The entrepreneurial life is not for the faint of heart. The journey is fraught with challenges and unforeseen obstacles are often encountered along the way. It can also take a lot longer than the entrepreneur anticipates to create a successful startup.
Such is the case with Jerry Nemorin, the CEO and Founder of LendStreet. I have known Jerry a long time, in fact I first wrote about his company on Lend Academy way back in 2011 when LendStreet was nothing more than an idea. We have kept in touch over the years and I was really pleased when I read last week that LendStreet had closed its Series A and secured a significant round of debt funding.
So, I reached out to Jerry to discuss this news and get an update on his company. First, we need to understand what LendStreet does because it is very different than most companies I profile. LendStreet is a lender that works with consumers who are experiencing financial difficulties. These are people who have taken on too much debt and find themselves in a hole, unable to pay it all back. But rather than declaring bankruptcy, these people want to work things out and reduce their debt through a debt settlement.
This is the point when the debt settlement companies come in. LendStreet lends only to customers whose debt is being or will be negotiated by a debt settlement company. Most of LendStreet’s customers are already enrolled with debt settlement companies before getting to LendStreet. Those who come directly to LendStreet are paired with a debt settlement company to negotiate down their debt, which will be funded by a LendStreet loan.
How the Process Works
It is easiest to understand this process through an example: A consumer realizes that she is in over her head because she can’t make the minimum monthly payments on her credit cards and personal loans. The consumer decides she needs help and contacts a debt settlement company.
Let’s say the total debt of the consumer is $30,000, and the debt settlement companies are confident they can settle these debts for $15,000 plus their fees. The debt settlement company will work with the consumer and set them up on a monthly payment schedule of say $500 that goes into an escrow account. The debt settlement company will then work with the creditors to settle the consumer’s debt at a discount. But herein lies the kicker and the reason LendStreet exists.
For most consumers, it is going to take many years to dig themselves out of the traditional debt settlement model. The debt settlement company will settle the debt one at a time as the escrow account builds up. That can take a long time and during this time their credit score will suffer as the accounts that are yet to settle are marked as delinquent.
LendStreet provides much quicker relief. It makes a new loan to the consumer that will cover the entirety of the settlement amount and the settlement fees. The debt settlement company settles with all the original creditors, and the consumer gets a fresh start with one monthly payment to LendStreet. Jerry said that the typical LendStreet customer will see a rebound in their credit score of around 80 points within 12 months (100 points within 18 months) of taking out a LendStreet loan.
Now, the first question I had when Jerry explained this process was how could LendStreet prudently lend to consumers who proven themselves to be high risk? Wouldn’t defaults be through the roof with this kind of offering? Jerry’s response was surprising.
The Surprising Performance of Debt Settlement Consumers
Jerry’s thesis is that these people are actually self-selecting as responsible. They didn’t just walk away from their debts or declare bankruptcy, they proactively wanted to work things out. When Jerry started with the first cohort of borrowers back in 2013 that was the big test. If these borrowers would not perform as he expected (closer to prime borrowers than subprime) then Jerry would not have a business. He even said he would close down LendStreet and admit he was wrong if this first cohort of borrowers performed badly. But they performed well.
Since then there have been many more cohorts and Jerry has continued to be proven right. Today, LendStreet offers term loans with rates of between 14% and 18% depending on the state. There is no risk-based pricing; it is a binary underwriting decision: the borrower is either approved or not. While Jerry would not share the exact numbers for defaults, it is pretty easy to surmise that they must be in the single digits as a percentage. Otherwise there is no way LendStreet would be able to attract outside investors while offering interest rates to borrowers of well below 20%.
Speaking of investors, last week LendStreet announced they closed $117 million of funding. This included a $7 million Series A led by Prudential Financial and Radicle Impact with participation from Accion, the Center for Financial Services Innovation (CFSI), Serious Change, Crunchfund, Kapor Capital, Cross Culture Ventures, and clients of Candide Group, which actually closed several months ago. Perhaps more significant is the $110 million of debt funding that was part of this announcement. This money came from Prudential Financial and Community Investment Management.
Now, my original article seven years ago talked about a possible P2P lending model. While LendStreet does have a few individual accredited investors (minimum investment is $100,000) most of their capital has come from the institutional side and will remain that way for the foreseeable future.
LendStreet makes money in a couple of different ways. The borrower typically pays an origination fee and there is a loan servicing fee paid by investors. This is a similar model to other online lenders. There is also a revenue share with the debt settlement company. They have chosen not to make money on the interest rate spread between their investors and the rates they charge borrowers. Their goal has always been to keep their loans as affordable as possible for borrowers.
One of the Good Guys of Debt Settlement
One of the really interesting things to me about LendStreet is how the financial inclusion community has embraced them. Jerry made the announcement last week at the Emerge Forum put on by the Center for Financial Services Innovation, they were one of the original investors in LendStreet’s seed round. Both Prudential Financial and Radicle Impact have a financial inclusion focus to their investments. Most people that I have spoken with in the financial inclusion space over the past couple of years have nothing but good things to say about Jerry and LendStreet.
The debt settlement space is one that has something of a bad reputation when it comes to making a positive impact on consumers. While there are some bad actors, it seems pretty clear with the organizations backing LendStreet that they are one of the good guys.
Jerry has remained passionate about his company’s mission since the day he conceived of the idea during the financial crisis. He has had to be patient and build his company slowly. But today, after putting in some hard yards, his company is in growth mode as he brings about positive change for more and more struggling consumers.