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The secondary loan market has played an important role in the history of fintech lending. It was important for those early loan buyers to know that there was a robust market in place if they needed to sell a loan portfolio. And sometimes platforms would hold the loans on their own balance sheet for a few months before offloading in a secondary loan sale. It was an essential ingredient in the growth of the space.
My next guest on the Fintech One-on-One podcast is Dan Arlotta, Senior Vice President at Garnet Capital Advisors. He has been around the fintech lending space almost from the beginning and has been putting together loan portfolio sales across the industry. There are few people who know the ins and outs of the loan-buying space better than Dan.
In this podcast you will learn:
- How loan buying in the fintech space has evolved over the past decade.
- How fintech loans compare to banks and credit unions today.
- What Dan he being seen in activity in non-performing loans.
- How tightened credit boxes will impact secondary transactions.
- How high interest rates have impacted buyer activity.
- The types of buyers that Garnet works with on secondary sales.
- What lending platforms they are working with on the fintech side.
- How it was different working with Figure.
- The best practices for lenders looking to do secondary loan transactions.
Read a transcription of our conversation below.
Peter Renton 00:01
Welcome to the Fintech One-on-One podcast. This is Peter Renton, Chairman and co-founder of Fintech Nexus. I’ve been doing this show since 2013, which makes this the longest running one-on-one interview show in all of fintech. Thank you so much for joining me on this journey.
Peter Renton 00:27
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Peter Renton 00:57
Today on the show, I’m delighted to welcome Dan Arlotta. He is a senior vice president at Garnet Capital Advisors. Now today, we’re talking all about loan sales, we dive into this topic in depth, Dan provides his perspective about the state of the market, gives a little bit of a history lesson on how it’s evolved over the last decade. And we talk about where it’s at today, the different sectors that he works in, the non performing loans area, what’s happening there. We talk about some of the lenders that they work with today, many names you would know. He also gives us a sense of what is on tap for the rest of this year. It was a fascinating discussion. Hope you enjoy the show.
Peter Renton 01:43
Welcome to the podcast, Dan.
Dan Arlotta 01:45
Thanks, Peter. Great to be here. Thanks for having me.
Peter Renton 01:47
My pleasure. Okay, so let’s get started by giving the listeners a little bit of background about yourself. Why don’t you just tell us a little bit about what you’ve done and and what you do today at Garnet?
Dan Arlotta 01:59
So I’m Dan Arlotta, I’m Senior Vice President at Garnet Capital. often tell people look at us as Garnet, no capital, we don’t buy anything. Although, you know, sometimes, it’s a good way to get somebody to appear for a meeting. We’re a loan sale advisor celebrating 20 years now, and involved in the sale of performing, non-performing, and charged off assets, across really all product types. Roughly 30 people headquartered in Westchester County, New York with offices around the country from Tahoe to Minneapolis, Boston, Atlanta, and Houston. Despite, and I would say, have really no other axe to grind other than maximizing price terms, mitigating risks, protecting brand reputation for the sellers we work with, while putting together a deal in story, in a transparent, fair process that allows buyers to easily digest and trust what they’re buying. We work with some of the largest banks, credit unions, government agencies and obviously fintechs in creating and building markets for products that doesn’t trade every day. Nobody’s hiring us to sell Fannie Mae eligible mortgages. You know, we’re the ones that are doing horse trailer loans, RV marine, student loans, personal loans, auto, again, a lot in the fintech space, but you know, a wide array of products, where you really need to come up with the story, understand the product, find the right people, get the deals done. I’m a part of the sales team here. Covering banks, credit unions, specialty finance, debt buyers really have to be a generalist first, although much of the work that I do here involves honing in on the fintech space. Been here 11 years now, which you know, often joke feels like yesterday and 50 years, at the same time. And my first sales job I always say was selling pens and pencils that I was collecting from my parents house in first grade, great business, by the way, 100% profit margin. But short lived. Fast forward a little bit more, prior through a series of internships, was heading toward more of a fixed income sales and trading path until the company that was hiring me out of college, went under halfway through my final year. So you know, welcome to finance, right. I’m big believer, though, in things happen for a reason and you know, persistence, good habits, things worked out. Garnet gave me a shot. And, you know, here we are. It’s a great place. Get to speak with smart people every day, work on short, medium, long term projects, but every day is a new day. And that keeps me from getting bored and keeps me excited.
Peter Renton 05:01
Right, well it has been an interesting last 11 years to say the least. So, before we get into it, maybe let’s take a step back. What is the state of loan buying today? Obviously particularly interested in the fintech space, but maybe you could give us a sense of the overall space as well.
Dan Arlotta 05:19
So I think I’ll maybe do a little bit of a look back the last couple of years, you know, maybe since 2020. And maybe even before that, you know, I think the fintech space arose, following the Great Recession, a little bit more benign in environment. Rates, you know, going down or, you know, flat, which was great, because it allowed for growth. I think that looking back in 2014, I was sent for kind of a recon mission out to San Francisco at LendIt. At your conference, and, you know, the more entrepreneurial space than I think where it is today, that’s, you know, a little bit more focused on how the efficiencies should work and a little more fine tuned. You know, you look at at 2020, and, you know, especially following COVID, call it latter half of the year, things really started to take off, right, perform, borrower performance was great. At really all enjoy the performance spectrum, you know, all the way down to charged off where people were getting their stimulus checks, and, you know, making payments on things that they hadn’t frankly, in years. It was a market where if we brought a deal, if you brought it, they would come, right, and saw a lot of deals where if price talk was x to y, everybody would be at least in x to y, and then you would have through some combination of you know, what I call, maybe second place syndrome, or just needing a deal. You know, you had a lot of outliers, right. You know, that remained, I would say, through the end of certainly 2021, a little bit into 22. I think at that point, right, you had inflation starting to pick up, subsequent rate rises would follow. Less on, you know, the stimulus packages and, you know, really changed things I would say a little bit throughout 2022, you started to see less of the outliers, a little bit softer market conditions, to where I would say the end of 2022, through end of Q1 2023 was probably the biggest shift I’ve seen in the market since I’ve been here.
Dan Arlotta 07:44
You know, obviously, some of it, you had banks having issues last year, you know, that doesn’t help. You have cost of capital going up, you know, from the lenders to the lenders, the lenders to buyers, kind of the entire, the entire stack, there. You also had rates starting to go up. And you know, when that happens, it was really the first time since I’ve been here that seasoned portfolios that already existed, right, were from a rate perspective, underwater relative to new originations, right. And what does that usually mean? That that means discounts. And I would say for most of last year, certainly the first half, maybe through Q3, and again, especially on the performing side, you know, fintech being included in this, you had some real bid, ask, spread challenges, right. I think that the market shifted towards more of a buyer’s market. Sellers spend some time getting used to that, you know, wanting pricing more of old. But throughout the year, kind of understanding where the market was to where more deals could get done. I think there are a lot of deals, especially in the consumer space last year, floating around. I get the gut feeling that, you know, two in 10 actually, were getting done. So for us, you know, we really had to pick spots and you know, opportunity costs became much more paramount. I would say as we enter this year and where things stand, there’s liquidity in this space, which is is great. I think that it’s you know, liquidity at what price and relative to what other opportunities may be out there? I remember, May of 2016, right? There was a bit of a hiccup in the fintech space pretty early on, that had an effect of more tourist investors, right. So we saw between 2016 and 2019, we were pretty busy in selling secondary pools for investors that you know, came in for a year or two, moved out, called it a day, maybe shifted strategies. But as I see it today, there seems to be less of that. I think that the fintech space is more ingrained in the market and, you know, seems to have more long term viability than them. So net net, you know, I think the investors in the space have grown and are more stable, right, to realize that there’s going to be some ebbs and flows. You know, I think a lot of the market is still dealing with call it the late ’21 or early ’22 vintages. You know, performance on those haven’t been as strong. But, you know, again, it seems like a moment in time, where as that starts to season its way out, and curves flat and new underwriting with higher rates comes through, you know, I think the platform’s have been smart about that over the last year, year and a half. And, you know, adapting to where people are committed. On the secondary side, and sort of, you know, our space, I would say, people are always looking at is, you know, what can I get on the secondary side of season pool versus what I’m buying directly from the platform? And there seems to be some more interest, I would say, in the secondary side, as of late. I think some of that has to do with, you can look at a pool that already exists, likely already have similar vintage product in one’s book, and, you know, offers an opportunity to, I would say, to shorten one’s duration, if that’s something that, you know, somebody’s looking to do, and, you know, pick up some more products along the way. So, net net, people have liquidity, we’re seeing more deals in this space. It’s, you know, it seems to be…we saw wave in between 2016-2019, a little bit less over, you know, the 2019-’22 period. And things have sort of been picking up I would say the latter half of last year into this year, where it feels like as far as fintech product in the market, you know, call it third or fourth innings sort of feelings around that.
Peter Renton 12:21
That’s what I was wondering about, because, you know, you talked about 2014 when you went out to our San Francisco event, and then that for like 2015 was like a go-go year where everyone just got funded. Money was sloshing around all over the place.
Dan Arlotta 12:36
That was 2021.
Peter Renton 12:37
Yeah. Right, exactly. Revisited! But then, now, I’m just curious about the state of the market today, and particularly, there’s now lots of banks, like back in 2014-2015, personal loans, were pretty much all done in the fintech space for the most part. Now, lots of banks, are doing personal loans, and a lot of them are just holding them on their balance sheet, they’re not doing a whole bunch of sales. But I’m curious about when you’re talking to buyers, is there much of a difference between a fintech pool of loans than a non-fintech like a ba.., a traditional financial institution doing a pool?
Dan Arlotta 13:12
No, I don’t think so. I think, you know, you see a lot of three and, you know three, four or five year term loans, right, of similar balance. I think, you know, the only difference, I would say, you know, banks, credit unions, they’re going to focus a little bit more on the higher credit. So you see incremental, maybe higher FICOsd as a whole, they’re also going to have more stringent floors on, you know, types of credit that, that they will originate to, but you’re right, I mean, for the most part, those originations in the non fintech community have largely been just, you know, held on balance sheet. You know, I think that there’s, there’s a reason, though, why the fintechs exist and still exist, that, you know, banks on the commercial side, right, doing a $100,000 loan or a $5 million loan is kind of the same effort. And, you know, when you’re looking at more volume maybe versus the balances, it’s still something that I think is tougher for them compared to, you know, the fintechs so, you know, I remember back 2014-15, right, I mean, there’s panels on banks and fintechs, you know, partner or build oneself. You know, also things like cost of borrower acquisition, right. I mean, that’s the advantage that a lot of banks have, that they can tap into their existing base versus, you know, actually acquiring a customer which can be expensive, you know, some of those same things still, and I think same questions still exist out there, you know, with incremental progress along the way.
Peter Renton 14:57
Now, with interest rates have been high, like this seemed to have stabilized, at least for now, with most people thinking next movement is down. With that, obviously higher borrowing costs, you know the people have been used to low interest rates for a long time. And you know now looking at probably interest rates double what they were, when you’re doing a, say a personal loan, for example, from two and a half years ago, are we seeing an increase in activity in the nonperforming loans? What are you seeing out there?
Dan Arlotta 15:26
Yeah, and I mean, you’re right. There’s some of the same deals, you know, selling today that were six to 8%, you know, are 12 to 14% now, right, and so it’s a real shift. On the NPL side, definitely seeing an uptick in that. Some of it is related to growth along the way, although, you know, it’ll be interesting to see the next six months or so of what kind of comes from call it the 2023 type origination product. I think, you know, what we’re seeing a lot of now is, you know, an uptick related still to that late 21-22, which was just before, right, I think inflation and the rate rises kicked in. We also had last year, right, I think, two unknowns in the market, you had rate rise after rate rise, and not really an end in sight. I think it’s a positive that, you know, one can make an argument, does it go lower? Does it stay where it is, for longer? But you could at least form a market, I think, around that now. You know, that’s a box that people are now used to.Bborrower uncertainty and performance, you know, I think still remains, although, it seems like most people talk to, you know, I don’t know if it’s a combination of hope, as well as, you know, actual prediction, but it seems like they’re looking towards Q1/Q2, this year of maybe the end of a cycle and some uptick in NPL. We’re definitely seeing more, though, you know, feels like that’ll continue, at least for the first half of the year. And then, you know, we’ll sort of see what the newer underwriting of 2023 at higher rates, coupled with, you know, what the Fed does, you know, after that,
Peter Renton 17:20
A lot of the fintech lenders that I’ve been speaking to, a lot of them decreased their origination volume, we’ve seen it with the public companies as well. But even though the private ones decreased originations tightened the credit box, made a, skewed it to a much more creditworthy borrower, how’s that sort of going to skew kind of what’s in the market when it comes to secondary loan transactions?
Dan Arlotta 17:42
Well, you know, like I was saying, right, I mean, if rates do go down, all of a sudden, you know, some of these originations in the last 12-18 months, right then become very, very attractive as it goes the other way. Really, throughout 2023 the platforms, you know, took a lot of time and focus on, you know, not necessarily focused on growth, right, which is inherently sort of embedded in, you know, being a tech company, but focusing on sort of maximizing efficiency, and, you know, getting it right, which I think they’ve done a great job on. And, you know, there’s always a lag in our business, so when you start to see the effects of that, But I have a feeling that, you know, in the coming months, and throughout the year, that’s going to be, show itself in a very positive way.
Peter Renton 18:32
Okay, so then when you’re doing these secondary transactions, who are the typical buyers here? I mean, we are we talking primarily hedge funds? I mean, who are you actually working with?
Dan Arlotta 18:45
Yeah, so the buyers of the product and, you know, I’ll do a little bit of separating, I think, between commercial and consumer. You know, consumer first, though, most of the time, right, it’s somebody that already is buying from the underlying platforms, products, right, that we’re selling. That makes, help makes it a little bit more commoditized. I think that your yield hurdles can be, you know, a bit lower compared to just the totally new product, totally new platform, type secondary sale. For the most part though, it’s fintech focused funds, and that ranges from you know, small to large, as well as you know, your mid to large multi strat credit funds. You know, depends on the deal size, right, not everybody’s going to look at a two and a half million dollar pool. You know, trying to come up with some some new ideas and ways to, right now, to you know, make sure that we have full market participation and not have you know, various people not be able to show, Sometimes, you know, you’ll get some banks involved, less so on the say credit union side I’d really because of, you know, credit unions needing to memberize borrowers. But you know, for the most part, I kind of look at it as, across all the platforms in the consumer space, you know, I look at it as a group of about 50 potential buyers. And that’s one of the nice things here at Garnet that I think is unique, I get to talk to lenders, you know, the originating platforms, the buyers across all of them. So, you know, you can really listen to all of them and find out where the successes are, where the challenges are. And every time we take a deal out, you know, thinking about what’s the optimal way to do this? But, you know, figure funds, fintech focused and not, a little bit on the bank side, less so on the credit union side when we’re doing the secondaries.
Peter Renton 20:52
Okay, so can you share on the on the platform side or the or the lender side? Can you name some names, like who you’re working with today?
Dan Arlotta 21:01
So, you know, more broadly, we…Garnet’s been around 20 plus years, right. We’ve worked with, I would say, most of your top 25 banks. Think, Capital One, TD, Key. On the credit union side, you know, we’ve worked with Navy Federal, on the fintech side, you know, really the first sale that kicked this all off, you know, with with Garnet in the fintech space, and a lot of ways my career was 2017 Lending Club, which was the wind down of LCA.
Peter Renton 21:40
LC Advisors.
Dan Arlotta 21:42
Correct, yeah. And, you know, that offers up obviously, when you have a bigger deal like that, offers up the opportunity to create some domino effects and go from there. So you know, what I’ll say is, you know, we’ve worked with, on the consumer side, you know, the likes of Lending Club, we’ve worked with Avant, you know, we’ve sold product of Prosper, Upstart, Upgrade, Marlette. So, you know, think some of the larger ones there have also done some smaller sales for smaller lenders, especially those looking to get, you know, warehouse facilities and kind of get going. But, you know, hopefully that gives a little bit of a flavor. I know, you had mentioned, you saw we had worked with Figure. You know, there’s a lot of different product types out there, you try to start with some of the larger ones, create that domino effect. I think since 2017, we’ve done 40 transactions in the fintech space in a roughly $2 billion of purchase price there. And some of that is also found its way into charge-off forward flow sales, which is another one that, you know, more and more are, are looking to sell than work it themselves.
Peter Renton 23:07
Yep. Yep. So I do want to dig into Figure a little bit because I think it’s an interesting case. I think you even had a quote in one of the press releases that I read, because Figure’s different to all the others insofar as they have originated everything on the blockchain, on the Provenance Blockchain, that I’m curious about a secondary loan transaction. I mean, the process obviously was different. But I’m curious about the buyer side of this, and how they felt with doing something that was so different from what they used to.
Dan Arlotta 23:39
Yeah. So that that one is actually was more on the new origination side. So you know, bringing forward flow buyers to the platform was sort of the idea there, which, you know, I think when people hire us for that type of effort, they’re looking less for us to, you know, bring in the hedge fund community, and, you know, more of your bank and credit union community. So, you know, that’s what we were doing there. You know, when I first saw the platform there, I remember walking out of the demo, saying, Wow, this is really cool. I see the tech here. And, you know, sometimes people are like, oh, you know, where’s the tech in the fintech, right? And, you know, they had something very, very unique there. You know, that’s part of that sort of opportunity costs, that we go through right, we want to go out there with something that’s unique, and it’s going to get people excited. You know, they were doing something that most do in you know, 45 to 60 days, in no more than five business days. You know, doing it a different way, but, you know, getting there. And, you know, those are the types of things that are always the most exciting about the fintech space where you know, I think it resonates Oh, you know, I I got a you know, a mortgage refi or, you know, a HELOC and you know, it was painful, it was difficult. And you know, that I think is ultimately, the fintech space, right? It is taking things that already exist, making them far better, far more efficient, far quicker, as well as the completely new idea there. So it was a little bit different product or process in that it was, you know, again, more of that new origination buyer. And then, you know, depending on who it is, you know, you end up spending more time on memberization of borrowers and things like that, then the economics sometimes.
Peter Renton 25:39
Say you’re a lender, and you want to position yourself for a successful secondary transaction. So what are some of the best practices that you would recommend lenders do in order to get the best price they can possibly get on these transactions?
Dan Arlotta 25:55
Yeah, so I think, you know, data is, is paramount, right? You know, I think that fintechs they’ve done things certain ways, a lot of times it’s their first sale, right? So, you know, it might think that, hey, here’s the data file, just have people take a look, this is what we do. Performance history, data, transparency, you know, being upfront with what the goals are, and really just focus on kind of no surprises in general. I mean, that’s the best way to start a process. You know, we like to spend a lot of time upfront making sure that what we think the market will bear, a process in mind, seems to be aligned with with the client’s goals. So we try to do that at the beginning so there’s no surprises. And once you hit the button of going to market, you have the right buyers, you know, prospective bidders corralled. Again, there’s no issues, people could put their best foot forward. You know, I look at it, as, you know, a part of buyer’s jobs are to find the deals that I don’t find, right, those are the deals they want to get in there, be the one in the room, you know, get the homerun, Grand Slam type deal. You know, for us, you know, on one hand, we’re looking to maximize price terms for the seller, that’s who we’re working for. On the flip side, putting together a deal that has as much information in it, the analysts here do a great job finding, you know, the golden nuggets and really telling a story, you know, because people, people can do the math, right, but at some point to you’re gonna have a finger in the air, especially as you get further down in sort of that that performance spectrum, you know, NPL charge off to really have somebody get excited and make that jump, right, for a deal. So data, transparency, upfront goals, you know, those are probably the most important things.
Peter Renton 29:39
Right, right. Okay. Okay, so last question, then I’m curious, you know, we are recording this late February, what’s your outlook for the next 10 months? What do you think is going to be the state of the market for the rest of the year?
Dan Arlotta 28:11
Going back a little bit to what, you know, said earlier, I think there’s a moment in time thing going on here, right now. If you look at the investors in this space, and you know, maybe more of that fund community more so than the bank, that’s, you know, just handling their own balance sheet. You know, I think if you look back over the last 12 months, if you’re an investor, within a fund, you might say, if you just compare what the last 12 months have produced to exactly today’s relative value, it may not be overly, you know, exciting, however, that I believe is going to, over the next six months with the higher rates, a tighter underwriting, that is going to look very different. So, you know, we have been seeing, you know, some sales of investor redemption, capital inflows, a little bit tougher, that already though, seems to be sorting itself out, and you know, more coming into the space again. I would say, I’d expect to see more first time sellers of charge off product, I think, on both consumer and commercial, maybe more so on commercial, which really hasn’t been much in the way of, you know, secondary transactions on either the performing or non performing side. And yet every article, you know, you can turn up oh, you know, commercial and cracks forming, all of that. But, you know, there really hasn’t been much in the way of supply, so I expect to see more supply on the commercial side. We’ve done some sales in the space. We did a sale for Funding Circle, you know, about a year, year and a half ago. You know, certain markets, certain niches, especially where, you know, I look at that commercial Fintech C&I product. I know one thing I’m out there trying to talk to people about is because there’s been such a lack of supply, which is the exact opposite of the consumer space, the buyer community is surprisingly robust. And you know, pricing still is kind of at all time highs, especially again, is as you get to that NPL side, where you know, you have C&I buyers, you actually had CRE secured buyers jumping into the C&I space in a search for product. That still remains, that to me is one of the bigger opportunities for holders of of fintech commercial to be very surprised at the pricing that they can get out there. And, you know, for a lot of the fintechs, I think, you know, they’re running this, you know, sale process or collection process on behalf of underlying investors, you know, the money today versus three to five years could be very attractive there. Otherwise, though, I, you know, I would say there’s ebbs and flows. I actually feel like the more recent challenges, the wind is shifting in the right direction, there’s probably more of a focus on profitability. And, you know, as you said, right, scaling back originations, making sure we’re doing thing right, than pure growth. And I think that’ll continue. There’s always these really niche players that start up that are very focused on a singular product, where maybe they don’t really have much in the way of competition, those are really exciting to me. I think, you know, that’s a very specific problem they’re trying to solve for, they can get a little bit more, you know, I think pricing power from it. And, you know, the road to profitability is a little bit, you know, quicker and more in sight. You know I love businesses to like point of sale product, where, you know, a lot of times you talk about the cost of borrower acquisition and things like that, you know, they have the benefit of going to merchants, and, you know, having them do the marketing for them, right. And, you know, that to me is a space that I think will become more prominent as well. I think the deal activity will be busy in the first half of the year. It’s an election year. So it could go either way. But could also see how come October, you know, maybe even, you know, September, people get into a little bit more of a wait and see mode. So in that I think, I know we’re focused more on the first half of the year for sure. But, you know, in the fintech space, in general, I always say the world’s not getting less digital, right. A long time ago, I think people wanted to talk to their banker, right, instead of the scary ATM. And you know, I don’t know the last time I walked through the next set of glass doors, you know, at the bank. The world’s not getting less digital, fintech is certainly here to stay. You know, you deal with some ebbs and flows, which is, listen at the end of the day, it’s still in early innings, I wouldn’t be shocked to see some consolidation, as I think equity and debt is more difficult to find and more expensive. So, you know, I do think it’s a year though where people have the opportunity to kind of separate themselves a little bit more, while also right, you root for the whole industry because it’s new enough, right? You don’t want to see, you know, anybody anybody falter. So I’m optimistic, you know, I’m in this for the long haul, too. And, you know, at the end of the day, every deal we take out with any fintech, you know, I go to bed at night, really thinking about what’s the best solution? How can this sale make a company more successful, more you know have, with the right partners, and, you know, hope to be a part of that in the future.
Peter Renton 34:22
Okay, well, let’s leave it there. Dan. Really great to hear your insights today. Thank you so much for coming on the show.
Dan Arlotta 34:27
Likewise. Thanks a lot, Peter.
Peter Renton 34:30
Well I hope you enjoyed the show. Thank you so much for listening. Please go ahead and give the show a review on the podcast platform of your choice and go tell your friends and colleagues about it. Anyway, on that note, I will sign off. I very much appreciate you listening, and I’ll catch you next time. Bye.
