Transparent Pricing Creates a Level Playing Field, says Kabbage’s Kathryn Petralia
June 7, 2016
Loan matchmaking site Lending Tree has joined the Innovative Lending Platform Association (ILPA) to participate in developing a universal small business lending disclosure system to raise transparency with lenders. It will work closely with the association over a 90-day “national engagement period” to create and implement the SMART Box (Straightforward Metrics Around Rate and Total Cost).
AltFinanceDaily spoke to Kathryn Petralia, cofounder of Kabbage Loans, which is spearheading the association with OnDeck and CAN Capital. Below are the edited excerpts from the interview:
Tell us about how the ILPA came about?
We (OnDeck, CAN Capital and Kabbage) represent the largest non bank lenders. We have collectively lent $12 billion through the course of our businesses and so we thought it will be great for us to make a statement through ILPA. We came from a perspective that there are a lot of different products for small businesses on the market like merchant cash advance, equipment financing, invoice factoring and lines of credit. All of these serve different needs and are ambiguously priced. So we wanted to find some methodology which is transparent to borrowers so they can know the exact price and total cost of borrowing.
We want to keep it open and hope that everyone participates in the disclosure methodology so borrowers can have a clear understanding of the fees they are paying.
What is SMART Box. How does it work?
Different loan products have different fees — some have maintenance fees, some have broker fees, usage fees and so on and they are all structured very differently. It can get very confusing and so we came up with all the products to understand what disclosures would be necessary to know the total cost of borrowing. We’re working with OnDeck and CAN Capital to gather comments and disclose a series of methodologies that will create the ‘Straightforward Metrics Around Rate’ and Total Cost or SMART Box. Those who want to participate will have to disclose it on loan agreements to their customers.
What about disclosures by companies? Would you say the industry needs more regulation on that front?
Kabbage and other companies in the industry are all regulated and go through FDIC audits. We all follow KYC, CIP, FFIEC guidelines that refer to lenders. We all follow these regulations and I would argue vociferously that we are regulated businesses already. All companies are very different and there are a bunch of things happening — states like California, Illinois and New York and CFPB are all taking interest in small business lending and it’s a positive that they recognize the partnership between banks and tech companies. On the general lending side, we have Dodd-Frank and Madden vs Midland which look at lending issues. Some of the regulation is around how loans are sold and some of it is around how they are limited. And on the small business lending side, there is push for more transparency which is the reason we launched ILPA. We wanted to set the standard for what that would look like. And having it done comprehensively is beneficial for us as it gives us a level playing field.
On the consumer lending side, there is transparency but it’s still lacking a comprehensive system that encapsulates the total cost of borrowing. APR is a great metric but the total cost of borrowing must be included.
Give us a snapshot of what the industry looks like to you
All businesses serve different markets, are different in the way they fund their loans and operate in different geographies, so it’s hard to say but in general those who have done a good job at incorporating data and tech and streamlined operative process will have an advantage and will make it through economic turbulence.
What’s your short-term prediction?
Companies that are not well capitalized will have a tough time raising capital in 2016 and we have already been approached by a number of businesses that are looking to sell or find a partnership because they aren’t well capitalized.
Tell us what’s happening at Kabbage?
We have two businesses – the direct lending business which we are trying to grow and the second is the platform business where we have seen sustained growth, with existing partnerships with ING in Europe, Santander in the UK and Scotia Bank in Canada. More partnerships are in the offing – both domestically and in Latin America.
Midland Funding Gets Mentioned in John Oliver’s HBO Show
June 6, 2016The infamous Midland Funding you might know from the Madden v Midland case, was mentioned on John Oliver’s Last Week Tonight and not in the best context. Midland is a subsidiary of Encore Capital Group, the largest publicly traded debt buyer in the United States and the episode was about the not-always-peachy world of debt buying and debt collection.
Oliver referenced Midland just to provide background on an industry as a whole, not to imply that they were involved in anything negative.
More background was added by Jake Halpern, the author of Bad Paper: Chasing Debt from Wall Street to the Underworld, who explained that the sale of debt from one party to another is not always done using the most sophisticated means, with it often being simply a list of fields on an Excel spreadsheet.
Oliver, who took his research to the extreme, actually set up his own debt collection company in Mississippi and purchased $15 million worth of debt that was aged beyond the statutory collections period for the bargain price of $60,000. Rather than try to collect on the debt, which he mentioned would not have been illegal, he decided to forgive the debt entirely and set the record for TV’s largest monetary giveaway in the process.
Oliver was careful to remind viewers throughout that while there are a few bad seeds and horror stories, the industry itself is regulated and is not illegal. You can watch the episode below:
Here’s Why The DOJ Wants to Keep an Eye on Online Lenders
May 26, 2016
Online lending has been getting a lot of attention, but not necessarily all good.
The U.S. Justice Department is among the latest authorities to be concerned about online lending, while it’s going through a rather choppy ride.
Assistant Attorney General at the DOJ, Leslie Caldwell voiced the regulator’s concern that the loans made online were backed by investors and are without “traditional” safeguards of deposits that banks rely on. Although alternative lending is still a small part of the lending industry, DOJ wants to keep an watchful eye to avoid another mortgage crisis-like situation.
“I’m not saying … that we’ve uncovered a massive fraud, but just that there’s a potential for things to go awry, like when underperforming loans were being sold in residential mortgage-backed securities,” Caldwell told Reuters.
And while the DOJ questions Lending Club, New York’s financial regulator is said to have sent letters to 28 online lenders seeking information on loans made in the state.
The New York Department of Financial Services first subpoenaed Lending Club on May 17th, seeking information about fees and interest on loans made to New Yorkers. Bloomberg reported that the regulator has sent letters to 28 firms including Funding Circle and Avant asking for similar disclosures. The full contents of those letters have not been made public yet, but Reuters seemed to characterize them as being perhaps more aggressive than the inquiry in California six months ago.
Most lenders, the NYDFS will likely learn, are relying on preemption granted under the National Bank Act or Federal Deposit Insurance Act. Chartered banks covered under these laws are typically the entities in question making the actual loans. The “online lenders” buy the loans from the banks and service them. But absent that structure, it is possible that New York could model future regulation on California’s system, where lenders must go through a vetting process and be licensed.
Online lenders dependent on chartered banks to enjoy preemption have slightly less reason to be worried after the US Solicitor General recently filed a response to the US Supreme Court’s request, that argued the Second Circuit’s ruling in Madden v Midland, a case that challenged preemption, was simply incorrect.
WebBank Alleged to be “Sham Pass Through Bank” in New Lending Club Usury Class Action
April 15, 2016
A new class action lawsuit filed on April 6th alleges that Lending Club and WebBank among others, violated state usury laws, consumer protection laws and the Racketeer Influenced Corrupt Organizations Act (“RICO”).
Plaintiff Ronald Bethune, a New York resident, is arguing that his 29.97% APR loan through Lending Club violated the state’s 16% interest cap.
While the Second Circuit’s ruling in Madden v. Midland Funding, LLC is cited, the complaint focuses more on WebBank’s role in carrying out a collaborative fraud scheme.
Defendants associated together for the common purpose of limiting costs, eliminating oversight, and maximizing each members’ profits by engaging in the fraudulent conduct described herein. Specifically, the members of the Enterprise enticed tens of thousands of consumers to sign up for loans through LCC [LendingClub Corporation], hoping that enough consumers would select LCC for their loans without the fact that WebBank was a “pass through” sham party to the transaction being brought to light making the loans illegal and usurious. The purpose was to allow Defendants to charge, and profit from, usurious interest rates to Plaintiff and members of the Class, and to do so without regulatory oversight.
The plaintiff acknowledges that Lending Club recently adjusted its relationship with WebBank and the class seeks to recover damages for all loans made prior.
WebBank’s parent company, Steel Partners Holdings LP, who is also named as a co-defendant, has barely registered any movement in its stock price.
Lending Club by contrast, is down almost 10% since the complaint was filed.
YOU CAN DOWNLOAD THE FULL CLASS ACTION COMPLAINT HERE
This case is unrelated to another pending class action against Lending Club.
Letter From the Editor – March/April 2016
March 1, 2016
In early 2016, a recession seemed inevitable, until it didn’t. Rumors of rising defaults across a variety of marketplace lenders have been defended as falling within model estimates. The stock market’s sudden plunge recovered. And Madden v Midland’s long-term impact is being chalked up as overblown. All is well again, well mostly anyway. Institutional investors have gotten a little spooked and the once insatiable appetite seems to have become just a little bit satiable.
But we’re back, and so is the beast that has come to be known as “marketplace lending.” The FDIC says that term can encompass unsecured consumer loans, debt consolidation loans, auto loans, purchase financing, real estate loans, merchant cash advance, medical patient financing, and small business loans. It can “include any practice of pairing borrowers and lenders through the use of an online platform without a traditional bank intermediary,” they wrote in their Winter 2015 Supervisory Insights report.
In this issue, we examined one piece of marketplace lending that has created many success stories, the merchant cash advance industry. For years, it’s turned hungry 20 somethings into front-page worthy stars. Will that trend continue or has the moment passed? The quality of leads will play a role in who makes it big and who doesn’t, said some of the folks we interviewed. Ironically, while the industry is often considered to be online, the Internet is reportedly becoming a less reliable place to acquire customers because of competition and cost. Having problems with leads? You’re not alone, we’ve learned.
But not everyone is struggling. In March, we published a list of the top 8 alternative small business funders of 2015. The numbers were either reported to us directly or we determined them using publicly available information. In this issue, we’ve got the year-over-year statistics for 18 companies. Some of them might surprise you.
I don’t want to finish off my introduction to this issue with the R-word, but since there were signs of weakness earlier this year, we did ask the wider marketplace lending industry what to expect from the next recession. Everything is at risk, they said, from borrower defaults to institutional backing to regulatory action. Marketplace lending, however big and strong it is now, is not believed to be impervious to market forces. Will the beast prevail? Or is it destined to fail?
–Sean Murray
Lending Club Shifts Fee Arrangement With WebBank
February 26, 2016
It’s a “belt and suspenders” precaution according to Lending Club CEO Renaud Laplanche. The Madden v Midland case has forced the company to rethink their arrangement with WebBank, the chartered bank that allows them to make loans nationwide. Under the new terms, the fee LendingClub pays to WebBank for the loans it issues will be related to how the loans perform over time.
Even if the U.S. Supreme Court were to rule unfavorably in Madden, Lending Club would still have been able to operate freely under their old arrangement. The change then may be a response to several cases, including ones that have accused online lenders of using chartered bank relationships to carry out alleged abuses. According to law firm Ballard Spahr, a “federal court refused to dismiss Pennsylvania racketeering claims against companies alleged to have partnered with a state bank to market Internet loans illustrates the risks inherent in these relationships and the importance of proper structuring.”
In a brief, Ballard Spahr wrote:
In Commonwealth of Pennsylvania v. Think Finance, Inc., et al., the Pennsylvania AG, working with a well-known private plaintiffs’ firm, claimed that the companies and their individual principal had engaged in a “rent-a-bank” scheme in which a Delaware state bank “acted as the nominal lender while the non-bank entity was the de facto lender—marketing, funding and collecting the loan.”
By WebBank maintaining an interest in the outcome of the individual loans, Lending Club will reduce its potential standing as the de factor lender.
Notably, the breaking story focused on Lending Club. WebBank also has a relationship with others in the alternative finance community such as CAN Capital, Prosper, AvantCredit and PayPal. It’s uncertain if their arrangements will also be subject to change.
Without Scalia, Media Outlets Reporting Marketplace Lenders Supposedly Doomed With Supreme Court Case (They’re Wrong)
February 18, 2016
Without Antonin Scalia, marketplace lending is apparently doomed, according to news outlets reporting on the matter. A high profile case (in the banking world anyway) known as Madden v Midland, is pending before the U.S. Supreme Court. Midland Funding seeks to reverse an appellate court ruling that said that interest rate preemption under the National Bank Act did not apply to them and thus they were subject to New York State’s usury laws.
According to BankRate.com’s reporting on the Scalia angle, “The U.S. Supreme Court has been asked to review a lower court decision that prevents marketplace lenders from getting around state usury laws by hooking up with banks headquartered in states that don’t have those rules.” But that’s not true at all. The case isn’t about marketplace lenders and the appellate court’s ruling isn’t currently preventing marketplace lenders from doing anything.
Midland Funding is a debt collector. Saliha Madden, a New York resident, obtained a bank issued credit card with an interest rate of 27% APR, racked up charges and didn’t pay them. The debt got written off and the bank sold the debt to Midland Funding. Midland continued to assess interest on the credit card debt while it attempted to collect. Saliha Madden sued on the basis that Midland was violating New York State usury laws. Midland Funding won and Madden appealed. Then a weird thing happened. The United States Court of Appeals for the Second Circuit held that in order “[t]o apply NBA preemption to an action taken by a non-national bank entity, application of state law to that action must significantly interfere with a national bank’s ability to exercise its power under the NBA.”
And from there began the somewhat justifiable panic in the marketplace lending industry. If a collector buying a charged-off debt from a bank can’t continue to enforce the terms as originally contracted, then could you make the same argument for loan platforms that buy newly issued loans? The answer is simply that you could make the argument. It’s not definitive. It’s one of those things that would likely have to be challenged in court by a borrower confident that a case involving a debt collector and a bank issued credit card somehow related to the matter between a marketplace lender and a borrower.
But there’s another problem in trying to make that link.
The Madden v Midland case involved a national bank and preemption under the National Bank Act. Many marketplace lenders such as Lending Club are not even conducting their business with national banks but with state-chartered banks. Their preemption ability falls under the Federal Deposit Insurance Act.
Lending Club did not shut their business down after the appellate court ruling and they didn’t stop lending in the states in which the Second Circuit has jurisdiction (New York, Connecticut and Vermont). Lending Club’s CEO Renaud Laplanche even expressed little worry about how it would impact their business when asked about it during their 2015 Q2 earnings call.
American Banker reported that “Scalia’s Death Is a Setback for Online Lenders in Key Court Fight.” But it’s really only a setback in the sense that a loss would peel away just one layer of the onion. Marketplace lenders weren’t going to suspend their operations regardless of whether or not the Supreme Court heard the case and regardless of whether or not Scalia was there to dissent.
Consider also that exporting home state interest rates using national and state chartered banks is only one system available to marketplace lenders. Square’s working capital program for example, is actually structured as a purchase of future receivables. There is no bank, no loan, and no preemption. An unfavorable Madden v Midland ruling would have no impact on that model or the dozens of merchant cash advance companies that offer similar products.
There’s also state by state licensing, which while costly and time consuming to set up, would at least allow marketplace lenders to lend in many states without relying on a bank or preemption. “I think the stronger business model is the state licensing model, as opposed to partnering up with a bank,” said Richard Eckman, a lawyer at Pepper Hamilton, to American Banker.
Even further distanced from this case are commercial marketplace lenders since state lending laws are generally less burdensome for business-to-business transactions.
And even if all else failed, a choice-of-law provision in a loan agreement can potentially decide which state’s law applies. Lending Club’s Laplanche said as much last year. “We continue to operate in the Second Circuit district where that decision was rendered, exactly as we did before and are relying on our choice of law provisions,” he said during an earnings call.
Scalia’s absence is at most a bummer for marketplace lenders. A win would only serve to tie up loose ends and finally put an end to bank charter model naysayers. Madden v Midland became so famous because the ruling was just so shocking. It practically begged the industry to take a look and wonder, what if? If this, then why not that? And if that, then who’s to say not this then? Even on AltFinanceDaily, we’ve explored the nightmare scenario in which a well established system totally unravels and the world ends. The real world holds much more promise.
The real losers in an unfavorable Supreme Court ruling would be national banks and credit card companies. And that’s because if debt collectors can’t enforce their loan agreements, then they’re not going to buy that debt to begin with. And if debt collectors won’t buy that debt, then banks are going to have to figure out a better way to collect on their own, else they make even less risky lending decisions.
Something tells me though that banks would find a creative work-around for that anyway. Because if they didn’t, Madden v Midland would end up being a massive boon for marketplace lenders.
Imagine that.
Moody’s Position on Marketplace Lending
January 21, 2016You can’t slap a FICO score on to an entire industry but you can still assess its short term and long term risks. That’s precisely what ratings agency Moody’s has done in a report they published last month titled, 2016 Outlook – Marketplace Lending Platforms Will Continue to Evolve, Expand Loan Types.
In their report, Moody’s defines “marketplace lending” as “the growing industry of Internet-based, alternative lending platforms for consumers and small businesses.” And there’s good news, they predict it will further expand globally in 2016. The US is not even the biggest game in town, according to Moody’s, China is. “China will remain by far the largest market for marketplace lending and similar online lending platforms,” they wrote.
OnDeck was labeled as the leading player in the small business loan market, SoFi and CommonBond for student loans, and Lending Club, Prosper, SoFi, and Avant for personal consumer loans.
Listed among the industry’s risks is the Madden v. Midland decision. Ironically, merchant cash advance companies who gave up doing purchases of future receivables in exchange for becoming a “true lender” have found themselves wondering if merchant cash advance was perhaps the safer model all along. “Questions remain about the viability of the loan origination model many marketplace lenders currently use, in which a partner bank originates the loans, then promptly sells them to the marketplace lender,” the Moody’s report states. “This model allows marketplace lenders to take advantage of federal “rate exportation” laws and offer loans with interest rates that exceed the maximum rate otherwise allowed.”
Below are some of the other highlights:
- An increase in interest rates will not have an impact on performance but defaults will rise moderately
- Defaults on student loans will continue to be low
- Unemployment is not expected to rise in the near term
Most people probably can’t name more than 5 peer-to-peer lending platforms in the US. Meanwhile in China, there are so many that 800 of them have already failed or were recently facing major liquidity issues. There are more than 2,600 platforms there nationwide.
