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1.!

There are many different models for online marketplace lending


including platform lenders (also referred to as peer-to-peer),
balance sheet lenders, and bank-affiliated lenders. In what ways
should policymakers be thinking about market segmentation; and
in what ways do different models raise different policy or
regulatory concerns?
At Bond Street, we believe online marketplace lending can provide
value by making the financing process more simple, transparent, and
fair for borrowers.
From a policy perspective, the model used by marketplace lenders is
less relevant than the products and customer experience offered. In an
environment where it is far easier for consumers to access financing, the
government has an obligation to ensure that they are being treated
fairly. Irrespective of operating model, we believe the following three
principles should guide government policymaking:
! Customers have a right to know what they are being charged.
Todays customers often compare different lending products
against each other (e.g. merchant financing and term loans).
There needs to be a common standard that allows them to do so
easily.
! Regulations must be clear, and compliance should be inexpensive.
For example, complex state-by-state lending laws hinder
innovation by making compliance prohibitively expensive.
! Customers should have widespread access to capital at fair rates.
Where possible, policymaking should be geared towards lowering
the cost of providing capital. Among other steps, democratizing
access to government data and providing government
guarantees to back loans will help drive down costs for online
marketplace lenders.
2.! According to a survey by the National Small Business Association,
85 percent of small businesses purchase supplies online, 83
percent manage bank accounts online, 82 percent maintain their
own website, 72 percent pay bills online, and 41 percent use
tablets for their businesses. Small businesses are also increasingly
using online bookkeeping and operations management tools. As

such, there is now an unprecedented amount of online data


available on the activities of these small businesses. What role are
electronic data sources playing in enabling marketplace lending?
For instance, how do they affect traditionally manual processes or
evaluation of identity, fraud, and credit risk for lenders? Are there
new opportunities or risks arising from these data-based
processes relative to those used in traditional lending?
Particularly for small businesses, applying for a loan has historically
been an offline, paperwork-laden process that usually results in
rejection. Small business owners spend an average of 24 hours
researching and completing loan applications,1 and fewer than 50%
receive the full amount of financing applied for.2
Online marketplace lenders seek to change this reality: the online
lending process is both easier for borrowers and substantially more
likely to end in an approval. The time required to go through an entire
underwriting process with an online lender is often less than 24 hours,3
and small business lenders approved 62% of loan requests in January
2015 (vs. 21% approved by banks).4
These outcomes are being driven by a proliferation of new APIs that
make it far easier for online lenders to collect data: this has the dual
effect of expediting the application process and giving lenders a richer
array of data on any given applicant.5 In many cases, online lenders like
Bond Street have as much data on a $50,000 loan application as a large
bank would on a $5,000,000 loan application.
For example, Bond Street uses data sources like Intuits online
Quickbooks platform and digital linkages to credit bureaus to quickly
assemble and evaluate customer financial data, while integrations with
banks and the IRS allow us to flag cases of potential fraud. Were still at
the early stages of realizing the benefits of collecting this information:
as we collect more and more data, the algorithms we develop to
process this information will become stronger.
1

Federal Reserve Banks of New York, Atlanta, Cleveland and


Philadelphia. 2014 Joint Small Business Credit Survey Report, pg. 12. 17
February 2015.
2
Ibid, pg. 14
3
Goldman Sachs. The Future of Finance: The Rise of the New Shadow
Bank, pg. 25. 3 March 2015.
4
Ibid, pg. 30!
5
Charles Moldow. A Trillion Dollar Market By the People, For The
People, pg. 21. 2014.
3

3.! How are online marketplace lenders designing their business


models and products for different borrower segments, such as:
Small business and consumer borrowers; Subprime borrowers;
Borrowers who are unscoreable or have no or thin files;
Depending on borrower needs (e.g., new small businesses, mature
small businesses, consumers seeking to consolidate existing debt,
consumers seeking to take out new credit) and other
segmentations?
Online marketplace lenders often serve businesses that have been
neglected by traditional financing sources; Bond Street too, is making
capital available to historically underserved small business, as well
explain in more detail in the next question.
However, there is a broader opportunity for online marketplace lenders
to offer an improved experience to customers already able to access
bank financing. As an example, several of our earliest customers had
existing relationships with banks, but chose to work with us, both
because they had a financing need that was time-sensitive and because
they placed value on the seamless customer experience we offer.
Our eventual goal is to become the financial advocate for every small
business owner. By developing a strong community of entrepreneurs
and building technology products that deliver valuable information to
customers about the state of their personal or business finances, we
believe we can dramatically improve the financial experience for all
customers irrespective of whether they have been approved for
financing in the past.
4.! Is marketplace lending expanding access to credit to historically
underserved market segments?
Yes. We started Bond Street because despite the fact that small
businesses are the foundation for growth in our economy, todays
banking system has left them behind. Of the seven million small
businesses in our current target market, roughly 40% apply for credit
each year.6 Between businesses that are discouraged from applying and
those that are declined for financing, we estimate the total addressable
market size of underfunded small business loans to be over $300bn
annually.
6

Federal Reserve Bank of New York. Small Business Credit Survey, 2013,
pg. 5. May 2013.
4

Banks have faced structural challenges that make it difficult to serve the
small business community: specifically, banks have not invested in the
technology or process improvements necessary to make small business
lending cost effective.
Banks are still reliant on branch infrastructure and manual processes
(e.g. collecting physical documentation from borrowers) that have been
in place for decades. These costs make underwriting small-dollar loans
prohibitively expensive. By contrast, marketplace lenders are also able
to operate at a significant cost advantage. By one estimate, by
eliminating branch networks and other significant expenses,
marketplace lenders are able operate at over a 400 basis point cost
discount to banks.7 This allows us to work with customers that were
never profitable for traditional lenders.
Similarly, the information collected by traditional lenders is often limited
to the data they are able to obtain through paperwork directly from
consumers or relationships with credit bureaus. Through APIs, online
lenders can overlay the traditional data inputs with valuable information
from a variety of sources, from online accounting software to an
individuals Facebook page.8 This added information allows online
lenders to serve a wider array of customers who otherwise may not
have been approved.
5.! Describe the customer acquisition process for online marketplace
lenders. What kinds of marketing channels are used to reach new
customers? What kinds of partnerships do online marketplace
lenders have with traditional financial institutions, community
development financial institutions (CDFIs), or other types of
businesses to reach new customers?
We believe our strongest source of new business should always be
referrals from existing customers. By remaining religious about the user
experience, which in our case includes everything from site design to
underwriting experience, we hope to provide genuine value to
customers so that they refer us to friends and colleagues.
Indeed, by providing a superior customer experience, marketplace
lenders are able to generate high Net Promoter Scores (NPS). A 2012

Ibid, pg. 13.!


Charles Moldow, Foundation Capital. A Trillion Dollar Market By the
People, For The People, pg. 21. 2014

survey revealed the average NPS of American national banks to be just


39 - alternative lenders report NPS scores over 70.10
Popular paid acquisition channels include digital marketing, radio and
television advertisements, and direct outreach via e-mail and direct mail
to prospective customers. Finally, mutually beneficial partnerships with
traditional financial institutions allow online marketplace lenders to help
customers more traditional lenders are unable to serve Bond Street
recently signed such a partnership with one of Americas largest 50
banks. Other partnerships with small business platforms also help us
serve a larger community of small business owners.
6.! How are borrowers assessed for their creditworthiness and
repayment ability? How accurate are these models in predicting
credit risk? How does the assessment of small 10 business
borrowers differ from consumer borrowers? Does the borrowers
stated use of proceeds affect underwriting for the loan?
In building Bond Street, we realized early on that risk management
would be a core function of our business. As a result, our first hire was
Jerry Weiss, who formerly oversaw risk management for small business
lending at Citi, Bank of America, and other major financial institutions.
Utilizing Jerrys 30 years of experience, Bond Street has built a
comprehensive underwriting process that blends data analysis on
several million historical loans as well as richer data collected via API.
More efficient data collection allows us to focus our underwriters time
on developing a thorough understanding of the businesses we
underwrite and their growth plans. Cash flow models play a substantial
role in our efforts to predict the probability of default over the one to
three-year term of our business loans. While we anticipate a low singledigit loss rate, we have experienced no defaults to date.
7.! Describe whether and how marketplace lending relies on services
or relationships provided by traditional lending institutions or
insured depository institutions. What steps have been taken
toward regulatory compliance with the new lending model by the
various industry participants throughout the lending process?
What issues are raised with online marketplace lending across
state lines?
9

Bain & Company. 2012 Customer Loyalty in Retail Banking, pg. 46.
2012.
10
Lending Club. Keynote Presentation at Lendit 2014, pg. 26!
6

To simplify their operations and ensure compliance with complex state


lending laws, several online lenders have partnered with banks in order
to originate all loans from a single state, a practice known as interest
rate exportation.11 Bond Street, however, has not adopted this
structure. We believe one advantage of a single regulatory framework
applicable across all 50 states would be to remove any incentive to
export interest rates.
8.! Describe how marketplace lenders manage operational practices
such as loan servicing, fraud detection, credit reporting, and
collections. How are these practices handled differently than by
traditional lending institutions? What, if anything, do marketplace
lenders outsource to third party service providers? Are there
provisions for back-up services?
We approach operations from a tech-first perspective: where it is
possible to do so, we use technology to streamline traditionally
expensive operational practices. As an example, our APIs allow us to
quickly detect potential fraud in real-time as applications are being
completed, and our credit team is alerted before underwriting has
begun.
We are fortunate in many cases to benefit from streamlined processes
already built by fellow innovators in the space. For example, while our
underwriting is performed entirely in-house, we are able to serve
customers more efficiently by outsourcing some operational practices
to experienced third party providers.
9.! What roles, if any, can the federal government play to facilitate
positive innovation in lending, such as making it easier for
borrowers to share their own government-held data with lenders?
What are the competitive advantages and, if any, disadvantages
for nonbanks and banks to participate in and grow in this market
segment? How can policymakers address any disadvantages for
each? How might changes in the credit environment affect online
marketplace lenders?
Our customers rightfully expect online marketplace lenders to provide
quick turnaround times. Broadly speaking, the government can foster
innovation by making it easier for lenders to quickly index government
data. Three examples include:
11

Peter Rudegeair, The Wall Street Journal. A New Tariff on InterestRate Exports? 30 June 2015.
7

Automating 4506-T tax pulls from the IRS. The 48-hour


turnaround for 4506-T authorization is currently the longest step
in Bond Streets underwriting process. The government can help
facilitate speedier access to capital by architecting an API for the
IRS and automating processes like this.

Creating a single, easily searchable source of business filings. For


instance, there should be a single data registry that covers
Secretary of State filings across all fifty states.

Improving macro-level data access. Some lenders already use


publicly available government data to make working capital loans
to small businesses.12 Expanding the amount of publicly available
data on small business operations and growth rates will allow
lenders to develop richer models and get more comfortable in
niche industries.

We do not anticipate a substantial impact from changes in the credit


environment. As is the case with all debt products, our investors track
their return to benchmark interest rates. Should these rise, the required
return from all debt products should increase in tandem. As has always
been true, a systemic event would lift the veil on new underwriting
models that have not been properly stress tested against a wide range
of macro-level outcomes. For that reason, our credit models include
recession-era data and assume a reasonable risk of such an event
recurring.
10.!Under the different models of marketplace lending, to what
extent, if any, should platform or peer-to-peer lenders be
required to have skin in the game for the loans they originate or
underwrite in order to align interests with investors who have
acquired debt of the marketplace lenders through the platforms?
Under the different models, is there pooling of loans that raise
issues of alignment with investors in the lenders debt obligations?
How would the concept of risk retention apply in a nonsecuritization context for the different entities in the distribution
chain, including those in which there is no pooling of loans?
Should this concept of risk retention be the same for other types
of syndicated or participated loans?
Marketplace lenders, including Bond Street, that do not take balance
sheet risk still live and die by the quality of the loans they originate.
12

Sophie Raseman, Data.gov. Small Business Lending with Open Data. 13


December 2013.
8

Particularly in the case of younger platforms, debt investors place close


scrutiny on past performance in determining whether to participate.
Given the increasingly competitive environment, chronic originators of
poor-quality loans are sure to find the supply side of their marketplace
drying up.
Allowing off-balance-sheet lending ultimately reduces costs for
borrowers. Because were able to lend off balance sheet, Bond Street
has the capability today to offer $100mm of financing to small
businesses with rates starting at 6%.
In a world where off-balance-sheet lending were not possible, the
outcome for our customers would look very different. As a young
company, raising balance sheet capital would have been expensive and
forced us to charge high rates to borrowers. Balance sheet lenders are
typically required to commit equity capital alongside each loan made,
which would not only have been dilutive to our business, but also
limited our ability to invest in our team and technology. All told,
restricting off-balance-sheet lending would stifle entrepreneurship in
the space and result in significantly worse outcomes for borrowers.
11.! Marketplace lending potentially offers significant benefits and
value to borrowers, but what harms might online marketplace
lending also present to consumers and small businesses? What
privacy considerations, cybersecurity threats, consumer
protection concerns, and other related risks might arise out of
online marketplace lending? Do existing statutory and regulatory
regimes adequately address these issues in the context of online
marketplace lending?
Because online marketplace lenders make it so much easier for
customers to access capital quickly, it is imperative that the cost of
these products is readily apparent and not obfuscated using policy
loopholes. By maintaining that their products are not technically loans,
merchant cash advance vendors and other lenders are able to avoid
representing the true cost of their products to customers.
We believe more transparency would benefit customers: among other
steps, all lenders should be required to publicly post the average APR
they charge.
12.!What factors do investors consider when: (i) investing in notes
funding loans being made through online marketplace lenders, (ii)
doing business with particular entities, or (iii) determining the
characteristics of the notes investors are willing to purchase?
9

What are the operational arrangements? What are the various


methods through which investors may finance online platform
assets, including purchase of securities, and what are the
advantages and disadvantages of using them? Who are the end
investors? How prevalent is the use of financial leverage for
investors? How is leverage typically obtained and deployed?
In assessing Bond Street as a partner, our debt and equity investors
were primarily focused on:
! Experience in underwriting. While technology has greatly
increased our ability to collect and evaluate data, our investors
still value experienced hands who have first-hand experience
underwriting across multiple credit cycles.
! Technology. Investors were focused on both our front-end and
back-end technology, with an eye towards the customer
experience and rigorous processes to secure sensitive data.
! Management. Given our focus on best-in-class technology and
strong underwriting, investors looked for a team that had the
experience and insight to execute on both.
! Customer acquisition. Our marketplace requires strong, sustained
growth; it was critical to demonstrate that we had a plan to cost
effectively acquire customers.
While most debt investors have direct relationships with lenders,
emerging platforms like Orchard Marketplace allow programmatic
purchasing of loans.
13.!What is the current availability of secondary liquidity for loan
assets originated in this manner? What are the advantages and
disadvantages of an active secondary market? Describe the
efforts to develop such a market, including any hurdles
(regulatory or otherwise). Is this market likely to grow and what
advantages and disadvantages might a larger securitization
market, including derivatives and benchmarks, present?
Broadly speaking, more liquidity enables better outcomes for
borrowers. While secondary markets for loans originated on online
platforms are currently limited, we envision such platforms enabling
new investors with more diverse performance goals to enter the space.
For instance, such investors may seek longer-term returns or lower risk
investments, enabling lenders to widen their target markets and help a
larger ecosystem of borrowers. Similarly, the enhanced liquidity offered

10

by secondary markets has been shown to reduce the average rate


charged by lenders13.
14.!What are other key trends and issues that policymakers should be
monitoring as this market continues to develop?
We invite the governments partnership in our continued bid to improve
access to financing for small businesses. Government support for nonbank lenders is not unprecedented: in the mortgage space, for example,
Fannie Mae and Freddie Mac have partnered with non-bank lenders who
are serving an increasingly large segment of the mortgage market. 14
Beyond 14 Small Business Lending Company (SBLC) licenses issued by
the Small Business Administration, which enable nonbanks to make SBA
7(a) loans, no such arrangement yet exists in the small business lending
space. 15 We strongly urge policymakers to reinstitute issuance of these
licenses or similar ones to spur further innovation in the space.
Americas small businesses deserve nothing less.

13

Mark J. Kamstra, Gordon S. Roberts and Pei Shao. Does the Secondary
Market Reduce Borrowing Costs? 7 April 2012.
14
The Street. Big Banks Back Away from Mortgages; Nonbank Lenders
Pick Up Slack. 26 January 2015.
15
Jordan Blanchard, Secondary Market Access. Stepping in to Fill the
Void. March 2012.!
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