Prosper Marketplace Closes Loan Purchase Agreement for up to $5 Billion of Loans with Consortium of Institutional Investors
February 27, 2017SAN FRANCISCO–(BUSINESS WIRE)–Prosper Marketplace, a leading online consumer lending marketplace, today announced that it has closed a deal with a consortium of institutional investors to purchase up to $5 billion worth of loans through the Prosper platform over the next 24 months. The investors in the consortium are affiliates of each of New Residential Investment Corp., Jefferies Group LLC and Third Point LLC, and an entity of which Soros Fund Management LLC serves as principal investment manager. The consortium will also earn an equity stake in the company based on the amount of loans purchased, further aligning the group with Prosper’s future growth and success. Warehouse financing of up to $1 billion will be provided by a syndicate of lenders including Credit Suisse, Deutsche Bank, Goldman Sachs and Morgan Stanley.
“We’re very pleased to be working with this consortium of investors, and believe they will be great long-term partners as we continue to build a large-scale business,” said David Kimball, CEO, Prosper Marketplace. “This deal gives us the funding stability and additional capital markets expertise we need to continue to grow our marketplace and achieve profitability in 2017.”
Prosper has maintained positive momentum since the second half of 2016, with monthly loan originations growing steadily since July. In addition, the Prosper loan portfolio is delivering solid returns to its institutional and individual investors, with an estimated net return of 7.86%<> for January 2017. Prosper continues to diversify its investor base, and is focused on bringing new banks and other institutional investors onto the platform.
Financial Technology Partners (FT Partners) served as strategic advisor to Prosper Marketplace and its Board of Directors on this transaction. DV01 will be the loan data agent to the consortium.
About Prosper Marketplace
Prosper’s mission is to advance financial well-being. The company’s online lending platform connects people who want to borrow money with individuals and institutions that want to invest in consumer credit. Borrowers get access to affordable fixed-rate, fixed-term personal loans, and investors have the opportunity to earn attractive returns via a data-driven underwriting model. To date, over $8 billion in personal loans have been originated through the Prosper platform for debt consolidation and large purchases such as home improvement projects, medical expenses and special occasions.
Prosper launched in 2006 and is headquartered in San Francisco. The lending platform is owned by Prosper Funding LLC, a subsidiary of Prosper Marketplace. Loans originated through the Prosper marketplace are made by WebBank, member FDIC. Visit www.prosper.com and follow @Prosperloans to learn more. Prosper notes offered by Prospectus.
1 Estimated return on January 2017 production is 7.86% according to the Prosper Performance Update: January 2017
Contacts
Prosper Marketplace:
Sarah Cain, 415-593-5474
scain@prosper.com
Confidence Stable For Small Business Lenders and MCA Companies
February 26, 2017Recent events may be putting a slight damper on the confidence of industry CEOs in being able to access capital needed to grow their businesses, but continued success of the industry in general is ticking back up. This data is according to the latest survey conducted by Bryant Park Capital and AltFinanceDaily of small business lending and merchant cash advance company CEOs.
Confidence in the industry’s continued success bumped back up to 81.9% in Q4, while confidence in being able to access capital reached its lowest level since the survey’s inception. Still, at 82.7%, it’s high.
In late November of 2016, CAN Capital, one of the industry’s largest companies, encountered problems that caused the company to suspend funding. Several of their competitors since then have reported a boost in submission volume, which they partially attributed to that event.
Pressure on companies to merge or exit the market may also be kindling optimism for larger players who stand to gain market share.
Catching Up With Marketplace Lending – A Timeline
February 20, 2017This is the expanded update to the timeline of events taking place in the industry.
12/16 Chicago-based Argon Credit filed for bankruptcy
12/20 Bizfi announced that it had surpassed $2 billion in originations since inception
1/4 Strategic Funding integrated US operations of Capify
1/9 Two US Senators protested the OCC’s plans to create a limited fintech charter
1/11 Funding Circle announced a new $100 million equity round led by Accel
1/12 Marketplace Lending Association announced 11 new members
1/16
- The WSJ broke a story revealing that CAN Capital had breached its covenants with its big-bank creditors, laid off about 250 staffers, hired a restructuring firm for assistance in negotiating with creditors, and hired Jefferies Group for advice on strategic alternatives
- NY proposed broad changes to its lender licensing laws
1/17
- OnDeck announced a partnership with Wex, a provider of corporate and small business payment solutions
- New York Department of Financial Services protested the OCC’s plans to create a limited fintech charter
1/18 Credible raised $10 million in a Series B round from investors that included Ron Suber, the president of Prosper Marketplace.
1/19
- LendIt announced finalists of its first ever industry awards
- Sean Murray of AltFinanceDaily selected as a finalist for Best Journalist Coverage
1/20
- Fifth Third announced a partnership with QED Investors to advance fintech strategy
- President Trump issued an executive order freezing all new regulations
1/25 loanDepot surpassed $100 billion in loans
1/26 LendingRobot launched a marketplace lending hedge fund
1/30 Prosper Marketplace’s EVP of capital markets, Eric Thaller, departed from the company
2/1 Prosper Marketplace appointed new CFO, Usama Ashraf
2/4 OnDeck announced departure of COO James Hobson
2/8
- Breakout Capital announced a $25 million credit facility
- Lendio announced that it had facilitated $240 million in funding last year
2/13 OnDeck announced a partnership with payroll company Wave
2/14 Lending Club reported a $146 million loss for the year and an increase in bank funding
2/16
- OnDeck reported a $86 million loss for the year, layoffs
- The DC circuit decided to rehear the PHH v CFPB case
Legal Battles to Keep an Eye On
February 18, 2017CFPB
The CFPB’s organizational structure might not be unconstitutional after all. The D.C. Circuit which originally concluded it was unconstitutional, has decided to rehear the case. Oral arguments on the matter are scheduled to take place on May 24, 2017. A detailed summary of the issues can be found on The National Law Review.
TCPA law
Serial litigant Craig Cunningham is one of two petitioners behind the challenge to an FCC interpretation of what constitutes “prior express consent.” Specifically, the petitioners want to get rid of implied consent resulting from a party’s providing a telephone number to the caller. The FCC has called upon the public to comment. If the FCC indeed decides to narrow the scope of their interpretation, it would become easier for litigants like Cunningham to bring lawsuits. Read a longer brief of the issue here.
New York Lending License
Governor Cuomo’s budget proposal contains changes to Section 340 of New York’s banking law and it has the potential to completely change the alternative landscape in the state. Read a full analysis here.
Platinum Rapid Funding Group Ltd v VIP Limousine Services Inc. and Charles Cotton
After a landmark trial court decision surrounding merchant cash advance last year, plaintiff Platinum Rapid Funding Group went on to obtain a judgment against defendants in an amount exceeding $100,000. However, filed papers on the docket show the case may be heading to the Appellate Division.
Merchant Funding Services, LLC v. Volunteer Pharmacy Inc
Merchant cash advance companies may find themselves having to answer for an unfavorable ruling issued in Westchester County, New York, in which a judge vacated a Confession of Judgment and voided the underlying future receivables transaction. A more in-depth brief can be read here. Notably, the judge in that decision was the same one that decided Pearl Capital Rivis Ventures, LLC v. RDN Construction, Inc.
Layoffs, Big Losses for OnDeck in Q4
February 16, 2017
OnDeck weathered a brutal fourth quarter driven largely by an increase in provision for loan losses which increased to $55.7 million, up from $20.0 million in the comparable prior year period. $18.7 million of this can be attributed to loans with original maturities of 15 months or longer whose performance has deviated or is expected to deviate, the company said. “As a result, the Provision Rate in the fourth quarter of 2016 was 10.2% compared to 5.6% in the comparable prior year period,” the company reported. For the full year of 2016, the Provision Rate was 7.4%, compared to 5.8% in 2015. CFO Howard Katzenberg said on the earnings call that it will likely continue to hover at around the 7% level.
The company lost $36.5 million in Q4 and $86.5 million for the year.
To try and turn things around, OnDeck is laying off up to 11% of their staff as part of a “cost rationalization plan.”
James Hobson, their COO, recently announced his resignation and March 15th is his last official day.
On the earnings call, Katzenberg wouldn’t say how many loans in their portfolio were 15 months or longer, but did say that it’s more than a third of their book. This is notable given that this segment is the one in which performance isn’t matching their models and led to the recalibration of loss expectations.
Meanwhile CEO Noah Breslow explained that losses did not stem from their partnership with Chase since Chase held all those loans on their own balance sheet. Breslow said their role in that relationship is servicing.
No origination channel was directly responsible for the loss provision increase. One analyst surmised if perhaps third party brokers or funding advisors, as OnDeck calls them, might be responsible, but the company said that origination channel wasn’t a factor.
Despite the fact that OnDeck is now using the 5th generation of their proprietary OnDeck Score, they were unable to predict performance on loans that now make up more than a third of their portfolio, yet the company said they remain very confident in their scoring model.
“Loans sold or designated as held for sale through OnDeck Marketplace represented 15.8% of term loan originations in the fourth quarter of 2016 compared to 39.8% of term loan originations in the comparable prior year period,” the company reported.
As NY Lending License Proposal Looms, Industry Trade Groups Mobilize
February 13, 2017
The alternative small-business finance community plans to lobby hard against a far-reaching proposed expansion of the New York state lending license. The proposal calls for any person or company that solicits, arranges or facilitates business and consumer loans – or other types of financing – to obtain a license. That could include MCA companies, business loan brokers and ISOs.
Critics claim the expansion, which Governor Andrew M. Cuomo included in his proposed state budget, could trigger a series of ominous and possibly unintended events in the courts and on Wall Street. “It could destroy the industry if the worst comes to fruition,” declared Robert Cook, a partner at Hudson Cook LLP.
Some opponents also contend that the public hasn’t had a reasonable opportunity to respond. “Sneaking a provision with significant impact like this into the budget and not going through regular order is really disturbing,” said Dan Gans, a Washington lobbyist who also serves as executive director of the the Commercial Finance Coalition. “They should allow all the stakeholders to have their voices heard.”
The industry’s trade groups have been quick to react. The Small Business Finance Association has been in contact with New York state legislators to help them understand the ramifications of the proposal, according to Stephen Denis, the trade group’s executive director. Meanwhile, Gans is recommending that the CFC’s board hire an Albany lobbying firm to help advance the industry’s interests.
New York’s current consumer licensing law is written broadly enough to cover any loan to an individual for less than $25,000, even if it’s made for commercial purposes, said Cook. That means the current law could cover loans to sole proprietorships but would not affect loans to corporations, limited liability companies, partnerships or limited liability partnerships, he noted.
Under the proposal in Governor Cuomo’s budget, any type of commercial loan of up to $50,000 would require a license, Cook said. Today, the state requires a license only if a loan carries a simple interest rate of more than 16 percent. Under the budget proposal, all lending would require a license, even if the interest rate is less than 16 percent. Loans made by alternative funders typically carry interest rates of 36 percent to 100 percent, he said.
New York already has a criminal usury rate of 25 percent, but lenders have two methods of avoiding that cap, according to Cook. Under one method, the parties to the loan can use a provision called the “choice of law clause” and thus agree that the contract is subject to the laws of a state that does not limit commercial usury rates, he said. Or, using the second method, the small-business finance company can solicit the loan and refer it to a bank in a state without a cap. The bank makes the loan but then sells the loan back to the small-business finance company or an affiliate, he noted.
But adopting the changes proposed in the New York budget could possibly stymie both methods of circumventing the state’s usury laws. Consider the choice of law clause, Cook suggested. The courts could interpret the proposed expansion as an effort by the state to gain more control of commercial lending. That could prompt the courts to refuse to enforce choice of law clauses involving New York state because doing so would violate a significant policy in New York, he maintained. The proposal could also gut the second way around the usury law – the bank model – by requiring employees of out-of-state banks to have a license in order to originate loans or by prohibiting rates in excess of New York’s cap, he said. Both outcomes are speculative but constitute distinct possibilities, he added.
Expanding the license would also grant additional regulatory authority to the New York State Department of Financial Services, Cook maintained. Besides requiring the license, the DFS would have the ability to regulate, supervise and examine commercial lenders, he said. In the past the department has imposed some significant regulations on licensees, including fair lending requirements and cyber security requirements, he said. “They’re a very active regulator,” he contended. “They could require commercial lenders to jump through a lot of hoops that aren’t there today.”
What’s more, time would pass while a company negotiates the initial hoops simply to obtain a license. Qualifying for the current New York license, for example, can take up to nine months, Cook said. “It’s a fairly intensive licensing process that requires a lot of information about the company, the officers and directors of the company,” he noted. “The licensing process is tough in New York.”
The expansion could also limit the industry’s access to capital, Cook warned. Some alternative funders raise money by selling loans or interests in loans on the secondary market. Requiring a license to buy those products could prompt Wall Street to look elsewhere for less-burdensome investment opportunities, he said.
The laundry list of potential bad effects has many in the industry wondering about the state’s intentions toward the industry. “It’s not clear whether the people up in Albany understand the potential effect this has,” Cook said.
To help bring about that understanding, the CFC intends to call upon its members and merchants who have benefitted from alternative finance to visit officials in the state capital, Gans said.
Gans finds reason for optimism as the associations coalesce around the issue. The state Senate in Albany tends to be pro-business, and I am confident we will find allies that will stand up to this, he said.
Denis also seems upbeat about the industry’s efforts to make itself heard in Albany. In Illinois, some legislators failed to differentiate between consumer loans and commercial loans when considering legislation last year, he noted. That might be the case in New York, too, and the SBFA might help them make the distinction, he said. As an example of the differences, he pointed out that business loans often carry high interest rates because of high risk. “We have talked to some folks in Albany, and everyone is receptive to the industry,” he said. Small business is a powerful constituency, he maintains.
Gans, Denis and Cook all said they’re not opposed to legislation or regulation that addresses problems caused by bad actors in the industry, but all three oppose government action that they believe unnecessarily limits members of the industry who are operating in good faith.
The proposed license in New York differs in at least one significant way from the California lending license that many alternative funders have obtained, Cook noted. The California license doesn’t impose a cap on interest rates, he said. If the New York proposal imposed licensing requirements but did not limit interest rates, the industry probably would reluctantly accept it, he suggested.
—-
Dan Gans at the CFC can be contacted at dgans@polariswdc.com
Stephen Denis at the SBFA can be contacted at sdenis@sbfassociation.org
Robert Cook at Hudson Cook can be contacted at rcook@hudco.com
Analysis: New York’s Lender/Broker Licensing Proposal
February 7, 2017
New York Governor Andrew Cuomo’s proposed budget includes a legislative proposal to “allow the Department of Financial Services (“DFS”) to better regulate the business practices of online lenders.”1 This legislation, which would amend Section 340 of the Banking Law, could have a dramatic impact on lending and brokering loans to New York businesses, as such lenders would have to obtain licenses to engage in business-purpose lending and could only charge rates and fees expressly permitted under New York law.2 It may impact the secondary market for merchant cash advances. If passed, the licensing requirements will take effect January 1, 2018.
The proposed law would amend NY Banking Law § 340 to require anyone “engaging in the business of making loans” of $50,000 or less for business or commercial purposes to obtain a license. The term “engaging in the business of making loans” means a person who solicits loans and, in connection with the solicitation, makes loans; purchases or otherwise acquires from others loans or other forms of financing; or arranges or facilitates the funding of loans to businesses located or doing business in New York.
Although the proposed law would require a license only for a person who “solicits” loans and makes, purchases or arranges loans, the DFS takes the position that the licensing law (as currently enacted) applies broadly and that “out-of-State entities making loans to New York consumers . . . are required to obtain a license from the Banking Department.”3 As a result, there is probably no exemption from licensing for a person who does not “solicit” loans in New York.
The potential impact of the legislation is significant.
Potential Impact on Lenders:
Licensing Required and Most Fees Prohibited. New York law already requires a lender to obtain a license to make a business or commercial loan to individuals (sole proprietors) of $50,000 or less if the interest rate on the loan exceeds 16% per year, inclusive of fees. The proposed law would require any person who makes a loan of $50,000 or less to any type of business entity and at any interest rate to obtain a license. And a licensed lender is governed by New York lending law that regulates refunds of interest upon prepayment;4 and significantly limits most fees that a lender can charge to a borrower, including prohibiting charging a borrower for broker fees or commissions and origination fees.5
Essentially, the DFS will regulate lenders who originate loans to businesses of $50,000 or less in the same manner as consumer loans of less than $25,000. The proposed law would exempt a lender that makes isolated or occasional loans to businesses located or doing business in New York.
Potential Effect on Choice-of-Law. The proposed law could lead courts to reject contractual choice-of-law provisions that select the law of another state when lending to New York businesses. With new licensing requirements and limits on loans to businesses, a court could reasonably find that New York has a fundamental public policy of protecting businesses from certain loans, and decline to enforce a choice-of-law clause designating the law of the other state as the law that governs a business-purpose loan agreement.
For example, the holding of Klein v. On Deck6 might have come out differently if New York licensed and regulated business loans at the time the court decided it. In the Klein case, a business borrower sued On Deck claiming that its loan was usurious under New York law. The loan contract included the following choice-of-law provision:
“[O]ur relationship including this Agreement and any claim, dispute or controversy (whether in contract, tort, or otherwise) at any time arising from or relating to this Agreement is governed by, and this Agreement will be construed in accordance with, applicable federal law and (to the extent not preempted by federal law) Virginia law without regard to internal principles of conflict of laws. The legality, enforceability and interpretation of this Agreement and the amounts contracted for, charged and reserved under this Agreement will be governed by such laws. Borrower understands and agrees that (i) Lender is located in Virginia, (ii) Lender makes all credit decisions from Lender's office in Virginia, (iii) the Loan is made in Virginia (that is, no binding contract will be formed until Lender receives and accepts Borrower's signed Agreement in Virginia) and (iv) Borrower's payments are not accepted until received by Lender in Virginia.”
The court concluded that this contract language showed that the parties intended Virginia law to apply. However, the court also considered whether the application of Virginia law offended New York public policy. The court compared Virginia law governing business loans against New York law governing business loans, and decided that the two states had relatively similar approaches. As a result, the court found that upholding the Virginia choice-of-law contract provision did not offend New York public policy.
The loan amount in the Klein case was above the $50,000 threshold for regulated loans in the proposed New York law, so this exact case would not have been affected. However, the court’s analysis in the Klein case would have been the same for loans of $50,000 or less. Accordingly, the new law could cause a New York court to reject a contractual choice-of-law provision.
Effect on Bank-Originated Loans. This proposed law apparently would not directly affect loans made by banks that are not subject to licensing under the statute.7 But, the law would require non-banks that offer business-purpose lending platforms that partner with FDIC-insured banks to obtain a license to “solicit” loans. And, it is possible, that the DFS could later, by regulation or examination, prohibit such licensees from soliciting loans at rates higher than permitted under New York law.
Potential Impact on Merchant Cash Advance Companies:
The proposed law imposes a license requirement if a person “purchases or otherwise acquires from others loans or other forms of financing.” New York law does not define the term “other forms of financing.” However, the DFS may consider merchant cash advance transactions to be a regulated transaction for which licensing is required.
As written, only purchasing or acquiring other forms of financing, such as a merchant cash advance, might require a license. As a result, the proposed law only has the potential for affecting the sale and syndication of merchant cash advances. It is unclear whether buying only a portion of a merchant cash advance, or “participation” could require a license, or if only purchasing the entire obligation could require a license.
Potential Impact on Brokers:
Because the new law would require a license to “arrange or facilitate” a business loan of $50,000 or less, ISOs and loan brokers would need a license. As mentioned above, a licensed lender is prohibited from charging broker fees or commissions. It is not clear at the moment whether an ISO or loan broker could contract directly with the borrower for a commission.8
1 See https://www.budget.ny.gov/pubs/executive/eBudget1718/fy18artVIIbills/TEDArticleVII.pdf, page 243. Although not discussed in this article, the proposal would also impose new licensing requirements on certain consumer lenders.
2 A licensed lender may impose a rate in excess of the 16% civil usury limit in New York, but is still subject to the 25% criminal usury limit. See, New York Banking Law § 351(1) and New York Penal Law § 190.40.
3 See http://www.dfs.ny.gov/legal/interpret/lo991206.htm The term “solicitation” of a loan includes any solicitation, request or inducement to enter into a loan made by means of or through a direct mailing, television or radio announcement or advertisement, advertisement in a newspaper, magazine, leaflet or pamphlet distributed within this state, or visual display within New York, whether or not such solicitation, request or inducement constitutes an offer to enter into a contract. NY Banking Law § 355.
4 NY Banking Law § 351(5).
5 NY Banking Law § 351(6).
6 Klein v. On Deck Capital, Inc., 2015 N.Y. Misc. LEXIS 2231 (June 24, 2015).
7 See NY Banking Law § 14-a; 3 NY ADC 4; NY Gen. Oblig. Law § 5-501.
8 See NY Gen. Oblig. Law § 5-531 that limits fees that brokers can charge on non-mortgage loans to not more than 50 cents per $100 loaned.
Katherine C. Fisher is a partner in the Hanover, MD office of Hudson Cook, LLP. Kate can be reached at 410-782-2356 or by email at kfisher@hudco.com.
Prosper Marketplace Appoints Usama Ashraf Chief Financial Officer
February 1, 2017
SAN FRANCISCO–(BUSINESS WIRE)–Prosper Marketplace announced today it has appointed Usama Ashraf as Chief Financial Officer. As CFO, Ashraf will oversee the company’s capital markets function, as well as all of the company’s finance activities. As head of the Capital Markets team, he will be responsible for expanding the company’s funding sources by bringing new investors onto the Prosper lending platform.
Ashraf brings more than 18 years of experience spanning corporate finance and global capital markets, including funding, securitization, financial reporting, planning, investor relations, balance sheet management, strategy, and mergers and acquisitions. He has held senior leadership positions at prominent financial services companies, most recently as Deputy Chief Financial Officer and Treasurer at Annaly Capital Management and Corporate Treasurer at USAA. Ashraf will start his new position at Prosper Marketplace on February 27.
“We’re thrilled to have someone with Usama’s experience and track record in finance and global capital markets join our team,” said David Kimball, CEO, Prosper Marketplace. “Usama will be instrumental in bringing new institutional investors onto the Prosper platform, including banks, as we continue to grow the platform in 2017.”
“I’ve watched the online lending industry with keen interest over the past year, and I have been impressed with Prosper’s resiliency and commitment to innovation,” said Ashraf. “I am a strong believer in Prosper’s mission to advance financial well-being, and I look forward to working closely with David and the Prosper team to take the business to the next level.”
Prior to joining USAA, Ashraf spent 13 years in the Treasury and Corporate M&A departments of CIT Group, most recently serving as Deputy Treasurer with responsibility for the firm’s Treasury activities in the U.S. Previously, he worked in the Investment Banking Division of Salomon Smith Barney/Citigroup focused on M&A. Ashraf received a BS in Economics with concentrations in Finance and Accounting from The Wharton School of the University of Pennsylvania.
About Prosper
Prosper’s mission is to advance financial well-being. The company’s online lending platform connects people who want to borrow money with individuals and institutions that want to invest in consumer credit. Borrowers get access to affordable fixed-rate, fixed-term personal loans, and investors have the opportunity to earn attractive returns via the platform’s data-driven underwriting model. To date, Prosper has originated over $8 billion in personal loans for debt consolidation and large purchases such as home improvement projects, medical expenses and special occasions. The award-winning Prosper Daily app offers essential tools to help people manage their financial wellness every day.
Prosper launched in 2006 and is headquartered in San Francisco. The lending platform is owned by Prosper Funding LLC, and Prosper Daily is owned by BillGuard Inc., both subsidiaries of Prosper Marketplace. Visit www.prosper.com and follow @Prosperloans on Twitter to learn more.
Contacts
Prosper Marketplace
Sarah Cain, 415-593-5474
scain@prosper.com
