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Updated on Thursday, September 17, 2015
Today American Banker reported that CircleBack Lending, a marketplace lender based in Boca Raton, Florida, raised $17.4 million of equity capital to help fund its growth. This funding was provided by Pine River Capital, an alternative asset management company. In addition to providing equity, Pine River has been given the right to buy up to $500 million worth of loans. According to Crunchbase, Circleback was created with a $250,000 seed investment in 2012 and has originated over $200 million worth of personal loans since inception.
In a low interest rate environment, investors are hungry for the yield that a diversified consumer loan portfolio can provide. The market leader, LendingClub, has more investor demand for loans than consumer supply. In other words, LendingClub and other lenders are unable to grow fast enough to meet investor demand. In the CircleBack deal, an asset manager is willing to take equity risk in exchange for the right to participate in the loan origination volume.
CircleBack offers personal loans up to $35,000 with interest rates ranging from 6.63% – 35.18%. Like many other lenders, the application process is digital, and borrowers are able to determine their interest rate without hurting their credit score. In a recent CircleBack review written by MagnifyMoney, it was noted that the maximum APR is a lot higher than most other marketplace lenders. And the company charges these higher rates despite having a higher minimum score cutoff of 660.
CircleBack has recently completed its first securitization of $106 million in June, and we can expect more to come.
Are Marketplace Lenders Really Just Nonbank Lenders?
The model of peer-to-peer lending was created by Prosper. The original Prosper was a marketplace that resembled eBay. Lenders would bid on loans, determining the interest rate. Underwriting credit risk is complicated, and the power of the market was not sufficient to protect the original investors. Losses on some of the earliest loans increased dramatically, the SEC became involved and the entire business model had to shift.
The second phase of marketplace lending, at businesses like LendingClub and a revamped Prosper, created platforms that match institutional money with individual loans. Investors can still buy slices of a loan, and can make a decision on a loan-by-loan basis, although most are building algorithms that bid automatically within certain risk parameters.
The new marketplace lenders, like CircleBack, do not even have a marketplace. Their business models resemble traditional nonbank lending. Using a digital storefront, the lenders acquire customers. But in many cases, lenders are warehousing the loans until they have enough for a securitization. And in many ways, the securitization activity resembles traditional nonbank lending.
The leader in this space remains LendingClub, followed by Prosper. Quietly, Marlette Funding has build a large portfolio of loans. However, most of the new entrants look more like the Delaware nonbank financial institutions that were created in the 1990s, rather than the Silicon Valley disruptor that was the original vision of peer-to-peer lending.
Excellent News For (Most) New Borrowers
Interest rates in America for unsecured borrowing have been extremely high. 75% of Americans with credit card debt have an interest rate higher than 15%. The new marketplace lenders have been driving down costs for people looking to refinance expensive credit card debt.
There is a risk. For the highest risk borrowers, it is becoming increasingly easy to access debt quickly, and at rates that are not low. CircleBack is charging 35% to its riskiest borrowers. If marketplace lenders want to remain in the good books of regulators and the public, they need to focus on providing value, rather than just access to quick credit at prices that are a bit better than payday loans.