Bloomberg by Matt Scully (August 3, 2016)

Avant Inc., the online lending marketplace, removed unsecured consumer loans made to Colorado residents from a securitization deal after a state regulator sought information about its lending policies, according to Kroll Bond Rating Agency. Colorado concluded that loans mad to its residents must comply with its lending statutes, even if the debts originate through partner banks in another state, as Avant does in Utah, Kroll said in an Aug. 2 report. Such statutes include usury laws and restrictions on late fees and other charges, Kroll said in its evaluation of an upcoming $200 million securitization to be sold by Avant. “In light of the letters from the Colorado regulator, Avant has removed all loans made to Colorado residents,” Kroll said. Carolyn Blackman Gasbarra, a spokeswoman for Chicago-based Avant, declined via e-mail to comment while the deal is pending. Kroll said Avant is “proactively addressing any regulator concerns.” Sheila Bair, the former head of the Federal Deposit Insurance Corp. and a frequent proponent of tougher regulation, was added to the company’s board earlier this year.

Court Rulings

Recent court decisions have bolstered the ability of borrowers to enforce state limits on interest rates, threatening a business model embraced by some non-bank lenders. The Supreme Court let stand a lower court’s ruling in June, rebuffing arguments that the decision would curb the availability of credit to borrowers and increase the cost. The appeals court decision was a blow to companies that arrange consumer loans online and bypass usury laws by originating loans in states without rate caps. Avant is among lenders that stopped making loans last year above rate caps in eastern states bound by the lower court’s earlier ruling. “It is possible that other state attorneys general and regulators could make similar assertions,” Kroll said in the report, which anticipates parts of the deal could be rated as high as A-. Peer-to-peer, or marketplace, lenders were first established to bypass big banks by directly matching borrowers with individuals who wanted to fund them over the Internet. The industry has increasingly embraced traditional funding strategies that have helped the lenders expand. Many Wall Street firms have contributed to the growth, as fund managers chase higher returns and bankers seek new assets to package into bonds that can be sold to other yield-starved investors. Underwriters including Citigroup Inc. and Morgan Stanley have bundled more than $10 billion of the debt into securities sold to institutional investors, according to a New York-based data firm called PeerIQ. At least one other online marketplace lender received letters from the Colorado regulator, Kroll said without naming the company, adding that both lenders are challenging the state’s position.  Avant separately has eased its policy on collections for U.S. borrowers, adding a one-time deferment for loans that are at least three payments past due,  according to Kroll. Founded by an entrepreneur who made a fortune in payday lending,  Avant grew quickly, raising capital from investors including private-equity firm General Atlantic at a valuation of almost $2 billion. The venture, which also has backing from Balyasny Asset Management and Tiger Global Management, specializes in unsecured loans to borrowers with less-than- pristine credit records.