October 20, 2015

Could marketplace lenders transform antitrust landscape?

The Justice Department has its eye on the pending sale of Citigroup's OneMain Financial to subprime consumer lender Springleaf Holdings. Scrutiny over whether the $4.25 billion deal clears antitrust concerns has slowed the transaction, originally expected to close by the end of September. The attorney generals of a handful of states joined Justice in raising their eyebrows over the sale. Even so, officials from both Citigroup and Springleaf recently told the financial press they expect the deal to close by the end of the year.

Does geography matter anymore?
A deal of that size would be worthy of notice on its own. But as American Banker notes, the sale also has important implications for how antitrust authorities view a new generation of possible mergers and acquisitions. What happens when a more traditional, geographically-focused financial institution aims to combine with a company that primarily conducts its business online?

The Justice Department appears to be concerned over access to credit in small towns where OneMain and Springleaf compete. After the merger, Springleaf is expected to close about 200 OneMain branches in places like Lufkin, Texas. Is that a valid antitrust concern when, as American Banker notes, 70 percent of Springleaf's new customer applications start on a phone or tablet?

An analyst for Compass Point Research & Trading said the old conceptions of antitrust may be outmoded.

"The argument is really whether competition comes in at the local level or at the national level," Tarkan said. "I think there's an argument to be made on both sides."

Signs of life in the subprime market
The acquisition underscores the high rate of activity in the subprime market. Both OneMain and Springleaf primarily service customers with credit scores around 600. These personal loans are generally for $25,000 and less, at interest rates lower than payday lenders charge but higher than those of most credit cards.

The cofounder and chairman of private equity and hedge fund firm Fortress Investment Group - which holds the majority stake in Springleaf - told the Wall Street Journal that subprime lending has an unjustifiably bad name. In Wesley Eden's analysis, the financial crisis came of lenders giving too many borrowers too much credit based on home values distorted by the real estate bubble.

"Lending to people without great credit wasn't the problem," Edens said. "A lot of people live paycheck to paycheck, and if they don't have financing it's not good for the country. This is a more humane way of people dealing with credit."

Fortress invested $124 million in Springleaf in 2010. The company's value had soared to an estimated $3.5 billion as of late this summer. That's amid a lending environment where a growing percentage of transactions - most prominently auto, credit-card and personal loans - happen in the battered-credit portion of the market. Equifax recently reported subprime lending accounted for a third of such loans in the first quarter of 2015, the highest amount since before the meltdown.

Regulatory uncertainty continues
Marketplace lenders present an interesting case when it comes to potential regulations. Entrants in the fast-growing but relatively new field do not operate under the same regulatory burdens shouldered by traditional banks. Observers expect regulators to step in at some point, it's just unclear how and to what extent. More red tape would add new costs to marketplace lenders' streamlined business models, but the tradeoff could be worth it if new rules buttress lending standards and provide consumer protections that lead to making the sector sustainable, according to analysts contacted by the WSJ.

Banks evaluating their loan portfolios in light of how marketplace lenders are changing the financial landscape can profit from the experienced counsel provided by loan sale advisory firm Garnet Capital Advisors.