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Recovering Non-Performing Loans: Better Options

In this guest post Brett Boehm of TBF Financial explores better options for lenders when it comes to non-performing loans.

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[Editor’s note: This is a guest post from Brett Boehm, principal and director of business development for TBF Financial. He can be reached at bboehm@tbfgroup.com, phone 847.267.0600, Ext. 101 or via LinkedIn and Twitter @TBFfinancial.]

Business models for online small business lenders focus on speed, agility and customer service. When it comes to managing non-performing loans, however, many fintechs rely on tactics that worked in their grandparents’ era but conflict with newer business models.

They chase non-performing loans (NPLs) past the charge-off date when there is a better option: selling the loans to a reputable commercial debt buyer. More fintechs are learning about this strategy and a major online small business lender is using it to earn money on NPLs, then reinvest the money into making more loans.

Commercial debt buying is an accepted practice for recovering payment in financial services that works well with fintech models but in fact was pioneered in the banking and equipment finance industries. The online small business lender in the example above is using commercial debt buyer services to reduce internal overhead, earn cash now versus waiting for recoveries 12-18 months or more and improve budgeting. If the lender expects to charge off $100 million of NPLs a year and the purchase price is $.05 per NPL, then the lender knows it will recover about $5 million. (The purchase price in this example, $.05, has been weighted against the outstanding balance on the NPL.)

Like all businesses, however, some commercial debt buyers and their brokers are reputable and others are not. Vetting buyers and brokers is a necessary but manageable process, described below. But first, it is important to understand the recovery options available.

Recovery Options

A small business lender knows that a certain percentage of loans will become NPLs and typically has parameters the business must stay within to remain profitable. The lender may pursue NPLs on an in-house basis indefinitely past the charge-off date or turn them over to a collections agency at some point. Both options create problems in the fintech business model.

Managing NPLs in-house throughout the life of an account is slow, inefficient and diverts resources that could be used to support customer lending. There is one upside: the lender maintains control over the account and may win the customer’s future business in the event its finances improve.

Lenders that instead have collections agencies chase bad accounts improve internal efficiency but the process is a lengthy one offering relatively little return. The biggest drawback is the potential for negative customer contacts that can sever the possibility of a future relationship.

The best recovery option for online small business lenders is to manage NPLs in-house until they become charge-offs, then use the services of a reputable commercial debt buyer. This is how it works.

  • The lender works with the commercial debt buyer on a one-time basis, periodically, or in a forward-flow relationship where NPL information is sent regularly to the buyer.
  • A non-disclosure agreement (NDA) is signed and the lender provides information to the buyer on the pool of non-performing assets. This includes the number of accounts and amount of outstanding balances.
  • Buyer assigns a value to the NPLs and offers a price.
  • Lender signs the purchase agreement. Typically, buyers in forward-flow relationships will send payment within 24 hours.
  • Reputable buyers then work to collect the debts over time, without using the lender’s name and in a sensitive manner, and without reselling the debt.

Deal Only with Reputable Buyers, Brokers

The following are important steps to take before using the services of a commercial debt buyer or brokers representing them.

  • Meet in person or by phone to discuss the buyer’s philosophy, collection process, experience, references from similar sellers and security procedures.
  • Make sure collection tactics are sensitive to debtors and that the buyer does not re-sell the debt. This way, any issues that arise post-sale can be resolved by repurchasing the loan from the buyer.
  • Never provide financial information without a signed NDA.
  • Carefully vet brokers who represent commercial debt buyers. Verify that they have a buyer accessible that they have worked with before.  Make sure the broker uses NDAs to protect all parties’ confidential information.  Find out how the broker is going to disseminate portfolio information and where it is going.  Ask how the NPLs are going to be collected and if they could be re-sold at some point.

Some brokers are reputable but there are dangerous ones, too. Deals have fallen apart because a broker showed a portfolio around without NDAs, or parts were sold off without the seller’s knowledge. In these cases, reputable commercial debt buyers will refuse to touch the portfolios.

Deal only with a reputable commercial debt buyer and its broker, and the deal will be smooth and legitimate.

Why Individual Investors Matter in the Transition to a Clean Energy Economy

Bryan Birsic of Wunder Capital and David Berliner of CoPower explore the role of individual investors in promoting clean energy.

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[Editor’s note: This is a guest post from Bryan Birsic, CEO at Wunder Capital, based in Boulder, USA and David Berliner, CEO at CoPower, based in Montreal and Toronto, Canada.]

According to the The Economics of Transition in the Power Sector Report released by the International Energy Agency (IEA), the transition to a low carbon economy will require $7.3 trillion in investment between 2010 and 2030. Naturally, a transition of this magnitude will require heavy involvement from the largest asset managers in the world: pension funds, sovereign wealth funds, banks, and other private managers.

That said, individual investors also have an important role to play in the manifestation of our clean energy future. Both of our firms (Wunder Capital and CoPower) are focused on bringing clean energy investment opportunities to individual investors.

Here’s why we are bullish on the power of the people:

1) Aligning individual investor portfolios with low carbon investments can have a scalable impact.

In 2015 alone, 6 million Canadians contributed $39 billion to a registered retirement savings plan (RRSP). In total, over $775 billion are held in such plans. And in the United States, retirement assets hit $26.1 trillion as of Q1 2017, according to the most recent data from the Investment Company Institute.

Individual investors are increasingly looking for products that match the profile of clean energy infrastructure: products with market-competitive yield and a positive environmental impact. According to Morgan Stanley, over 70% of active individual investors are interested in sustainable investing and 65% see sustainable investing becoming even more prevalent in the coming 5 years. Global Sustainable Investment Alliance (GSIA) similarly reports that 75% of Millennials are guided by environmental, social, and/or political impacts when they invest, and 75% of women consider positive ethical impacts when investing, (compared to 60% for men). It’s clear that retail-focused clean energy financial products can mobilize huge amounts of capital.

2) Individual investors are a perfect fit for under-served sectors in clean energy

As individual investors seek yield in today’s market, financing for clean energy projects is an increasingly attractive opportunity. While these projects require upfront installation costs, they do generate strong returns for 35+ years. This uncorrelated asset class is meeting the investment needs of more and more individual investors today.

The capital behind these massive infrastructure investments has traditionally come from government, corporate bonds, and large institutional investors. While mainstream capital market players are already providing ample project finance for large projects, a wide range of projects are underserved. This is because a typical infrastructure investor, like a bank or pension fund, is often only interested in projects that are larger than $10, 20, or even $50 million.

Solar financing for the middle of the commercial market is one such underserved market.
Larger US businesses (top 5% by size) are typically able to receive a credit rating from one of the big three rating agencies, while the other 95% of businesses are usually left out. This means lenders are reluctant to finance solar assets for these companies because of the cost of underwriting, in addition to their lack of solar expertise.

Wunder’s novel approach matches accredited investors in the US with diversified solar funds that lend into this underserved commercial-scale solar market. Investors can help deploy more solar across the USA without sacrificing return expectations.

Similarly, CoPower addresses underserved lending markets in Canada. Smaller clean energy generation and energy efficiency projects, like solar, geothermal, and LED lighting retrofits, lack access to project finance. Using a Green Bond product, CoPower helps all types of individual investors in Canada lend into a pooled portfolio of these type of loans.

3) Clean energy is a huge wealth creation opportunity, made accessible to individual investors via fintech platforms:

Bloomberg New Energy Finance estimates that $7.8T will be invested in renewable energy between now and 2040 (with only $2.1T being invested in fossil fuels) source: BNEF. Platforms like Wunder and CoPower open up these investment opportunities to individual investors who otherwise wouldn’t be able to access these types of infrastructure investments. With lower minimums, made accessible by new online ‘fintech’ platforms, individuals can fund renewable energy investments across North America.

Why shouldn’t we all stand to profit from the greatest wealth creation opportunity, and environmental call to action, of our time?

The Current State of Marketplace Lending in Japan

In this guest post we get an overview of the Japanese marketplace lending market.

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Editor’s note: This is a guest post from Yo Shibata, a serial entrepreneur that has sold three businesses. In 2016, he co-founded Crowdport, a “Bloomberg for marketplace lending in Japan”. He is also a partner at an angel investment fund, Tokyo Founders Fund. His previous service Smapo, later acquired by Rakuten, provides users with loyalty points as they enter participating stores by pairing a mobile application with his proprietary ultrasonic based micro-location technology. Prior to founding startups, he worked for McKinsey & Company as a consultant.

Growing market

Marketplace lending growth in Japan has been slow compared to the U.S., Europe and China but that has started to change in the past three years. The market has been almost doubling each year and we expect this trend to continue through 2017. Investment volume was $140 million in 2014, $310 million in 2015 and $530 million in 2016. We estimate it to reach $1 billion this year.

Marketplace lending, also commonly referred as “social lending” in Japan, started as p2p lending around 2008 but struggled due to high default rates, which sometimes reached 30%. Since Japanese lending law prohibits interest rates above 15% in most cases, a 30% default rate was not sustainable for those businesses.

Around 2011, marketplace lending players, which at the time was just three or four companies, started to shift their focus to business loans, specifically in real estate and clean energy where there is valuable collateral behind the loan. As those players started to prove the new model was working, new companies entered the market. The number of crowdfunding platforms increased from less than 10 to 21 in two years. There are now many more companies looking to enter the market.

Rising APRs

The industry average APR increased to 8.4% from 5.7% in two years, mainly due to newer entrants that were charging higher APRs. Default rates in the past three years have been close to zero due to platforms being more selective on who they lend money to. As a result, marketplace lending as an asset class became very attractive to investors.

From a macroeconomic point of view, Japan is famous for zero or negative interest rates. Yields for Japan’s 10-year government bond are a mere 0.06% and the 5-year bond yield is -0.07%. Average APRs for savings accounts at banks is 0.4%. Average consumers are pessimistic on Japan’s economy in the long term, due to an aging and decreasing population which is a hard trend to reverse.

Financial literacy

So why aren’t Japanese people rushing into marketplace lending where APRs are 200 times better than savings account? Are they conservative? No they are not.

When you look at the bitcoin prices and the hype around bitcoin in the past three months (March 2017 – May 2017), it’s mainly been driven by the Japanese. JPY-based bitcoin transaction volume often exceeds USD-based transaction volume, which may be surprising. It is well known that Japan has the biggest ForEx trading volume in the world. A portion of the Japanese population do like trading and we estimate there are about 100 million active ForEx investors in Japan.

However the rest of the population are conservative investors. Despite the effort by the government to convince the population to financially prepare for their retirement, financial literacy among the Japanese population has been low for many years.

Current investors in marketplace lending are early adopters but are also cautious. There has been almost no loss of principal for three years across all crowdfunding platforms, and an 8% APR is very high. We predict that some funds will have principal losses in the coming months and some investors will react emotionally to the loss of principal since this isn’t something they are used to.

Crowdfunding platforms can do better at managing expectations, customer support, information disclosure and publicity as the platforms mature. We believe our service, Crowdport can add value to maintain transparency in the market. [Read more…]

An Investor’s Due Diligence Lessons in Marketplace Lending

This investor shares what he has learned doing due diligence on 40 origination platforms and 50 investment vehicles.

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[Editor’s Note: This is a guest post from James R. (“Jim”) Hedges, IV. He was one of the early leaders in the hedge fund and alternative investments industry, and is the author of Hedges on Hedge Funds. He was the Founder and Chief Investment Officer of LJH Global Investments, LLC, an alternative investment advisory firm which advised on over $5 billion of alternative investment allocations.  In 2017, Mr. Hedges founded HEDGES COMPANY (www.hedges.company) to provide insights on alternative investments to entrepreneurs, investors and fund managers.  The firm is especially focused on specialty finance and co-investment opportunities.  Mr. Hedges is also a partner in LJH Financial Marketing Strategies, LLC (www.ljhfm.com). He lives in Los Angeles, California.]

When I began working in the family office and hedge fund worlds in 1992, private investors were looking, foremost, for return enhancement and, secondarily, for diversification. Fast forward 25 years, investors are still looking for return enhancement, but less on the equity side, and rather more for current income. In the early 1990’s, hedge funds were a secretive, largely unregulated landscape with virtually no disclosure and very little educational information available for those looking to allocate capital to the space. As a result, investors often did not know how to differentiate fund managers and tell the difference between an A- player and a C- player. There was a profound lack of thought leadership, and those charged with advising new entrants in the market had to do a great deal of educational missionary work and lay out a thoughtful path of insights.

In today’s marketplace lending sector, it is a similar story. There is a proliferation of funds in the space, and assets are flowing in to funds to the tune of hundreds of millions of dollars per quarter. There are ample industry-focused conferences and e-publications, but there remains precious little in the way of independent research and insight for private investors, institutions and the consultants who serve both groups. Product differentiation is difficult, and there is still not a robust set of data analytic tools or benchmarking indices.

In terms of the landscape, on one side of the field, we have a universe of loan originator platforms. Best known names like Lending Club, Prosper and SoFi have dominated the press, but there are, in my estimation, well over 100 unique specialty finance loan origination platforms, and within that group, loans are being originated in an ever-increasingly diverse set of sectors, such as:

  • Unsecured consumer credit for debt consolidation and emergency expenditures
  • Real estate lending (often secured by real property)
  • Small business credit
    • Merchant Cash Advance
    • Equipment Financing
    • Factoring
  • Retail installment contracts (RIC’s)
  • Solar equipment financing
  • Education financing
  • Automotive repair financing

Each of these segments has unique drivers impacting customer acquisition costs, underwriting procedures, and borrower behavior. Consequently, many of the segments offer differing yields, default rates and durations.

On the other side of the marketplace lending landscape, once the loans are originated, there are many different asset management structures through which capital inflows are being allocated, including:

  • Managed Accounts for institutional investors
  • Hedge Fund Vehicles (i.e. private partnerships: funded all at once with shorter lock-ups)
  • Private Equity Vehicles (i.e. private partnerships with investment drawdown periods and long-term lock-ups)
  • Fund of Funds investing across a spectrum of originator strategies
  • UK-listed Funds (i.e. closed end funds, most of which trade at meaningful discounts to their NAV)
  • Luxembourg SICAV’s
  • 40 Act Funds (interval funds which mostly have staggeringly high fee burdens)
  • Notes and Variable Life Insurance wrappers for tax efficiency

[Read more…]

Will the Real Marketplace Lender Please Stand Up?

Understanding the hidden consumer regulatory risk for hedge funds

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Regulation of peer to peer lending

[Editor’s Note: This is a guest post from Michael Mann and Margot Laporte. Michael Mann is a partner in the Washington, D.C. office of Richards Kibbe & Orbe LLP. Margot Laporte is an associate in the Washington, D.C. office of Richards Kibbe & Orbe LLP.]

The recent growth of marketplace lending platforms has resulted in non-bank entities, such as hedge funds, engaging in activities that could conceivably be construed as consumer lending transactions. The Consumer Financial Protection Bureau (the “CFPB”) was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 as an independent agency within the Board of Governors of the Federal Reserve System to regulate the offering and provision of consumer financial products and services and to enforce federal consumer financial laws against banks and other covered entities. Currently, the CFPB does not have authority over non-bank entities that engage in activities such as marketplace lending that do not constitute the offering or provision of financial products or services directly to consumers. However, as marketplace lending becomes more sophisticated, the line will continue to blur between the regulated consumer lending activities of banks and other covered entities, which include the origination, brokerage, and servicing of mortgage, student, and payday loans, and the unregulated marketplace lending activities of non-bank entities, which includes the provision of liquidity to online lending platforms that originate loans to consumers.

While marketplace lenders historically have partnered with originating banks that are subject to regulation by the CFPB and other banking regulators, as the marketplace lending space expands, we expect that the sources of funding will expand as well. In this article, we outline the potential risks and theories of regulation for non-bank entities engaged in funding and other activities related to marketplace lending and suggest several areas where proactive policies and procedures implementing best practices in advance of specific regulatory guidance would benefit non-banks engaged, directly or indirectly, in the fast evolving marketplace lending industry. [Read more…]

3 Real Estate Crowdfunding Trends You Need to Watch This Year

These three trends will dictate the growth of real estate crowdfunding in 2016. Whether novice or veteran investor, don’t risk missing them.

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Jilliene Helman Headshot[Editor’s Note: This is a guest post from Jilliene Helman. Jilliene is the CEO and Founder of RealtyMogul.com where she sits on Realty Mogul’s Board of Directors and Investment Committee. Jilliene has underwritten over $5 billion of real estate and holds Series 7, 63 and 24 licenses. Jilliene has a degree in Business from Georgetown University.]

Real estate crowdfunding experienced red-hot growth in 2015. DealIndex predicts the market to reach $2.6 billion when the tallies come in. That’s more than a 150% increase over 2014, reckons crowdsourced solutions provider Massolution.

There’s a reason for the explosive growth. Investors have started to realize the attractiveness of crowdfunded real estate investments. Crowdfunding gives investors access to deals and deal flow they didn’t have before.

Owners and operators benefit, too. Crowdfunded loans close faster and come from alternative sources outside banks. That makes it easier for borrowers to inject new capital into operations faster.

But the market is changing and growing fast. New entrants and seasoned vets alike must keep a laser focus on key trends in 2016 to maximize yield. [Read more…]

Keys to a Successful Securitization for Marketplace Lending Platforms

As marketplace lending securitizations rise, competitive advantage lies with companies able to move efficiently through the process

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First Associates White Paper

[Editor’s note: This is a guest post by David Johnson. David is the Chief Executive Officer at First Associates, the fastest growing loan servicer in the country with a $7 billion dollar portfolio under management for various asset classes including P2P and P2B loans. As CEO, Johnson increased revenues at First Associates by 20x in just three years.]

Marketplace lending reliance on non-deposit funds for lending capital is driving increasing securitization volume. Marketplace lenders aiming to rise to the top of the pack would be well-advised to start planning for securitization now, if they haven’t already.

For those both contemplating and completing securitization, PeerIQ Research has initiated a series of reports called the Marketplace Lending Securitization Tracker, starting with third quarter 2015. The reports track various elements of securitized marketplace lending progress and performance.

According to the inaugural report, “As the sector continues to scale—with a projected $50B in total US originations by end of 2015—origination platforms, loan purchasers, and other market participants are increasingly looking to the [Asset-Backed Securities] ABS markets to meet their funding needs…Securitization is an essential link in the funding chain connecting originators to institutional investors in the capital markets. A transparent, simple, high-quality securitization market with active repeat issuance will connect marketplace lenders to long-term, low-cost, and diverse capital base, thereby reducing the funding risk through all credit environments.” [Read more…]

About Lend Academy

Lend Academy has been bringing you all the news and information about peer to peer lending since 2010. Founded by Peter Renton, Lend Academy not only has the most active news site, but also the largest online forum and the first and most popular podcast in the industry.

The Lend Academy team loves peer to peer lending and our staff have all invested their own personal money in one or more of the platforms. Lend Academy Media is part of Cardinal Rose Group which also owns LendIt, the leading industry conference, and has a majority interest in NSR Invest.

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