Tag Archive for lenders

Attn mortgage lenders: Here’s how to stay compliant

Compliancy with the TILA-RESPA Integrated Disclosures rule has become a thorn in the side for many lenders, however one lender found a way to overcome it.

In a report on the impact on TRID on residential mortgage-backed securities, Moodys Investors Service analysts write that several third-party firms have reviewed a number of recent mortgage loans for TRID compliance and found violations in more than 90% of the loans.

The Supreme Court Sides With the Lenders in Puerto Rico’s Bankruptcy Case

In a 5-2 decision on Monday, the Supreme Court ruled that federal law preempts Puerto Rico from enacting its own bankruptcy laws, something the islands government attempted in 2014 to help its public utilities restructure nearly a third of the islands $72 billion debt.

The ruling solidifies the islands dependence on the US Congress to work out a plan to deal with a debt that the islands governor has said cannot be repaid. According to Bloomberg Politics, the island faces a $2 billion debt payment on July 1, which comes just two months after it defaulted on $370 million in debts owned by its Government Developmental Bank. On Thursday last week, the US House of Representatives passed its most recent measure to deal with the debt crisisthis one would establish an independent financial review board to manage the islands affairs.

This is the second recent Supreme Court ruling that reinforces Puerto Ricos colonial status. Last Thursday, the court ruled that the island cant separately prosecute defendants in criminal cases as states can because the islands power comes from Congress, not from local authorities.

Todays ruling involves a 2014 effort by the islands government to help its public utilities restructure more than $20 billion in debts through the creation of a bankruptcy process that mirrored that of the US federal system in which states can authorize their cities and public agencies to use federal bankruptcy laws. On the same day that the island enacted the Puerto Rico Corporation Debt Enforcement and Recovery Act, two mutual fund companiesFranklin Advisers and OppenheimerFundsfiled suit to block it.

In Commonwealth of Puerto Rico v. Franklin California Tax-Free Trust, lawyers for the islands government argued that a 1984 amendment to US bankruptcy laws that barred Puerto Rico from using federal bankruptcy law, left the territory no recourse to deal with debts it cannot manage. Since Puerto Rico is not a state, they argued, it should not be forced to comply with federal law that bans states from enacting their own bankruptcy laws. California Tax Free Trust, a mutual fund, pointed to federal law that specifically bars Puerto Rico from allowing its cities or publicly-financed institutions from using bankruptcy laws to restructure debt, and argued that Puerto Rico had to negotiate with individual lenders directly.

The US district court in Puerto Rico and the US appeals court agreed with the lenders, and the Supreme Court upheld the lower courts decision.

In the majority ruling, Justice Clarence Thomas wrote that federal law clearly states that Puerto Rico cannot authorize its municipalities or publicly-financed institutions to declare bankruptcy because the 1984 amendment to the federal bankruptcy statutes specifically bars Puerto Rico and the District of Columbia from seeking bankruptcy court protections.

Our constitutional structure does not permit this Court to rewrite the statute that Congress has enacted, Thomas wrote in the opinion, which was joined by Chief Justice John Roberts, and Justices Stephen Breyer, Anthony Kennedy, and Elena Kagan. Justice Samuel Alito recused himself from the case likely due to his financial investments in Puerto Rico bonds, according to SCOTUSblogs Lyle Denniston.

Justice Sonya Sotomayor wrote the dissent, joined by Justice Ruth Bader Ginsburg.Sotomayor argued that if Puerto Rico isnt treated as a state by federal law, it shouldnt be held to federal bankruptcy laws that govern the activities of states. Further, she argued, the debt crisis in Puerto Rico is causing a real-world humanitarian crisis, and resolving it should not be dependent on political infighting in Congress.

Congress could step in to resolve Puerto Ricos crisis, she wrote. But, in the interim, the government and people of Puerto Rico should not have to wait for possible congressional action to avert the consequences of unreliable electricity, transportation, and safe waterconsequences that members of the Executive and Legislature have described as a looming humanitarian crisis.

Lending Club’s CEO Has Left and Its Stock Has Plunged. Should Lenders Bail Out?

Lending Club launched in 2006 with a promise to disrupt banks by letting individuals make and apply for loans through an online lending platform. Both Lending Club and its rival, Prosper Marketplace, drew interest from investors seeking a fixed-income alternative with higher rates of return than what bonds were paying.

But as the industry has sought faster growth, it has also expanded the types of lenders it works with, inviting institutional investors like banks and hedge funds to make loans alongside individuals. In fact, during the first quarter of 2016, only about 15% of Lending Clubs loans came from individuals investing on their own.

That shift has brought new scrutiny to the industry, and more trouble for Lending Club in particular.

Controversy amp; Resignations

In May, Lending Club founder and CEO Renaud Laplanche and several other executives resigned amid an ethics controversy. Although there were two separate issues cited, one in particular is pertinent to individual lenders. This spring Lending Club sold a number of loans to Jefferies, an investment bank, which planned to package them into bonds and sell them on to other investors. Like the individual lenders who use the site, Jefferies specified the types of loans it was willing to buy. But $22 million of the loans didnt meet the criteria Jefferies asked for, and the company has said at least some of its executives were aware of the flaws and let Jefferies buy them anyway. (In addition to forcing out Laplanche, Lending Club says it took back the loans and was able to resell them properly labeled at full value to a different investor.)

The events at Lending Club have raised some eyebrows. After all, if the company is willing to sell mislabeled goods to one its largest and most sophisticated clients, why should Joe Investor assume hell be treated any better? It brings up issues of trust, says Michael Tarkan, a stock analyst that follows the company. Small investors need to be sure they are receiving the loans they signed up for.

Peer-to-peer lending has faced other problems as well. Two ratings companies raised questions this spring about the performance of peer-to-peer loans. In February, Moodys said investments backed by loans issued by Lending Clubs rival Prosper werent performing as well as expected and might have to be downgraded. And in April, Fitch said pockets of recent credit underperformance were prompting marketplace lenders (a larger group that includes peer-to-peer companies as well as other lenders) to tweak the computer models they used to evaluate loans suggesting that the companies may not be as good at vetting borrowers as they had suggested. In an emailed statement, Lending Club said it monitors a variety of economic, credit and competitive indicators on behalf of investors.

Bankruptcy Implications

Lending Club hasnt put the controversy behind it yet. Last week the company delayed its annual shareholder meeting, saying it was not yet in a position to provide its stockholders a complete report on the state of the company. Still, the company says it has more than $900 million in its coffers and posted a profit during the first quarter of the year.

Lending Clubs overall financial health is relevant to mom-and-pop lenders using its platform because a bankruptcy could put any money youve lent at risk. Investors who make loans through Lending Club are actually buying a note from the company not unlike a bond rather than from the borrowers themselves.

Youve got exposure not just to individual borrower but also to Lending Club, says Peter Manbeck, an attorney who has worked with online lenders.

Thats an important distinction. It means if Lending Club were to enter bankruptcy, you would become one of the companys unsecured creditors, the notes prospectus makes clear. In other words, your legal claims are ultimately against Lending Club, not the person who borrowed money from you through Lending Club. (Prosper works slightly differently, with notes issued by a separate entity, which may provide lenders an extra layer of legal protection if Prosper Marketplace were to ever go bankrupt.)

While its possible a bankruptcy judge would decide to let you collect on the loan, its also possible he or she might decide to divert those payments to other Lending Club creditors.

Takeaways for Investors

So should you stay clear altogether? Not necessarily. For investors seeking higher returns outside their equity allocations, peer-to-peer lending seems to offer an alternative to traditional bonds. Historically, interest rates on Lending Clubs highest rated A loans have averaged 7.6% eclipsing the current 6% yield for corporate junk bonds although borrower defaults can bring your effective return down to 5.2%, Lending Club says.

There are higher risks, says Little Rock, Ark., financial planner Ryan Fuchs, who has experimented with peer-to-peer lending in order to advise clients who want to try it on their own. Thats why you get the higher return.

The companys problems appear to be isolated and shouldnt be a deal breaker, Fuchs argues.

What you should do, however, is approach peer-to-peer lending with the same caution you would any untested investment. Remember that individuals, even ones with high credit scores sometimes lie, lose their jobs or end up in the hospital. That makes peer-to-peer lending inherently riskier than lending to the government or a blue-chip corporation.

While the fixed payouts on peer-to-peer loans mean they fit naturally into the bond section of your portfolio, view them as akin to junk bonds, not Treasurys or investment-grade corporate debt. Fuchs recommends limiting the amount you loan out to 3% to 5% of your overall investments.

He also suggests you build a diversified portfolio of loans, rather than making just one or two big bets. (With a $25 minimum investment per loan, this should be easy to do, even with a few thousand dollars.) If you put in $2,500, pick 100 loans at $25 each, says Fuchs.

Youll also want to keep an eye on the companys overall financial health over time, Fuchs says, checking its SEC filings as you make ongoing investments. Keep up with the news and their quarterly reports, he says.

Dem study: Lenders finding ways to skirt state payday laws

House Democrats are out with a new report detailing how payday lenders try to skirt state laws.

The Democratic staff of the House Financial Services Committee examined how lenders in five states have found ways to operate around legal limitations placed on high-interest loans.

Loans for porn Chinese money lenders are forcing female students to send them nude pics as ‘guarantee’

The lenders threaten the students with telling their parents about the naked shots

According to the newspaper Legal Daily, some lenders sell the nude pictures for 30 yuan at a time, even after they receive all their money.

A female student told Beijing Youth Daily that she sent nude pictures to numerous lenders to raise 120,000 yuan to start a business.

But, between February and June, her debt doubled and she was forced to ask her parents for help to pay back the loan.

Is There Really Any Difference Between Mortgage Lenders?

The Consumer Financial Protection Bureau has safeguards in place to make sure mortgage companies operate on a level playing field with consumers. The level playing field specifically has to do with rates, pricing, and whether borrowers are getting a fair and reasonable offer from one lender to another. But how banks look at your financial picture is something else entirely.

Here are some factors that impact how your mortgage company works and the deal you get on your mortgage.

Whats their relationship with Fannie Mae amp; Freddie Mac?

The relationship your mortgage company has with Fannie Mae and Freddie Mac carries significance in whether or not they can fund your loan even if it is slightly outside the box.

For example, if youre dealing with a company that originates the loan through another source, and then ultimately that loan is sold on the secondary market, the mortgage originator may be more conservative in its product offering and underwriting. Simply put, the more hands touching the file, the more scrutiny that file is going to have when the loan ultimately is delivered to the end investor.

Lenders hold 63.07% stake in Gammon India

Lenders hold 63.07% stake in GammonIndia
Gammon India informed the stock exchanges on Friday that the CDR lenders and joint lenders collectively hold 63.07% of the total equity capital of the company.

Issuer universe expands as new lenders flock to ABS markets

Issuer universe expands as new lenders flock to ABS markets
By Ryan Weeks on 16th June 2016

The securitisation industrys best-known gathering of issuers and investors has been bitten by the marketplace lending bug. Despite there having been just one securitisation within the UK and European marketplace lending sectors to date, a number marketplace lending platforms have made the trip to Barcelona for Global ABS 2016. Theres a clear interest in the asset class among investors, as reflected by the six or seven sessions that touch on or revolve around opportunities within the marketplace lending space. But these sessions have also thrown up a number of concerns. These are my takes from a hectic first few days at Global ABS.

Education

The conference organisers (IMN) have placed a heavy emphasis on the need to educate both investors and issuers about marketplace loans and how these interact with securitisations markets. Day 1 at the event featured an Alternative Finance 101 session. Rupert Taylor from AltFi Data provided an overview of the risk/reward proposition on offer and characteristics of the asset class. Nick Parkhouse of EY explained that alternative lenders mostly play in niches that the banks have retreated from, and that its too early to tell whether technology is a fundamentally better means of pricing risk. This point relates to track record, and thats been another important focus throughout the course of the event.

A number of questions and potential problems stand between marketplace lenders and the securitisation markets. Parkhouse spoke with a number of investors who elected not to buy into Funding Circles debut securitisation. The deals split rating stood out as a key concern, with investors worrying that ratings agencies are yet to come up with an established methodology for dealing with marketplace loans. Simon Wooltorton of Deloitte said: Its not helpful that the rating agencies themselves cant agree on how to rate that transaction. Risk retention was another talking point. Funding Circles fairly limited track record was also cited, as was the fact that there was one very large buyer in the senior note, meaning limited liquidity.

The European Investment Funds involvement in the SBOLT deal was the subject of some discussion. Paolo Gabriele of Finanziaria Internazionale an investor in the deal believes that it would have completed with or without the EIFs involvement. He also believes that the majority of large investors would probably like to see marketplace lending platforms investing their own capital when they come to securitise their loans. It was noted several times that the support of governmental and supra-national entities like the EIF could be the key to launching marketplace lending into the mainstream of institutional investment.

Lack of liquidity was raised as a concern in a number of panels. Daan Potjer of Dynamic Credit said: There is not yet a secondary market in loan portfolios that is suitable for professional investors. Dynamic Credit is setting about solving that problem. However, one panellist pointed out that many ABS investments are by their nature hold-to-maturity assets, and as such a lack of liquidity may not have an adverse impact on investor appetite for marketplace lending securitisations.

Marketplace lending platforms are famously transparent at the loan book level, but is this kind of disclosure useful in structuring securitisations? Speaker sentiment on this issue was somewhat split. One speaker said: Transparency is always good, but who is it aimed at? Does your average Joe Public really understand how to analyse a cohort? The key questions are who is it aimed at and is it detailed enough? Another speaker, from a major ratings agency, argued that transparency not just in terms of loan book disclosure but also at the corporate level is an important part of building trust in the capital markets.

The surmounting of STS regulations may be tricky for marketplace lenders. Technical expertise and risk retention requirements were pointed to by a number of speakers as a potential stumbling block for new issuers. However, Annabel Schaafsma of Moodys Investors Service said that she hasnt seen anything which explicitly excludes new lenders. The challenge lies in getting both investors and regulators comfortable with technology-based, intermediary models.

There have been a large number of polls at the event, upon which the audience has been voting during panel sessions. Here are a few of the headline findings on alternative finance:

  • SME loans stood out as the most desirable underlying segment within marketplace lending.
  • The motivation for investors wanting access to marketplace lending assets is a combination of return and diversification.
  • The biggest barrier to investment in marketplace loans is a split decision between the absence of an appropriate investment structure and the absence of a liquid secondary market. The absence of standardised data also drew some attention from voters.
  • Nearly 70% of voters pointed to owning a securitised asset as the most attractive means of accessing the marketplace lending space. Small surprise, given the nature of the audience.

Mortgage spotlight

Marketplace-funded mortgage loans have been something of a hotspot at the event. Both LendInvest and Landbay have been featured in speaking roles. Its clear that RMBS investors are now awakening to the possibilities in marketplace lending. The scale isnt quite there yet, but Landbay boss John Goodall confessed that he expects to securitise loans in the future, calling securitisations a more efficient medium of investment for large institutions. To have diversified funding is key as an originator, said Goodall. Markets are fickle.

RMBS transactions will likely be crucial in bringing larger investors to the table. As one Goldman Sachs speaker noted, insurance funds are well suited to funding long term assets like mortgages, and RMBS is the most suitable investment channel for these sorts of companies. Hardly surprising, then, that the marketplace lending platforms are circling.

Here are the key findings from the mortgage-focused polls:

  • The audience believe that alternative funding sources (including P2P) and RMBS are among the most attractive forms of financing for new participants. Goodall made the point that P2P platforms can tap up both sources of funding.
  • The top consideration when investing in a RMBS offering from a new lender was quality and continuity of servicing.
  • Will we continue to see smaller issuers placing RMBS, or will the mainstream lenders dominate? 60% of the audience reckoned that mainstream issuance would continue, but that challenger activity would also increase.

A natural extension?

An often talked about theme at the event has been the idea that the marketplace lending model is naturally suited to securitisation. The thinking here is that a marketplace lending platform that offers a pooled investment product, backed by a large number of loans, is not dissimilar in structure to a securitisation. Some P2P platforms have provision funds, which look a bit like first loss protection mechanisms within securitisations. Alistair Jeffery of Bluestone Group (a mortgage and auto lender) compared the existence of differing investment products within P2P platforms to the various tranches of securitisations, even if the former are less sophisticated. Such comparisons may be seen as facetious, but they serve to highlight the fact that securitisation is a natural funding mechanism for marketplace lenders, and that increased ABS activity within the European marketplace lending sector seems inevitable.

Look out for our continuing coverage of Global ABS 2016.

The Real Flaw at Online Lenders LendingClub, OnDeck

Market turbulence at the start of this year revealed deep flaws in the business models of online lenders. While all aren’t equally vulnerable, they share a common problem: dependence on short-term finance.

After uncovering misleading sales practices and firing its chief executive, LendingClub is scouring the market for loan buyers. So far, the jury is out on whether it will succeed. Last week, the company canceled a shareholder…

Alternative lenders are opening up an opportunity for dangerous borrowing

BI Intelligence

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Alternative lenders in the US are failing to detect borrowers who are stacking loans and its making it harder for other lenders to spot the practice, according to sources quoted by Reuters. 

Stacking refers to a scenario in which borrowers take out multiple loans in a short time period, often using the new loan to fund repayments on older loans. Its a widely known practice among small businesses, in part because they struggle to get funding from traditional lenders.

In 2015, only 45% of US businesses with £70,000 ($100,000) to £700,000 ($1 million) in annual revenue received all financing requested from large banks. That statistic drops to 37% for merchants with less than £70,000 ($100,000). Some lenders allow stacking, but many consider it a prohibitive risk because it can increase the chances that the borrower will default. 

There are a number of reasons why the alternative lending industry makes detecting loan stacking difficult. 

  • The speed of originating loans. It can take 30 days for lenders credit checks to show up on a credit report. But alternative lenders expedited application and underwriting processes mean they can issue loans in just hours, compared to traditional lenders whose processes can take weeks. This means borrowers can get loans from multiple online lenders before their credit report reflects their true status. 
  • Alternative lenders use soft checks. Soft checks give an overview of a borrowers credit history, while hard checks are applications for credit, and therefore more thorough. Traditional lenders mostly use hard checks, which register on a borrowers credit report — unlike soft checks. Alternative lenders credit scoring algorithms often combine soft checks with other information like bank statements and tax returns, which they say gives them enough information to make a decision. But it also means they may miss existing loans held by the borrower. And by not performing hard checks, online lenders make their own loans harder to detect for other lenders.
  • They dont report to credit bureaus. A significant number of alternative lenders dont report to credit bureaus, according to Experian. There is no requirement for lenders to do so, but it means borrowers can have multiple loans from different online lenders, none of which show up on their credit records. In comparison, most major banks report to the three major US credit bureaus (Experian, TransUnion, and Equifax). 
  • Loan stackers may target alternative lenders. Its possible that borrowers who want to stack loans believe that it will be easier to get a loan from alternative lenders and actively seek them out after rejection from banks. That would amplify all of the previously mentioned issues.  

Some alternative lenders are making efforts to tackle stacking — Prosper and LoanDeck have built algorithms designed to detect and prevent it. But overcoming this issue will likely require an industry-wide initiative.

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