First, why securitize? For marketplace lenders, securitization creates the opportunity to grow your business, make substantially more money, and become a formidable force in the marketplace lending space. Specifically, it:
- Opens the door to the virtually unlimited financing capacity of the public capital markets
- Increases the enterprise value of the marketplace lender by validating the lender’s strength, viability and performance
- Provides lenders with lower cost financing
- Provides a secondary source of repayment for warehouse lenders and sponsors
- Enables lenders to obtain matched funding for the life of the receivables with no renewal risk
The benefits of securitization are compelling, but to successfully securitize one must follow six specific requirements to set the stage for a positive securitization outcome. Being successful requires much more than snapping one’s fingers or expecting the seas of red tape and due diligence to magically part. Emerging marketplace lenders are advised to think carefully about six requirements critical to success:
Build an innovative and sustainable business model.
The business model should be differentiated within the marketplace lending industry, and be supported by a significant management team, serious technological smarts, substantial equity capital and superior credit decision-making protocols. Develop and document best business practices to maximize the opportunity.
Establish an effective customer acquisition and retention model.
Create a powerful and proprietary customer acquisition program that consistently shows healthy growth. It’s also vitally important to keep customers happy, establish long-term loyalty and to develop a persuasive referral system in the process.
Secure a skilled, industrial-strength servicer.
Your servicer of choice should be supported by strong institutional relationships, have a stellar reputation, possess applicable asset class experience and be invested in leading-edge technology. They should also be skilled in providing comprehensive back office support – including onboarding, payment processing, delinquency management and reporting. Lastly, the right servicing partner should be consumer focused and consistently deliver high quality interactions that help build the brand.
Get bulletproof backup servicing in place.
Hiring a well-known and respected loan servicing company can eliminate the need for backup servicing. On the other hand, if a marketplace lender is self-servicing or using a lesser-known servicer, the lender will need to prove that it can protect investors in case of problems (e.g., the servicer goes out of business). Rating agencies, along with sponsors, banks, major Wall Street trustees and others, require that backup servicing take over loans within 30 (or fewer) days if a trigger event occurs. They also need to be fully confident about the processes, compliance and reporting of the backup servicer. Not surprisingly, the most respected servicers are also in great demand as backup servicers.
Hire a trusted advisor with a top-notch track record.
This advisor must know the territory and be well-respected by/connected with key industry players including – money center banks, investment banks, sponsors, trustees, rating agencies and other financial market participants. This helps guide marketplace lenders through the processes needed to get the job done in the most efficient way possible. In today’s financial world, networks and relationships make all the difference.
Commit to compliance.
Be prepared to address compliance every step of the way. For example, on the loan servicing side, compliance is an ongoing process. Practices such as contacting borrowers only when legally permitted must hold up under close scrutiny. Even seemingly small infractions may cause big problems for marketplace lenders seeking securitization. In contrast, being buttoned-down completely on all compliance issues will establish greater confidence among those doing the examination, and spur positive momentum.
Would you like to discuss securitizations, loan or backup serving with an experienced partner? First Associates is an agency-rated, industry leader with deep Fintech expertise in Fintech and can help. Please reach out to us today at 888.486.2509 or solutions@1stAssociates.com.