It has been an interesting year. I can confidently say it was a better year than 2016 for the marketplace lending space but the news was not all good. While there were lots of positive new developments in 2017 we also saw some negative news with the CEO of another major lending platform being forced to resign. We also saw many big new deals signed, none bigger than the $5 billion commitment to Prosper. On the regulatory front it was mainly good news with the exception of the now infamous report from the Federal Reserve Bank of Cleveland that they were forced to pull from their website given the many inaccuracies. Below are my top 10 stories from 2017.
For the second year in a row the biggest news story in our industry (in my opinion) was the resignation of the CEO of a leading platform. Until September SoFi was the envy of the industry, raising more money at a higher valuation than any other platform ever. They were the first company to garner a AAA rating in a securitization and they had successfully expanded into other lines of business beyond their original focus on student loans. While very different to the Lending Club news from 2016 it was another self-inflicted wound that rocked the entire industry.
In November researchers at the Federal Reserve Bank of Cleveland released a report titled The Taste of Peer to Peer Loans. They were attempting to determine whether loans obtained from peer to peer lending platforms actually helped a consumer’s financial situation or not. The premise was good but the execution was appalling. They used data from a variety of lenders including established banks and decided to lump it all into “peer to peer loans”. They did the right thing and removed the report from their website but not before causing a huge stir in the marketplace lending space.
The rumors about this deal first started swirling about in the summer of 2016. This $5 billion deal would be the largest funding commitment ever in the history of the marketplace lending industry. Prosper finally got the deal done in February of this year and there was a collective sigh of relief from not just Prosper but the broader industry. While they had to give up quite a lot to get this deal signed it helped put Prosper on a positive trajectory in 2017.
After Renaud Laplanche exited Lending Club last year everyone wondered what his next move would be. In April, we all found out when the launch of Upgrade was announced. Renaud raised a record $60 million in a Series A for his new consumer lending platform. He is clearly planning a big second act, taking everything he learned as the CEO and founder of Lending Club and applying it to his new company.
The year saw the emergence of new players in small business lending as Amazon, PayPal and Square all made significant inroads into the space. These companies have a unique advantage over other lenders in that they are targeting their large existing customer bases so customer acquisition costs are negligible. Right now these companies are primarily focused on their own customers but if they start to roll out their offering to all small business they will become even more formidable competitors.
While this article looks at how fast the major consumer lending platforms reached $1 billion it is really about Marcus. When Goldman Sachs CEO Lloyd Blankfein said in an interview on CNBC in June that Marcus had already passed $1 billion in total loans issued the industry took notice. They had only launched in October 2016 and within eight months they had passed that milestone. We now know Marcus has passed $2 billion as they become entrenched as a leading consumer lender.
Ever since inception Upstart has used alternative data in their underwriting models and the models themselves have relied heavily on artificial intelligence. It has never been completely clear that the use of this data was in alignment with all fair lending laws. So, Upstart applied for a “no action letter” from the CFPB which they received in September. What this means is that the CFPB has essentially validated their use not just of alternative data but of the underwriting models themselves which is big news for Upstart and the industry.
The OCC Fintech Charter has been a hot topic for some time now but it was not until March of this year that we found out some of the details of the charter. The OCC released a 16-page supplement to its licensing manual that laid out their plans for the new charter. The move has greeted with legal challenges from the states and the OCC themselves have said they are not yet ready to start receiving applications. This will be a story to watch in 2018.
The “Madden issue” is one that been hanging over the industry since 2015 when we first covered the case. It is centered around exporting interest rates in a case unrelated to marketplace lending, but since a ruling by the Second Circuit any loans made to individuals in NY, CT and VT have had to be under the usury caps of those states regardless of who originated these loans. This ruling has created uncertainty over whether or not this would be expanded to other states. So, two bills were introduced in Congress this past year that would bring a legislative fix to this problem. Neither bills have made it to a vote yet but there is optimism we may see movement in the coming months.
In December LendingClub held their first ever investor day in New York. The executive team shared their vision for the company and the opportunity they see in front of them. While Wall Street was not impressed with this day, as equity investors sent the stock sharply lower, there were several interesting pieces that came out of it not the least of which was LendingClub’s plans for a new kind of investment vehicle called an exchange traded partnership.
There was more important news for the industry that didn’t make it into my top 10. There were many large funding commitments in 2017 not included here, we had the first industrial loan charter applications filed, Ron Suber, also known as the godfather of fintech, stepped down as President of Prosper, we had the emergence of China as the global force in fintech and much more.
It was an interesting year and now we move on to 2018. Happy New Year everyone. I hope you have an enjoyable long weekend and all the best for this coming year. I have a feeling it is going to be another fascinating year.