Marlette Funding's next securitization may show that winning over new investors is better done through emulating, rather than disrupting, traditional bank lending practices.
Marlette, better known as Best Egg at mybestegg.com, is marketing a new $257.44 million pool of bonds backed by $281.7 million of prime unsecured personal loans purchased from a third-party originating partner bank. Marlette Funding 2017-1 is the third transaction backed by loans originated on the platform. The trust will issue three classes of notes with preliminary ratings from Kroll Bond Rating Agency.
In a presale, KBRA cites Marlette’s conservative growth in loan volume and commitment to aligning interests with investors as prime reasons for giving the deal higher ratings and lower cumulative net loss estimates than recent deals from peer marketplace lenders (or MPLs) such as Lending Club and Avant.
Marlette’s investor-friendly practices, including keeping loans on its balance sheet (totaling $100 million as of February) as well as paying its originating partner-bank to oversee and manage the loans “is a credit positive relative to other pure marketplace lenders,” the presale report states.
Kroll expects cumulative net losses of 9-11%, or about half of what it assigned to Avant’s $255 million transaction in August. Meanwhile, Marlette needed only 27.45% of credit enhancement in its senior class notes to achieve an ‘A-’ rating, while Lending Club’s $101 million trust issuance in December included 35.5% CE for the Class A notes that earned only a ‘BBB’ – the same rating as Marlette’s subordinate $26.76 million Class B notes in the 2017-1 transaction.
Marlette’s deal will also issue $24.9 million in Class C notes, rated ‘BB’.
The loans that Marlette makes are not differentiated greatly from other fintech lenders. They have terms of three to five years, range in size from $2,000 to $50,000 with fixed APRs of between 4.9%-29.99% for prime borrowers with average FICOs of 714. The loans being securitized are seasoned about 11 months, on average.
But Kroll is more comfortable with Marlette's practices. The firm partners with institutional investors for whole loan sales. All whole loan purchasers receive a random allocation of origination. Marlette also deploys a New Jersey-chartered bank, Cross River Bank, to originate and service the loans.
Other marketplace lenders partner with banks as well, but in some cases these banks hold the loans for a short period of time. Whereas Cross River retains some of the loans and also receives an oversight fee for all the loans on the BestEgg platform.
This gives Kroll comfort, both because it aligns the bank's interest with those of Marlette and its investors, but also because it reduces regulatory risk. Two two court decisions (known as “Cashcall” and “Madden”) have limited marketplace lenders’ ability to rely on federal preemption of state usury laws in ruling that the originating banks for customers’ loans nationwide (from which higher rates could be exported) were not the true lender exempt from state caps on rates.
[Kroll noted, however, that Marlette is the subject of a recent complaint filed by Colorado officials pertaining to loans originated for borrowers in that state. No loans originated in Colorado are included in this transaction.]
Since March 2014, over $3 billion in loans have originated through the platform by Cross River.
Like other newer asset classes, Kroll had to use proxy data to forecast the 9-11% CNL expectation. The agency combined the limited 32-month history of Marlette’s operating and origination history with proxy data compiled from static pool loss data of comparable consumer loan and marketplace lenders, according to KBRA.
Marlette’s securitization is the second for a fintech/marketplace lender this year, following online small-business lender Kabbage’s $500 million securitization via Guggenheim Securities. It also arrives after a period of considerable stress for the sector involving slowing loan originations and massive job cuts. The chief executives for industry leaders Prosper and Lending Club each left under dark clouds last year, and online consumer lender Avant abruptly dropped plans to expand into auto loans.