture To accelerate engineering and Ocean Azul Partners processing software solutions. product enhancement efforts as well as expand the team 4/26/17 QUOVO QUOVO INC. develops and markets a $10,000,000 Venture, To accelerate the growth of F-Prime Capital Partners, platform that provides financial analytics, Series B its suite of data analytics FinTech Collective, Inc., Long data management, and insights to small- offerings Light Capital, LLC, Napier Park and mid-sized investors. Financial Partners 4/28/17 Tradeplus24 TradePlus24 AG provides receivables $100,000,000 Debt The new capital will be used OceanoOne financing and insurance services to small to fund future loan growth for and medium companies in Switzerland. Swiss SME
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THE ALTERNATIVE LENDING REPORT Loan Tape
Indices of Interest All data as of May 3, 2017 or last reported date. Constituents refer to either stocks or individual loans included as members of the index. Information sources include Nasdaq and company websites. INDEX TICKER VALUE CONSTITUENTS TYPE KBW/Nasdaq Fintech Performance Index KFTX 1,148.66 50 Fintech Cliffwater Direct Lending Index CDLI 3,139.00 > 6,000 Comm. Loan Orchard U.S. Consumer Online Lending Index n/a 1,500.08 1,350,355 Cons. Loan Funds of Interest All data as of May 3, 2017 or last reported date. Information sources include Nasdaq and company websites. FUNDS TICKER MKT. CAP CURRENT PRICE 12-MO. % CHANGE VPC Specialty Lending (in GBP) VSL n/a $0.820 (11.65%) Ranger Direct Lending (in GBP) RDL n/a $9.14 (5.04%) SME Loan Fund PLC (in GBP) SMIF n/a $97.03 0.10% River North Marketplace Lending (in USD) RMPLX n/a $25.27 n/a
SBA Year Over Year Activity Comparison (For week ended April 28, 2017) The following table includes information about Small Business Administration loans for the current year to date, broken down by size, and compares that activity with the similar period from last year in order to gauge changes in credit formation and composition. 2016 2017 YOY CHANGE All Activity YTD (7A) $12,784,530,000 $13,975,833,500 9.32% Existing vs. New Business (% of All) 64% 36% 64% 35% Size Breakdown Amount Amount $150K and Under $1,254,797,700 10% $1,220,788,100 9% >$150K - $350K $1,484,196,200 12% $1,516,753,400 11% >$350K - $2M $6,049,925,400 47% $6,359,035,900 45% >$2M $3,995,610,700 31% $4,879,256,100 35%
SBA Year Over Year Activity Comparison ($Billions) SBA Loan Size Breakdown For week ended April 28, 2017 YTD as of April 28, 2017
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THE ALTERNATIVE LENDING REPORT Loan Tape
Thomson Reuters/Paynet Small Business Indices (As of March 2017)
The Thomson Reuters/PayNet Small Business Indices track credit activity within the U.S. small business sector. The nearby chart graphs two of these measures, the Thom- son Reuters/PayNet Small Business Lending Index (SBLI), which tracks the net volume of new commercial loans and leases to small businesses, and the Thomson Reuters/PayNet Small Business Delinquency Index (SBDI), which measures the percentage of small businesses that are 91 to 180 days past due (DPD) on payment as an indicator of financial stress and default risk. Taken together, the indices provide mean- ingful insights into business cycle trends, economic growth, capital investment and employment within the small business niche of the U.S. economy.
Net Percentage of Banks Tightening Standards for C&I Loans to Small Businesses
Taken from the U.S. Federal Reserve’s quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices, the nearby chart shows the net percentage of banks polled that have indicated they are tightening credit standards for small businesses. Declines in the measure suggest fewer banks are raising standards, and thus suggest easing credit condi- tions; rises mean businesses may encounter greater difficulty obtaining financing. Gray areas indicate periods of recession.
U.S. 10-Yr./3-Mo. Spread Versus Recession Probability
Declines in the yield spread between 10-year U.S. Treasury bonds and 3-month U.S. Treasury bills tend to lead increas- es in the chances of a recession. The nearby chart shows the yield spread (blue line) graphed against the U.S. Fed- eral Reserve’s Recession Probability Indicator (background) back to January 1988. Sharp drops in the spread generally foreshadow rises in the probability indicator, increasing the likelihood of recessionary conditions exist 12 months later. Currently, the gradual saw-tooth movement down in spreads since the end of the financial crisis has broadly coincided with global zero-interest rate policies and quantitative easing, and has not yet generated a meaningful increase in recession probability, which although off its 2016 lows, remains very low.
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THE ALTERNATIVE LENDING REPORT ‘Algoracism’
Continued from front page tion to disclose their algorithms to the If fintech lenders are discriminating Incorporating Alternative Data public. Most of these credit models are against minority-owned small business into Risk Models built in-house and not covered by stan- borrowers, Arora said it stems from two dard federal loan disclosure require- causes: thin credit histories and a higher To improve fintech credit access and ments, according to the HBS paper. percentage of these borrowers being pricing for minority business owners, CFPB Spokesperson Sam Gilford said incorporated as sole proprietorships and former SBA Administrator Karen Mills, his agency has chief rulemaking author- single-member limited liability corpora- who co-authored the HBS paper, told ity over ECOA in general. tions. The Alternative Lending Report that the Firstly, Arora said that industry needs a “broader set of credit minority-owned small busi- predictors.” Mills’ thinking is aligned with the “There has to be some ongoing, nesses have limited credit his- tories and proof of repayment CFPB, which is advocating for the close-up regulatory involvement.” behavior, which leads fintech use of so-called “alternative” data to algorithms to issue them improve credit access for protected Congressman Emanuel Cleaver, II higher-risk borrower scores groups, according to a February 2017 (D-Mo.) by default. For some minority press release. Alternative data are the groups, Arora attributes their “footprints” a legal entity leaves while lack of borrowing history to conducting business, according to the American Banker story. Rep. Cleaver told The Alternative deep-seeded cultural traditions Examples of non-traditional data Lending Report, “There has to be, I of thrift. points include: bill payments, the acti- think, some ongoing, close-up regulatory While financially responsible, this vation and continued use of telephone involvement.” non-borrowing leads to a smaller sample lines and utilities; licensing and registra- The congressman, who right before size of credit data, with far less depth. tion applications; transactional data; and the interview participated in a commit- From a risk-scoring standpoint, this puts people closely connected to the business tee hearing that discussed new legislation previously frugal borrowers at a disad- owner, whose credit profiles could be aimed to repeal Dodd-Frank, concedes vantage because “the unknown is always used as a type of co-signing mechanism that regulatory reform is unlikely, given a higher risk,” he said. that these new bills, if passed, would also Further, a 2016 American dismantle the CFPB. Banker story supports Arora’s “The most discriminatory lenders Nevertheless, concerns about dis- view, with its finding that “half criminatory, small business risk scoring of the small businesses tracked are those that require a personal are arising at a time when the issue of by traditional commercial guarantee from the borrower.” data bias is becoming a hot topic in the credit bureaus have only one artificial intelligence community. The line of credit, and usually it’s a Secil Baysal problem, says Patrick Reily, CEO of credit card.” FastPay Verde International, a financial and risk Shifting to Arora’s second modeling solution for institutions, is that point, a nationwide Biz2Credit to develop a better picture of the propri- these algorithms are making “raw corre- survey of 1,500 minority business own- etor’s risk score. lations without insight.” ers found more than two-thirds were Reily imagines future models where “Machine learning models don’t registered as sole-props or LLCs. In an lenders factor social benefits like job cre- understand when they’re stepping over a ecosystem, where most small businesses’ ation, crime reduction, health and keep- protected class line,” he said. are single-member entities and the only ing kids in school into their risk scores. A recent Vox article bolsters Reily’s borrowing history inputs come from He said that improving the economic point, describing machine-learning as an a single credit card, it’s easy for unso- foundation of neglected communities unsophisticated and child-like process, phisticated algorithms to conflate the could produce better credit performance where the computer “builds its vocabu- individual’s credit risk with that of the for institutions in the long run. lary through how often terms appear individual’s business. Secil Baysal, the president and chief together.” This process is not true AI, Arora said that for many of these operating officer of FastPay, a Los Ange- according to Reily. business owners, the business is their life. les-based fintech company that provides Biz2Credit CEO Rohit Arora agreed But a “business entity should have a life financing for the digital media industry, that “AI is still in its very early stages.” of its own,” he added. SmallBusinessLending.io 14 May 4, 2017 For use by original recipient only. It is illegal to forward or otherwise distribute without permission.
THE ALTERNATIVE LENDING REPORT ‘Algoracism’
said the company’s risk-scoring model Ultimately, Arora attributes flawed business borrowers, minorities and other- factors applicants’ accounts receivable credit-risk modeling in fintech to the wise, that are considering a fintech solu- above all else. big banks that refuse to share data. But tion should seek out a lender that offers In fact, FastPay’s loan algorithm is banks in the U.S., unlike in Singapore unsecured, or collateral-free, loans. A over 80% weighted towards the credit and the UK, where lenders are open- March 2017 Nerd Wallet article identified risk of the brand counterparties, which sourcing their loan algorithms, see no Kabbage, OnDeck, Lending Club, Fund- typically average 90-days sales outstand- incentive to make accountholder data box and Street Shares as the top unse- ing before they pay their creative and available to third parties. cured lenders in the fintech space. These advertising technology vendors. Despite Mills seconded Arora’s point, specu- companies provide financing in the range prolonged payment terms, Proctor & lating that the “most fruitful place” for of $2,000 to $300,000 per loan, charging Gamble and other Fortune 500 brands alternative data sources may be in bank between 8% and 99% APR. pose extremely low credit-default risks balances and bank transactions. If data is, Despite Rep. Cleaver’s Dodd-Frank to invoice financiers like FastPay. in fact, banks’ “most valuable asset” as Mills jitters, his words have made an impact. At Biz2Credit, Arora has been exper- said, then their ability to leverage data An April 2017 CFPB Fair Lending imenting with image recognition and deposits at scale suggests they may have a Report published a month after his let- identified an encouraging correlation competitive edge over fintech lenders with ter said: between “good” image scans and portfo- limited predictive cycle inputs. “Congress expressed concern that lio loan performance. He said that image Regardless, Mills said Kabbage, women-owned and minority-owned scanning technology has moved beyond which charges an annual percentage rate, businesses may experience discrimina- pattern recognition and is now able to ranging from 24% to 99%, is an interest- tion when they apply for credit, and make more insightful correlations. For ing fintech small business lender because has required the CFPB to take steps to example, if “you don’t see proper signage, they factor variables like borrower credit ensure their fair access to credit. Small that’s not a good sign,” he said. card data and the company’s Facebook business lending supervisory activity page into their risk will also help expand and enhance the scoring models. Bureau’s knowledge in this area.” S s ri e today to Personal Central to this growing supervisory Guarantees impetus is enhanced small business credit data collection. The CFPB report May Signal highlights Section 1071 of Dodd-Frank, ntelli en e or small siness leaders Bias which is currently in the pre-rule stage an ers and servi e roviders. (not yet enacted), and requires financial But in this non-
a e institutions to keep detailed records and transparent lend- inan e Le a e a o submit credit application data for wom- Te no o p ing niche, how can nan e en-owned and minority-owned small borrowers deter- Te nolo y a ne Len n o , businesses to the bureau. mine a predatory
THE ALTERNATIVEGLOVES LENDING‘TRUE COME LENDER’ OFF INREPORT addenCASESCOLORADO . idland Funding If Dodd-Frank 1071 were to pass, and - o e o from 2015 as legal authority for claims platform from a Le al alleging usury and other violations of the input/output By Steve Evans state’s Uniform Consumer Credit Code. fintech lenders may be legally required 2 “True lender” lawsuits filed in Colorado Referring to the Madden case, Colo ...... rado argues that “a bank cannot validly COMMENTARY business-friendly highlight the ongoing legal ambiguity of assign [federal interest rate exportation] e latory Addressing the Lack of Transparency marketplace lenders using the bank partner in Small Company Lending to a non-bank.” However, in that earlier to disclose data points like: number of 3 model. The latest dispute began earlier this Madden case, the dispute involved the STRATEGY ...... year when Colorado’s attorney general filed sale and assignment of charged-offone? debt Baysal said With SBA Budgets on the Chopping complaints in state court against Marlette – not loan originations under an ongoing Block, What’s the Lending Funding and Avant of Colorado on behalf arrangement between a non-bank lender the application; date the application was
Environment oing Forward? 6 of the administrator of the state’s Uniform like Marlette and Avant, and federally LEGAL & REGULATORY Consumer Credit Code. Later amended insured institutions like Crossthe River and -most discrimi- Recent Litigation Illustrates 8 and removed to federal court, the suits Strate y ...... WebBank. The banks earlier this month Why Merchant Cash Advances allege violations based on earlier true lender received; type and purpose of loan or Are Not Loans jumped into the fray with filings for ...... and loan assignment cases. According to declaratory judgment against Colorado. Bankrupt NuLook Now natory lenders are Facing RICO Suit the complaints, these non-bank companies “The decision in Madden was incor are the true lenders because they market rect based on longstanding banking legal 10 credit applied for; the amount of credit NEW TECHNOLOGY and service loans originated by New Jersey- & PRODUCT LAUNCHES precedent,” says Mike Tomkies, a partner based Cross River Bank and WebBank, a with Dreher Tomkies in Columbus, OH, Platform announcements, new those that require a ...... state-chartered institution in Utah. The r e Lender on page software and services, and notable specializing in banking and finance law. banks sell the loans to their partners. , urn to o ll re eive product releases. applied for and approved; the type of 12 Relevant Litigation Still Pending INDUSTRY NEWS ...... In both cases, ash all the AG’s Inc. complaint . orrisey cites personal guarantee A recap of recent news of 14 importance to lenders, brokers, the 2014 case and service providers. 15 action taken with regard to each appli- ...... 16 - dis o nted la n ...... LOAN TAPE ...... 17 from the borrower. M&A + Partnerships ...... ONLINE PLATFORMS HAVE New Investments cation; the census tract of the principal Indices/Funds of Interest/SBA Activity CHANGED BROKERING DYNAMICS ri in o only Credit Conditions/Indicators “This is an indi- LENDER SATISFACTION By Gary M. Stern % place of business; and the race, sex, and 1 % Situated in his lower Broadway office, Nick Defonte who runs Broad Satisfaction percentages of applicants80% - who were approved for financing: way Advance is in the crosshairs of small businesscation lending. Defonte offers that under- % 1 % accounts receivable financing, often in the garment industry or for retailers. Small Bank Even as small company finance strategies like factoring have changed the ethnicity of the principal owners of the and om limentary 78% - traditional lending landscape, Broadway Advance still also serves as a broker, 1% connecting clients to online lenders such as OnDeck,writing Fundation, Kabbage, is skewed Credit Union 22% 77% Credibly and ForwardLine, to name a few. Most online lenders offer a specialty. For example, Kabbage specializes business. a ess to o r Small 1 % in lines of credit of $2,000 to $100,000 with a six-month to one-year repay CDFI 2 % rokeringto personal namics on page credit- ment schedule; Accion lends to businesses open less than six months, and 61% urn to Rapid Advance advances up to 250% of monthly credit card sales. 1 % But with no current regulatory regime In the past, savings banks and community banks issued these small busi Large Bank % worthiness,” which B siness Lendin Dire tory. 6% Online issatisfied demanding data collection for small Lender Neutral denotes an “inher- Satisfied
ou e all usiness C e it u ve e e al ese ve an s business loan origination, Mills said “we ent bias,” he said. CallCall us(516) today 876-8006 at (516) or 876-8006. visit www.dealflowmedia.com Don't miss this offer. are flying blind.” As such, small SmallBusinessLending.io 15 May 4, 2017 For use by original recipient only. It is illegal to forward or otherwise distribute without permission.
THE ALTERNATIVE LENDING REPORT Marketplace Lending
Continued from front page laying off 60 staffers, and dropped plans New York-based Biz2Credit.com. “The think – specifically, as in his case, in the to roll out fresh business lines in credit advancements in technology at big banks commercial real estate space. cards and refinanced auto loans. and institutional lenders channels more Bechtel added, “More federal over- More recently, there’s talk that creditworthy borrowers to these institu- sight of the industry may be needed, but BizFi, an SME marketplace lender, is tions and leaves alternative lenders with the outlook for the industry is strong.” experiencing difficulties tied to obtain- less attractive borrowers.” Stiff Competition ing additional financing. Industry In comments to The Alternative from Big Banks insiders speaking with The Alterna- Lending Report, Arora calls the problems tive Lending Report have indicated the hovering over the marketplace lending Brayden McCarthy, vice president of company has recently laid off as many sector “well documented,” but says he strategy at Fundera and a former White as 30 to 40 people, and is rumored to sees shoots of green emerging from the House economic policy advisor, says be up for sale. According to one source, rubble. that marketplace lenders are starting to BizFi is over-leveraged and that’s been “In the past year or so, the sector has face stiff competition from big banks a major problem in obtaining new seen a lot of problems, especially with like Goldman Sachs who have rolled financing. OnDeck and Lending Club,” he points out their own fintech lending initia- “Growth for growth’s sake has a lot out. “But the disruption that market- tives. of industry players chasing the carrot, place lenders caused will remain.” But that trend he says, should not and many were hurt by holding long- “The aura and the excitement has have been a surprising one for alternative term paper,” one industry veteran says. gone away,” Arora adds. “However, lenders, nor should it be an insurmount- “The entire industry is stretched right marketplace lenders are not on the way able one. now.” out. Rather, a convergence is happening “Now, we’re seeing those online lend- While Banks Prosper, between traditional lenders and market- ers forced to compete with banks like Alt Lenders Struggle place lenders. Banks are getting more Goldman Sachs, Wells Fargo, Chase and and more into it. So yes, the disruption others – and that will be the most inter- All the bad news comes at a time caused by marketplace lenders is here esting next chapter,” McCarthy says. when banks and traditional lenders con- to stay. When that happens within any McCarthy, who has co-authored two tinue to prosper, as alternative lenders industry, the incumbents eventually will Harvard Working Papers on the subject grind away. adopt the disruption. Don’t write the of online lending to small businesses According to the latest Biz2Credit epitaph yet.” with former SBA Administrator Karen Small Business Lending Index, a month- Other lending experts also see more Mills, says increased competition from ly analysis of more than 1,000 small of a balanced industry landscape – a banks was inevitable. business loan applications, “Big banks’ natural occurrence in a relatively nascent “While online lenders are nimble and ($10 billion-plus in assets) loan approval industry where many companies aren’t tech driven, banks have a larger deposit rates were stagnant in the last month, yet ten-years-old. base and brand recognition that borrow- but remained at an all-time index high. Gary Bechtel, president of real estate er’s trust,” he explains. “The real dial will Meanwhile, loan approval rates at credit lender Money360, says “Marketplace turn when banks spot the opportunity unions and alternative lenders continues lenders and other non-bank lenders are and go online.” to falter.” generally nimbler and more streamlined Additionally, “The jury is still out Loan approval rates dropped at alter- than traditional lending sources. The on whether or not the MPL model is native lenders by two-tenths of a percent use of technology increases the speed in sustainable, but it is clear that there are in March, as they granted 58.2% of the which loans can be closed, and stream- some pain points,” McCarthy states. loan requests. This marks the ninth con- lines the process.” “First and foremost, no online lender secutive month of decreases in this cat- Bechtel said that some of the chal- has lent through a downturn,” he notes. egory of lenders, the index reports. lenges in the marketplace lending sector “Because of that, credit models aren’t “As their competitive advantage – of last year were the result of some lend- tested – it’s an open question of whether speed in processing loans – becomes less ers being reliant on a handful of large or not investors want to put money into and less, alternative lenders continue to institutional investors. And while those medium term lenders with no skin in struggle to take market share away from cases received a lot of attention, the the game, when they’re responsible for lenders,” explained Rohit Arora, CEO of problem isn’t as pervasive as one might underwriting and segmenting risk.”
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THE ALTERNATIVE LENDING REPORT Marketplace Lending
Thus, the institutional investor has to rates go up, that makes online lend- constitute nearly a fifth of the total SME trust the online lender, and that is diffi- ing a little less attractive to institu- lending market by that point,” he says. cult for two reasons, McCarthy explains. tional investors.” Yet getting to that point will surely • Alignment of interests. Investors may “When there are hiccups at an online mean undergoing what experts across want the lender and investors to be lender, as we saw in 2016, institutional the board call “growing pains” for mar- aligned and therefore might want investors tend to run because their cash ketplace lenders. lenders to put skin in the game, isn’t guaranteed,” McCarthy adds. “Given “As the MPL industry matures, it McCarthy says. “Investors have to their lack of deposit base, it’s an open ques- is adopting, or being forced to adopt, trust that lenders are appropriately tion whether this model is sustainable.” best practices from other types of con- pricing risk. It is unclear if the inter- Slow and Steady sumer lending such as third party qual- mediary model will persist without a Wins the Race ity control and review, increased investor requirement for medium term lend- transparency, and the use of verified ers to participate alongside institu- Still, industry experts insist that third-party employment and income tional investors.” growth prospects are strong for online information,” states Geoffrey Hickman, managing director of Equifax Capital • Institutional investors are relatively and marketplace lenders. Markets. fickle, compared to banks. “[Investors] Citing data from Morgan Stan- “I think any rapidly growing lending are willing to pump money into ley, McCarthy says the total address- segment will experience growing pains,” intermediary lenders because they able market for online SME lenders is Hickman adds. “The buy side will reward need yield, particularly in a low yield $280 billion and the industry will grow MPL originators that provide added environment, when they want to at a 47% annualized rate through 2020. transparency and demonstrate more com- earn a return. When that changes, as “They estimate that online lenders will prehensive underwriting practices.”
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