CircleBack Lending

What did it do?

CircleBack Lending was an internet-based lending platform in the US that offered consumers unsecured personal loans of between $3,000 and $35,000 and sold those loans to institutional investors as an investment product. The loans were originated by County Bank in Delaware.

Why did it shut down?

The founders, Michael Solomon and Todd Walters, had set up Loanio, one of the first peer-to-peer lending platforms in the US, in 2008, but closed it in 2011, partly because of the requirement to register its notes as securities. In 2014 CircleBack struck a deal with Jefferies for the sale and securitisation of up to $500 million of loans. According to Morgan Stanley data, cumulative losses on CircleBack loans reached 13.5 per cent in 2015. When some borrowers fell behind on their payments, the company's loan funding dried up, and in October 2016 Bloomberg reported that CircleBack had stopped lending. Solomon said they were not currently making loans and that if they could not find funding they would transfer the existing loans to another company; in 2019 the company's domain redirected to a site listing domains for sale.

The story

Michael Solomon and Todd Walters were no strangers to online lending. In 2008 the pair had founded Loanio, the third peer-to-peer lending platform in the US after Lending Club and Prosper. Loanio had started lending before the requirement to register its notes as securities came in, and that requirement proved decisive in the company's closure in 2011.

The founders' new venture, CircleBack Lending, went live in 2012. The company described itself as a platform with two purposes: to provide fast, low-interest loans to US consumers with strong credit histories, and to offer institutional investors a transparent channel for investing in those consumer loans. Loans ranged from $3,000 to $35,000 and were originated by County Bank in Delaware. In 2014 a deal was signed with the investment bank Jefferies for the purchase and securitisation of up to $500 million of loans.

The picture deteriorated in 2015. According to Morgan Stanley data, cumulative losses on CircleBack loans reached 13.5 per cent. When some borrowers fell behind on their payments, the company's loan funding evaporated. Crowdfund Insider reported that finding funding had become harder across the online lending sector as a whole during this period.

In October 2016 Bloomberg reported that CircleBack had stopped lending. Solomon said they were not currently making loans and that if they could not find funding soon they would transfer the existing loans to another company. By 2019 the company's domain redirected to a site listing domains for sale. CircleBack's story shows how much growth on online lending platforms depends on credit quality and on the confidence of the investors who provide the funding.

Lessons for founders

• In a marketplace model, losses count against your reputation even if you do not lend from your own balance sheet; monitor loss rates before the investors who fund you do.
• Funding tied to a single institutional buyer or securitisation channel can close overnight when the market mood changes; diversify your funding sources.
• If the founders' previous venture was closed by a regulatory hurdle, put legal and funding risk at the heart of the business plan from day one of the new venture.

Sources

1. CircleBack Lending Stops Making Loans, May Transfer Portfolio to Another Company (Crowdfund Insider, 2016-10-16)
2. Online Loan Pioneer Stops Lending Money as Industry Losses Mount (Bloomberg, 2016-10-14)
3. CircleBack Lending, Company Overview (archived copy) (Internet Archive, 2014-04-11)

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