After underwriting loans at Citigroup just after the
200809 recession, David Snitkof concluded that even
in a healthy economy there had to be a better way to lend.
Banks were pulling back from making loans of all kinds, and the
market seemed increasingly unattractive to everyone but
distressed-debt investors. Many institutional investors
werent comfortable with that kind of risk, so
opportunities to buy debt dried up.
Snitkof and several colleagues from the tech world soon
discovered a new way to conduct a lending business. The first
generation of peer-to-peer lenders firms such as Prosper
and Lending Club that lent money to individuals without a
traditional financial institution, like a bank, as an
intermediary had been operating for several years. These
pioneers made the data they had gathered accessible to
investors. Snitkof, along with Angela Ceresnie, Jonathan Kelfer
and Matt Burton, realized that they could gather and analyze
that data, much of it related to small consumer loans, and
create a lending and investment marketplace they called Orchard
Platform Advisors. New Yorkbased Orchard was officially
founded in 2013 and has since tried to bring so-called
marketplace lending (the term preferred now over
peer-to-peer lending) to institutional
Marketplace lending allows nonbank institutions to lend to
individuals and small businesses online, without a traditional
financial middleman but usually with some sort of
credit-checking apparatus. Most marketplace loans are
unsecured, though the market also includes student,
small-business and real estate loans.
When it was called peer-to-peer lending, the only
product being offered was unsecured consumer loans, and they
were all being funded by retail investors, says Snitkof.
This didnt provide many attractive opportunities for
institutional investors looking for secure, low-risk
investments. But as time went on, he adds, institutional
investors started applying sophisticated credit strategies to
buying these loans, using leverage and doing some
innovation. Now a number of institutions look to Orchard
to be educated about the best way to invest in consumer loans
in a market that has grown with hardly any bank presence.
In fact, consumer lending has attracted a number of new
players. Even Goldman Sachs Group is reportedly planning an
online consumer loan program next year, which some analysts
believe is a major risk. The reason: Goldman, the epitome of a
wholesale financial institution, has little experience in
consumer finance and developed an unfavorable public reputation
during the financial crisis. But as a sort of validation of the
concept, the bank apparently wants to be part of the trend,
according to a memo Goldman sent to employees and obtained in
May by Bloomberg.
The financial crisis actually made this type of lending
possible for Wall Street firms like Goldman and Morgan Stanley
that, at the height of the financial crisis, became banks.
Regulations enacted in the backwash of the crisis required
them to behave more like conventional banks, which were facing
increasing regulation, including higher capital ratios that
caused them to rethink their businesses.
Marketplace competitors vary quite a bit, but their
customers are largely the same: consumers and businesses that
might not qualify for more than a few thousand dollars and
whose options for borrowing are limited. Specialty finance
companies that have generally used the balance-sheet approach
to fund loans, including auto lenders, equipment lenders and
other small-business lenders, are getting into distribution
with the marketplace model too, as are hedge funds.
Princeton, New Jerseybased Princeton Alternative
Funding launched a direct-lending fund earlier this year
the Princeton Alternative Income Fund aiming to raise
$50 million by year-end. PAF is focused on lending to small
nonbank financing operations, such as retail furniture chains
and auto lenders that have anywhere from $50 million to $100
million in outstanding loans, most of which are classified as
A lot of platforms out there their strength is
originating loans for those with high credit scores. We feel
theres a big gaping hole in the market in that below-700
range, says Bert Szostak, one of PAFs founders.
We dont want to compete with Lending Club or
Prosper. We see an opportunity to provide funding for those
with FICO scores at a level where Lending Club and Prosper are
not comfortable making loans.
So why should investors feel comfortable with those loans?
PAFs secret sauce is MicroBilt Corp., a credit data
company that owns a majority stake in the fund and gives it an
edge with regard to collecting and analyzing data about
consumers payments and eligibility that the Big Three
credit data companies Experian, TransUnion and EquiFax
do not provide. PAFs anchor client is Dallas-based
Ranger Capital Group, which included PAF in its portfolio for a
direct-lending fund that it launched in May.
Subprime became a bad word during the financial
crisis, but its always been a very important part of the
overall economy, says Szostak, noting that subprime
borrowers represent about $3.4 billion of earned income in the
U.S. But still, he admits, we wouldnt even invest
in that space without having the data [from]
If some investors feel subprime is
too risky, they can consider
student loans, which marketplace lending has also tackled.
One New Yorkbased lender, CommonBond, is focused on that
class of loans. CommonBond has funded $200 million in student
loans and closed its first securitization of graduate loans at
the end of June. The deal earned a Baa2 rating from
Moodys Investors Services the highest
investment-grade rating for a first-time issuing marketplace
lender. Purchasers of the $100 million securitization included
insurance companies, banks, asset managers and hedge
fundsthat is, institutions.