Should Alternative Lenders Reconsider IPOs?
August 31, 2015
OnDeck has gotten very quiet over the past month as the stock hovers near its all time low, and down more than 50% from its IPO price. The only updates related to them on the news wire lately are reminders from law firms to join in on the existing class action lawsuit. One has to wonder if they regret going public.
To make the things murkier, the Madden v. Midland decision effectively makes it illegal in a handful of states for alternative lenders to rely on chartered banks to originate loans for them at interest rates that violate state usury laws. In states such as New York, that’s a big problem for OnDeck, but fortunately for them and other lenders like them, they can still fall back on a choice of law provision to still be able to make the loans.
Combine that landmark ruling with the Treasury RFI, The Dodd Frank Section 1071 Reg B rule that everyone wants enforced all of the sudden, and a chorus of lenders calling for regulatory action, and we don’t exactly have an ideal environment for other alternative lenders considering an IPO.
But does an IPO really matter?
I am reminded of a long email that Elon Musk sent to employees of SpaceX two years ago regarding their aspirations to go public so that they could monetize their stock options and get rich.
“Some at SpaceX who have not been through a public company experience may think that being public is desirable. This is not so.”
“Another thing that happens to public companies is that you become a target of the trial lawyers who create a class action lawsuit by getting someone to buy a few hundred shares and then pretending to sue the company on behalf of all investors for any drop in the stock price.”
“Public companies are judged on quarterly performance. Just because some companies are doing well, doesn’t mean that all would. Both of those companies (Tesla in particular) had great first quarter results. SpaceX did not. In fact, financially speaking, we had an awful first quarter. If we were public, the short sellers would be hitting us over the head with a large stick.”
“Public company stocks, particularly if big step changes in technology are involved, go through extreme volatility, both for reasons of internal execution and for reasons that have nothing to do with anything except the economy. This causes people to be distracted by the manic-depressive nature of the stock instead of creating great products.”
“It is important to emphasize that Tesla and SolarCity are public because they didn’t have any choice. Their private capital structure was becoming unwieldy and they needed to raise a lot of equity capital.”
“Those rules, referred to as Sarbanes-Oxley, essentially result in a tax being levied on company execution by requiring detailed reporting right down to how your meal is expensed during travel and you can be penalized even for minor mistakes.”
Any other alternative lenders possibly considering an IPO should strongly evaluate whether or not it’s necessary to go public to carry out their objectives. Surely the folks at OnDeck must be at least a little bit distracted by the manic-depressive nature of their stock price, the class action lawsuit, reactions to their quarterly reports, and the unyielding scrutiny by analysts and pundits. Surely it could be argued that they’ve lost some of their PR mojo in the mix.
It’s not easy running a public company, especially a lender in a post-financial crisis world where Wall Street hatred still runs hot. Hopefully if you are in this industry, you are in it for the long haul and not just for an IPO to cash out and give up…
Are Your Sales Agents or ISOs Up to Snuff? (Take Our Research Survey)
August 12, 2015If you enjoy reading AltFinanceDaily’s articles, please take the time to take our short survey:
Some background:
What started as a few sensational articles about practices in small business lending and merchant cash advance is now turning into a cry for a governmental crackdown by not only observers outside the industry but lenders from inside the industry itself.
Stories that look like they’ve been written by consumer activist groups are being penned by your peers. Just recently, Fundera’s Brayden McCarthy submitted his thoughts to American Banker and the Huffington Post.
“As evidence,” he wrote. “One need only look to some lenders’ triple-digit interest rates, the proliferation of shady loan brokers and inadequate or nonexistent disclosure of price and terms. Some practices, such as brokers that brand themselves as impartial but take incentives to market certain lenders over others, resemble behavior seen in the run-up to the financial crisis.”
Along with the Treasury’s RFI, there is a mass lobbying effort to regulate the industry as fast possible. As Patrick Siegfried, Esq pointed out recently, former SBA Administrator Karen Mills recently urged the the CFPB to implement the Small Business Data Collection Rule of the Dodd-Frank Act, a law which could potentially outlaw the underwriting practices of the entire business lending and merchant cash advance industries.
There’s also been the publication of a Small Business Borrowers’ Bill of Rights and the formation of the Responsible Business Lending Coalition. And on Forbes, an interview with loan broker Ami Kassar described the industry as the wild, wild west.
As a long time participant and observer in the industry, (this is my 10th year now) I want nothing more than a bright and prosperous future for both my peers and America’s small businesses. I hope you’ll take two minutes to take our survey above.
Thanks!
Former SBA Administrator Karen Mills Urges CFPB to Enact Small Business Data Collection Rule
August 11, 2015
Last week a handful of small business lenders announced the formation of the Responsible Business Lending Coalition. The announcement was made at an event held at the National Press Club in Washington, DC. The event’s Keynote speaker was former SBA Administrator Karen Mills.
During her presentation, Ms. Mills called on the CFPB to implement the Small Business Data Collection Rule of the Dodd-Frank Act. Ms. Mills’ request echoes the recent letter signed by 19 US senators urging the Bureau to issue the regulations contemplated by section 1071 of the Act. Ms. Mills argued that the data collection rule will be critical to understanding small business credit availability, especially for women and minority owned businesses.
Ms. Mills’ statements are the most recent in a series of requests to the CFPB to implement 1071. In addition to the 19 senators, multiple community activist groups along with the National Community Reinvestment Coalition have demanded that the Bureau take action.
The White House has remained silent on the issue so far. If the Bureau does decide to act, the new rule could be added to its list of action items as early as this winter.
Less Regulated, Non-bank Lenders? Never Heard of ‘Em
July 20, 2015
Recently, two journalists for the Wall Street Journal sat down with Senator Chris Dodd and former Congressman Barney Frank to ask their thoughts about the Dodd Frank Act five years later.
The WSJ asked Frank specifically, “Do you have concerns that Dodd-Frank rules are driving more activity into the shadow banking system (less-regulated, nonbank lenders), sowing the seeds for a future crisis?”
The response…
Frank: “What activity? The law gives the regulators the power to regulate. When people tell you that activity has been moved to the shadow banking system, ask them what activity because I don’t know exactly what they’re talking about.”
One has to wonder what the awareness level was then when the Dodd Frank lawmakers drafted up Section 1071 to expand the Equal Credit Opportunity Act.
Meanwhile, Frank told me personally last year in a walking one-on-one in NYC that he supported transparency in business loan transactions, such that the borrower should be easily able to identify the terms. The premise behind consumer loan protections was that consumers were less sophisticated, he said. He also that he was not in favor of a federal cap on business loan interest rates.
Federal Government Wants Your Thoughts About Online Lending
July 19, 2015
Whether you’re a funder, lender, broker, or platform, the U.S. Treasury Department deserves to hear your input.
Only July 16th, the Treasury announced that it was seeking public comment on various business models and products offered by online marketplace lenders to small businesses and consumers. One stated purpose of this is to study “how the financial regulatory framework should evolve to support the safe growth of the industry.”
The comment period is only open for six weeks.
Over the last year, many funders and brokers have voiced their opinions on best practices, ethics, and standards. Some want regulation to curb what they believe to be immoral behavior and others just want clarity where the laws are obscure, illogical, or even in conflict with themselves.
In at least one recent case, a merchant cash advance company CEO wrote about the complexity of dealing with an endless amount of state laws. In Lift the Fog, Give us Regulation, Merchant Cash and Capital CEO Stephen Sheinbaum wrote, “It is also better, at least for the financial services industry, if the central government is the one to craft the regulation instead of getting one rule from each of the 50 state governments.”
Meanwhile the Consumer Financial Protection Bureau (CFPB) will eventually start to enforce the amendments to the Equal Credit Opportunity Act, which technically already became the law under Section 1071 of the Dodd Frank Act. As part of that, underwriters of business loans and merchant cash advance alike may no longer be allowed to meet applicants, speak with them on the phone, examine their driver’s licenses, review their social media profiles, or even ask what their business model is or how they market themselves.
One has to look at any opportunity afforded by a government agency to share input before future regulations are implemented then as a duty. It might not matter, but you should do it anyway, just like voting.
Below are the questions, the Treasury wants you to answer (or Click to view on Treasury.gov):
1. There are many different models for online marketplace lending including platform lenders (also referred to as “peer-to-peer”), balance sheet lenders, and bank-affiliated lenders. In what ways should policymakers be thinking about market segmentation; and in what ways do different models raise different policy or regulatory concerns?
2. What role are electronic data sources playing in enabling marketplace lending? For instance, how do they affect traditionally manual processes or evaluation of identity, fraud, and credit risk for lenders? Are there new opportunities or risks arising from these data-based processes relative to those used in traditional lending?
3. How are online marketplace lenders designing their business models and products for different borrower segments, such as:
• Small business and consumer borrowers;
• Subprime borrowers;
• Borrowers who are “unscoreable” or have no or thin files;
Depending on borrower needs (e.g., new small businesses, mature small businesses, consumers seeking to consolidate existing debt, consumers seeking to take out new credit) and other segmentations?
4. Is marketplace lending expanding access to credit to historically underserved market segments?
5. Describe the customer acquisition process for online marketplace lenders. What kinds of marketing channels are used to reach new customers? What kinds of partnerships do online marketplace lenders have with traditional financial institutions, community development financial institutions (CDFIs), or other types of businesses to reach new customers?
6. How are borrowers assessed for their creditworthiness and repayment ability? How accurate are these models in predicting credit risk? How does the assessment of small 10 business borrowers differ from consumer borrowers? Does the borrower’s stated use of proceeds affect underwriting for the loan?
7. Describe whether and how marketplace lending relies on services or relationships provided by traditional lending institutions or insured depository institutions. What steps have been taken toward regulatory compliance with the new lending model by the various industry participants throughout the lending process? What issues are raised with online marketplace lending across state lines?
8. Describe how marketplace lenders manage operational practices such as loan servicing, fraud detection, credit reporting, and collections. How are these practices handled differently than by traditional lending institutions? What, if anything, do marketplace lenders outsource to third party service providers? Are there provisions for back-up services?
9. What roles, if any, can the federal government play to facilitate positive innovation in lending, such as making it easier for borrowers to share their own government-held data with lenders? What are the competitive advantages and, if any, disadvantages for nonbanks and banks to participate in and grow in this market segment? How can policymakers address any disadvantages for each? How might changes in the credit environment affect online marketplace lenders?
10. Under the different models of marketplace lending, to what extent, if any, should platform or “peer-to-peer” lenders be required to have “skin in the game” for the loans they originate or underwrite in order to align interests with investors who have acquired debt of the marketplace lenders through the platforms? Under the different models, is there pooling of loans that raise issues of alignment with investors in the lenders’ debt obligations? How would the concept of risk retention apply in a non securitization context for the different entities in the distribution chain, including those in which there is no pooling of loans? Should this concept of “risk retention” be the same for other types of syndicated or participated loans?
11. Marketplace lending potentially offers significant benefits and value to borrowers, but what harms might online marketplace lending also present to consumers and small businesses? What privacy considerations, cybersecurity threats, consumer protection concerns, and other related risks might arise out of online marketplace lending? Do existing statutory and regulatory regimes adequately address these issues in the context of online marketplace lending?
12. What factors do investors consider when: (i) investing in notes funding loans being made through online marketplace lenders, (ii) doing business with particular entities, or (iii) determining the characteristics of the notes investors are willing to purchase? What are the operational arrangements? What are the various methods through which investors may finance online platform assets, including purchase of securities, and what are the advantages and disadvantages of using them? Who are the end investors? How prevalent is the use of financial leverage for investors? How is leverage typically obtained and deployed?
13. What is the current availability of secondary liquidity for loan assets originated in this manner? What are the advantages and disadvantages of an active secondary market? Describe the efforts to develop such a market, including any hurdles (regulatory or otherwise). Is this market likely to grow and what advantages and disadvantages might a larger securitization market, including derivatives and benchmarks, present?
14. What are other key trends and issues that policymakers should be monitoring as this market continues to develop?
The Treasury asks that you include your name, company name, address, job title, email address, and phone #. You can submit your responses on http://www.regulations.gov/. Just click on the tab that says “Are you new to the site?”
You can also submit by mail:
To: Laura Temel,
Attention: Marketplace Lending RFI,
U.S. Department of the Treasury, 1500
Pennsylvania Avenue NW., Room 1325
Washington, DC 20220
If you have questions, email marketplace_lending@treasury.gov or call 202-622-1083.
Merchant Cash Advance Risks and Myths
October 24, 2014
The Lend360 Conference in New Orleans last week had a different vibe from the five other conferences I’ve attended this year. For one, I was a partner in it through DailyFunder. And further, there was a huge focus on best practices, ethics, and regulations. Expert speakers and panelists aired it out to dispel myths and disclose risks.
Most telling about the future was a response from Victory Park Capital’s Brendan Carroll about whether or not he feared looming regulations could hurt the merchant cash advance and alternative business lending industry. As someone who has invested heavily in Kabbage and more recently in Square Capital, he expressed concern about regulations in general but clearly was not convinced they were on the immediate horizon for the industry.
Lisa McGreevy, president of the Online Lenders Alliance moderated the two-man panel which also consisted of John Hecht of Jefferies and she did a great job of digging out the true thoughts from one of the room’s most powerful investors. It’s unlikely a company like Victory Park Capital would invest hundreds of millions of dollars in an industry they believed faced imminent regulatory upheaval.
Merchant Cash Advance regulation is not on any regulator’s immediate agenda but they are doing their homework. At Lend360, it was revealed that several members of the North American Merchant Advance Association met with the Federal Reserve in Washington D.C. months ago for a Q&A. There’s communication occurring now on some levels. Even I’ve been contacted by the Federal Reserve to comment as a part of a broad research assessment.
Eventually I believe the CFPB will try to play a role in the industry through Section 1071 of the Dodd-Frank Act. We’re a long way from there though and it doesn’t mean they’ll be successful. Even internal operatives have expressed doubt on business-to-business jurisdiction.
In the meantime, it’s not all blue seas and sunny skies. Robert Cook, an attorney at Hudson Cook, LLP explained at the conference that the industry is already in many ways supervised by the FTC. And with the FTC, it’s not a question of how high the costs are, it’s about how transparent those costs are. If they’re high, fine, but do the customers understand them and are they marketed accordingly?
Terms like guaranteed, 99% approval rate, and lowest rates can be deemed deceptive if not true.
Transparency, ethics, customer experience, that’s what people in the business need to be focused on right now. Stacking, while a polarizing topic, seems to be a matter of contract law. Everybody’s caught up in the stacking debate believing it’s the lightning rod that will attract regulation. If left unchecked, it might draw interest, but it’s the fundamentals that get overlooked that could draw the ire of an agency like the FTC.
If your marketing says “rates from 1.10 and up”, while actually contracting 99% of your customers with 1.49s, that’s something you’ll probably want to address now. Think about the net cost your customer is likely to be charged. If a 1.10 is a buy rate and there’s a 10 point upsell, a 10% closing fee, and 10% origination fee that makes the end cost closer to a 1.40, you probably don’t want to market the cost as 1.10.
Right now it all basically comes down to doing good business in a transparent manner. Costs may be high but explain those costs, make sure the customers understand them. Don’t be deceptive. There will always be critics of high costs, but rational people are being exposed to the sober reality that you can lose money even at a 50% interest rate.
As a word of advice for new ISOs and brokers, stay away from funding companies that don’t even have a paid email account. If a funder is too financially strapped to afford a web domain, they probably are going to cut corners in other places too. The story about working off a gmail or hotmail account in the interim while they try to get their website set up is indicative that they’re getting ahead of themselves. There are way too many solid funding companies to choose from for you to entertain doing business with hotFunding4ISOsNow@hotmail.com. Even middlemen are accountable in the grand scheme of best practices and the customer experience.
Fund intelligently…
– AltFinanceDaily
Also read:
4/11/14 Regulatory Paranoia and the Industry Civil War
8/13/14 Should Licensing and Accreditation come to Merchant Cash Advance?
Fantasy Football Championship Begins Tomorrow
December 19, 2012
The MCA Industry Fantasy football league is finally drawing to a close. If you somehow missed the action this season, twelve companies came together to compete for a grand prize donation to a charity of their choice. Each company, in addition to several non-participants pledged funds to the prize. A total of $7,100 was raised!!!
In a winner-take-all format, the two teams competing in the championship this week are:
TakeCharge Capital – Newington, CT
Sure Payment Solutions – New York, NY
A winner will be declared next week. A big thanks to everyone that contributed. 100% of the funds will be donated to the winning team’s charity selection.
- Rapid Capital Funding – $1,000!
- Raharney Capital – $500
- Financial Advantage Group – $500
- Merchant Cash Group – $500
- Sure Payment Solutions – $500
- Meridian Leads – $500
- Merchant Cash and Capital – $500
- NVMS – $500
- United Capital Source – $500
- RapidAdvance – $500
- Capital Stack – $500
- Swift Capital – $250
- Strategic Funding Source – $250
- Entrust Merchant Funding – $250
- Paramount Merchant Funding – $250
- TakeCharge Capital – $100
– Merchant Processing Resource
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15,000 exempt from the debit card interchange fee standards
August 23, 2011Originally Published on July 14, 2011.
Why is the number ‘15,000’ significant? That’s approximately the number of banks that are EXEMPT from the debit fee interchange cap. Download List
From the Federal Reserve:
The Federal Reserve Board on Tuesday published lists of institutions that are subject to, and exempt from, the debit card interchange fee standards in Regulation II, which implements provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These lists, available at http://www.federalreserve.gov/paymentsystems/debitfees.htm, are intended to help payment card networks and others determine which issuers qualify for the statutory exemption from interchange fee standards. The statute exempts any debit card issuer that, together with its affiliates, has assets of less than $10 billion.
To facilitate compliance with the debit card interchange fee standards in the Board’s Regulation II, 12 CFR part 235 (which implements section 920 of the Electronic Fund Transfer Act), the Board is publishing two lists of institutions using data available to the Board. These lists are intended to help payment card networks and others determine which issuers qualify for the statutory exemption from interchange fee standards.1 The statute exempts any debit card issuer that, together with its affiliates, has assets of less than $10 billion. The lists have been generated from the set of institutions in existence on December 31, 2010, according to the available data.2 Institutions have been grouped into two categories: Exempt and Not Exempt. Institutions in the Exempt category have been determined to have, together with their affiliates, reported assets of less than $10 billion, and therefore are exempt from the interchange fee standards under the statute. Institutions in the Not Exempt category have been determined to have, either individually or together with their affiliates, reported assets of $10 billion or more, and therefore are not exempt from the interchange fee standards under the statute.
In addition, a small number of debit card issuers may not appear on either of these lists, such as institutions for which the Board has incomplete affiliate data, de novo institutions for which the Board did not have financial data as of December 31, 2010, and issuers without federal deposit insurance. If an issuer does not appear on either of these lists and is exempt from the interchange fee standards, it should so certify to its participating payment card networks.
The interchange fee standards become effective on October 1, 2011. The Board plans to update the lists annually.
For media inquiries, call 202-452-2955.
Read the report and find the list here:
http://www.federalreserve.gov/newsevents/press/bcreg/20110712a.htm
