Todd Nelson has been around consumer lending for more than 25 years. He is the Business Development Officer for LightStream and he has also worked for Lending Club and Capital One as well as an early company in the online lending space. This podcast marks the first time we have featured the online lending arm of a bank and it was a fascinating conversation.
In this podcast you will learn:
The origins of Lightstream.com
Why SunTrust decided to buy FirstAgain and rebrand it to Lightstream.
The kinds of borrowers they are focused on at Lightstream.
The FICO score cutoff they use to filter prospective borrowers.
The typical loan terms: amount, rate and term length.
Why their rates vary depending on loan purpose.
Why this works well for super prime credit customers.
The biggest loan categories for Lightstream (not debt consolidation).
Why the decline in home equity lending has been great for Lightstream.
How their unsecured auto loan works.
Why they have a mostly manual underwriting process.
How long it takes for the customer to get their loan.
The channels they use to source borrowers.
Who they see as their primary competition for borrowers.
Why Todd thinks so few banks have entered the online lending space.
[expand title=”Click to Read Podcast Transcription (Full Text Version) Below”]
PODCAST TRANSCRIPTION SESSION NO. 73: TODD NELSON
Welcome to the Lend Academy Podcast, Episode No. 73. This is your host, Peter Renton, Founder of Lend Academy.
Peter Renton: Today on the show, I’m delighted to welcome Todd Nelson. He is the Business Development Officer for LightStream.com. Now you may not have heard of LightStream, but they are quietly becoming a major player in the online lending industry. They’re actually a division of SunTrust Bank which is a top 25 bank and in 2015, they did $1.5 billion in unsecured consumer loans so they really are already a significant player. I’ve been wanting to get someone from LightStream on the show because I’ve been very interested in what they’re doing. They have I think a unique advantage which is somewhat obvious, the fact that they are part of a bank. I wanted to get Todd on the show just to talk about LightStream; what makes them different, what sort of borrowers they’re targeting and really how they see the competitive landscape in this industry. It’s a fascinating interview, I hope you enjoy the show!
Welcome to the podcast, Todd!
Todd Nelson: Thanks, Peter.
Peter: So why don’t we get started, let’s just give the listeners a little bit of background about yourself so they can learn more about you.
Todd: Sure, I’ve been in consumer lending for 25 years, started my career in credit cards back at First USA in Delaware, sort of the heyday of the affinity and co-branded credit card space. From there I got into other parts of consumer lending, did home improvement, did a little bit of mortgage, ultimately ended up working for a startup auto finance company called People First that was very innovative at the time and they really changed the way a lot of banks and lenders looked at the direct to consumer auto lending space so their big idea back in late 90’s was to take the collateral out of the lending equation.
What had always happened historically was that banks would ask a consumer what they were going to buy and their credit decision was often predicated by what they wanted to buy. So if you wanted to buy say a Ford F-150, they would think about that as a different credit decision for the same consumer as someone that wanted to buy a BMW 3 Series so it was very much collateral-based. People First’s big idea was we’re just going to underwrite the consumer and if they’re good for the money then we’ll let them buy whatever vehicle they want so that was a big leap forward in auto lending.
That business grew, was eventually acquired by Capital One and we became part of Capital One Auto Finance and the founders of that company left and I stayed on as part of Capital One for several years, then ended up getting into the marketplace lending space very early with a couple of different companies. One of whom did not survive, the other one is Lending Club. I was there for a few years and then got back into auto finance in the subprime space working at Car Finance, rejoined with those same entrepreneurs in their second startup which was called First Again which does online unsecured consumer lending. That company made loans for about three years, stopped making loans during the recession and was eventually acquired by SunTrust Bank. So now SunTrust bought it about five years ago, re-launched it three and a half years ago as LightStream and I rejoined them again as part of LifeStream about four years ago so now I’ve been kind of back with those same entrepreneurs now for my third tour of duty for about four years.
Peter: (laughs) Okay, but it sounds like you’ve really spent your career in the lending business. So just curious, what did you do at Lending Club?
Todd: Business Development. So I was there, geez that was almost five or six years ago now, so we were pretty small, we were still down in Redwood City and had, I don’t know, 40 or 50 employees at the time so just working on growing the borrower side of that business through partnership.
Peter: Okay, so LightStream came about after…it was re-branded. First Again got going and then SunTrust Bank bought it and re-branded it to LightStream. I guess I’m curious, it sounds like there was like this gap…I’m curious about what was SunTrust’s plan, why did they buy a company that was clearly not…you said you stopped lending, the financial crisis happened and…do you know the thought process behind what SunTrust was doing?
Todd: Yeah, so SunTrust like lots of banks, fairly active and interested in acquiring consumer debt assets and so their initial conversations I think with the founders of First Again were to buy the portfolio. So we had put a couple hundred million dollars of unsecured consumer loans on the books during 2007, 2008, 2009 and that portfolio was still sort of paying off and SunTrust came along initially looking to purchase the portfolio and what they realized during those conversations was that while the portfolio was performing very well even through the recession, despite the fact that it was unsecured, the real value was the company itself and the technology and process that they had built.
You know, SunTrust is a great, very stable, fairly conservative southern bank and not one that’s generally been the leader in terms of sort of technology and those kinds of investments and they realized that the technology that First Again had developed would allow them to go from kind of middle of the pack to the very forefront of consumer lending in one acquisition and they could do so faster, cheaper and better than they could probably have built it internally so they purchased the whole company and brought those entrepreneurs along with them.
That was a big leap of faith for them because it was something that was really sort of outside of what SunTrust typically does and it’s paid off very well so we’ve grown significantly since we’ve relaunched…I think now…actually according to data that you provided we were in the top five last year in terms of consumer loan originations kind of in this unsecured space and we continue to grow, so it’s been a great acquisition for them and it’s been very positive for the millions of consumers we’ve touched.
Peter: Okay, so let’s just talk a little bit about your offering. I mean, what kinds of borrowers are you focused on, whereabouts on the credit spectrum do you play?
Todd: So being part of a bank, our appetite for risk is somewhat limited so we’re really focusing on prime and super-prime borrowers so if you want to think about the entire credit spectrum, we’ll probably target the top third if you will, that’s kind of our focus.
Peter: Okay, so do you have a FICO cut off, what would be your average FICO score of your loan book?
Todd: We do, but we think about FICO maybe a little differently than some other lenders do. I think lots of smaller lenders and some of the marketplace lenders are very fixated around FICO as being kind of the end all be all for credit and performance. We don’t think about it that way. For us, FICO is more of a disqualifier. So if someone applies today and has a FICO score under 670, we’re going to automatically decline them and an underwriter is not going to look at that application, it just falls out automatically.
Todd: If they’re above 670 then it will go into the underwriting queue and ultimately the FICO score itself is really a non-factor. What we care about is underwriting that individual on a more holistic basis so because it’s unsecured we’re really just underwriting the individual and that means we’re going to look at the depth and breadth of their credit history, look at how they’ve used credit in the past and then look at things like income and assets, right, so that gets to their ability to repay us.
You know, we’re not going to make a loan to a consumer that’s going to be a stretch for them and put them into financial peril, that’s not who we are. But for those folks that have good credit, that have stable income and have some assets, we think we’ve ended up offering them really the best in class solution in terms of speed, transparency and ease of use and obviously, we offer very attractive interest rates.
Peter: Sure, we’ll get to that in a little bit. Just one thing as an aside here, I think you’ll find that many of the online platforms actually operate in a very similar way. They use FICO as really a hard cut off for people who…say if you have less than 660, less than 640, whatever it may be, different platforms have different criteria, but then they’ll typically go into an underwriting process similar to what you described. Now not everyone is like that, some people are really very focused on FICO, but I think you’d find that most of the online lenders now are using it just as one of the many data points. Anyway, I want to move on to the terms of the loans…can you give us some idea about the amount, the different loan term lengths you offer and the rates that you offer.
Todd: So we offer loan amounts from $5,000 to 100,000, again, all unsecured and we’ll do terms ranging from two years to seven years so 24 to 84 months and we allow the consumer to pick both their loan amount and their terms. So if they want 73 months, they can have that; if they want 81 months, they can have that; if they want 27 months, they can have that. We allow them to pick their own loan amount and term and then we price based on three things; loan amount, term and loan purpose.
I think where we differ than many of the other folks in this category is that we think about loan purpose and it factors into how we price. So part of it is based around sort of risk and experience there and part of it is based around the competitive set. For instance if you look at our interest rates today for say new or used automobile purchase, I think up to 60 months our rates start at 1.74%, incredibly low, very, very competitive rates and that really is for the prime and super-prime borrower.
If you don’t have an interest rate starting with a one or a two, you’re just simply not competitive because that’s how banks and credit unions and the captive finance units at the dealership are able to price so in order to play in that space, you need to be able to price aggressively.
If you look at a different category like say debt consolidation, I think our rates start at 5.49% APR today, and again, priced very competitively. Generally speaking, we are the low cost provider in the market, part of that is the benefit of being a bank and really for us, we’re wanting to communicate that message to the consumer that if we can approve you, you are not going to get a better rate from someone else or a better customer experience. We even have a rate beat guarantee so if a consumer can actually get approved by another lender for the same terms and amount at a lower rate, we’ll actually beat that rate.
Peter: Okay, okay, so that is interesting, that’s very different and also those rates are a lot lower than just about every other online lender. So I’m curious…I’m on your website right now and you’ve got auto, you’ve got motorcycle, you’ve got debt consolidation, medical, etc….where does it…like Lending Club and Prosper, as you’re probably aware, debt consolidation is really the biggest category, what is the biggest category for you guys?
Todd: So for us we’ve got several categories that are bigger than debt consolidation and I think that’s one of the opportunities in this space. I think that the marketplace lenders have been really successful kind of using the same playbook that we had 20 years ago in credit cards around balance transfer. You go to the credit bureaus and you run a prescreen and you find people that have existing balances and you offer them the ability to refinance it so the card companies always did it as a balance transfer and I think Capital One was really the originator of that 25 years ago.
The marketplace lenders sort of picked up that same playbook and said we can do the same thing here for debt consolidation so if you’re paying 20% on your credit card, we can get you an unsecured loan at 12% with some kind of fee so it’s a better deal for the consumer. I think the interesting part is that…I think the broader set of players in the space, the personal financial software websites and things like that oftentimes categorize this unsecured loan category really as being synonymous with debt consolidation.
But for LightStream, our business is much broader than that, we really tend to market more to consumer need, and not that debt consolidation isn’t a consumer need, it’s just not nearly as big as some of the other needs that are out there. So the auto finance business is a trillion dollar market, there are 50 million cars sold in the US, new, used, private party, every year so lots of transactions there so that’s a big part of what we do. In fact, that’s our biggest category…is auto.
We’re also very big in home improvement. There’s a big need there for consumers that want to do home improvement projects. I think if you go back 10 years ago, a lot of folks used home equity for that.
Todd: And you know part of those decisions which some of them were not well chosen by either the consumer or the bank, didn’t end well obviously through the recession, but home equity as a category has really shrunk significantly from where it was 10 years ago. Today if you’re a consumer and you want to do some kind of home improvement project and you have equity in your home and not everyone does, it’s a much longer, more arduous process today to get a home equity loan. You’re looking at two months most of the time and fairly paper intensive because of all the requirements now that banks have around that product so we offer a really nice, much simpler alternative. Again, at very competitive interest rates. I think in home improvement our rates start at 4.29%, so very competitive with home improvement and again, it’s unsecured so you can do whatever kind of project that you want to tackle with that loan.
Peter: Right, so I just want to go back to that. These are unsecured loans, you say auto is really your biggest category, so how does it work? I mean auto finance is obviously a huge industry as you mentioned and you’re not tied in with dealers I presume, how does it work? You don’t have security in the auto, in the car, so just explain how it works.
Todd: So our auto business at LightStream is strictly direct to consumer. SunTrust does have a dealer financial service group that does indirect financing so the financing that you can get when you show at the dealer and you apply with the finance manager, SunTrust does play in that business, it’s just a different line of business and not what we do. That’s referred to as obviously the indirect side of auto lending and LightStream is really the direct to consumer piece.
Indirect is significantly larger by the way from an industry standpoint. I think the numbers are something like 80% of the people that finance a vehicle purchase do so through the financing provider at the dealership and that includes banks and credit unions as well as the captive finance units like Ford Motor Credit and so forth. The value of being direct to consumer, and I think this works for all consumers is that you can apply for financing up front, you know exactly what your interest rate going in is which then puts you at a little bit more of an advantage, A in negotiating the price of the vehicle, but B it also shines a lot of light on what’s otherwise a very opaque process at the dealership.
You get a rate from the F&I manager but you don’t always know is that the best rate that I could have gotten? You really don’t know what’s going on there because you just don’t have the information, there’s a real imbalance of information from the car buyer versus the F&I manager so this is an opportunity that kind of shines a little light on that for the consumer.
So for us it being unsecured works well because it allows us to lend to the consumer and they can buy any vehicle, from any seller, anywhere so it’s not just limited to vehicles in the dealership. You can buy your neighbor’s car, you can buy a vehicle off eBay or Craigslist, you could buy something overseas and have it shipped to you. So because it’s not collateral specific, the consumer has the flexibility to buy whatever they want which is a fundamentally different way to think about auto lending so again I think that we’ve done a little bit more pioneering in that auto loan category by taking the collateral not only out of the underwriting decision but really out of the whole process.
Peter: It’s interesting because…I mean, really you’re doing unsecured lending so it doesn’t matter really whether they are buying an automobile or doing a home improvement loan and it’s interesting that your rates are so different, depending on…particularly the low end. They’re quite different depending on what the purpose is so clearly, a borrower could look at your website…I don’t know, you can tell me how much this happens, a borrower looks at your website and says huh, I see that auto is the cheapest and I want to do whatever…I have a medical expense, whatever it is and so they take out an auto loan and get the cheapest rate, but in reality they’re using it for something else. What’s your reaction to that kind of thing, does this not happen very much?
Todd: So the consumer is obligated, part of our terms and conditions in the note and security agreement, to use the funds as agreed so if they say they’re going to get a car loan they’re obligated to do so and if they don’t, we have the ability to call the loan or to reprice them. The one thing about sort of super-prime credit is they tend to be a little bit more transparent. I would guess as big as we are, we probably have had customers that have cheated there, we hope it’s fairly small, but it’s something that we certainly don’t want to have happen often. Our underwriters do a fairly good job of vetting our borrowers and making sure that what they say they’re going to do lines up with their lives so we pay very close attention to that.
Peter: Right, yeah. Just a little bit on the underwriting process, are you using 100% manual process, I mean, how does it work?
Todd: It is, so the decisions today, the approval decisions are all made by hand so like I said we’ve got a model where if they don’t have the minimum FICO score on the way in then we’ll just automatically decline them. If they’re above that threshold then it will go to a human and the underwriter is actually going to look at it. Oftentimes they will have a conversation with the borrower, where they will send them an email and ask them to call in and they’ll have a conversation about the transaction and that allows us to do some vetting, really understand sort of that broader financial picture and ultimately make a decision.
We still render decisions very quickly oftentimes inside of an hour, but the real beauty is once a consumer has been approved, they’re done. They are able to essentially self fund so if you get approved you’re going to get an email from us. It says, Peter, congratulations, you are approved, please log into the website, electronically sign your loan documents so you go into the website, you e-sign your note and security agreement. At that point, you would put in your bank’s routing number and your account number and tell us the day that you want the money to go into your account which can be the same day or up to 30 days out.
So let’s just say you applied for a loan this morning because you’re going to go buy a car tonight, you could fund your account this afternoon. We’ll either ACH or wire the money directly into your checking account and now you’ve got the cash to go buy your car this weekend, but if maybe you weren’t going to do it until next weekend you say, put it in my account next Friday so it’s very powerful for the consumer because they can control when they fund and they get 100% of the loan proceeds on the day they select without any discounts or fees.
We don’t charge any fees to our borrowers so if you borrow $50,000 at 1.74% and you want it next Friday, next Friday you’re going to have $50,000 from SunTrust in your checking account at 1.74% interest. At the same time, when you’re in there funding your loan, the consumer will decide when they want to make their monthly payment so they can select any day of the month they like and then we’ll auto debit from their account on the day they select.
Peter: Okay, okay, so that sounds good. So how do you find these borrowers? What’s your main source? Are you getting these from the bank, are getting these 100% online, what do you do?
Todd: So the only way one can apply with LightStream is online, we don’t take applications over the phone, you have to come through the website. It’s most efficient for us, allows us to offer very low rates because we try to minimize our own overhead.
We source business from a number of different places. One is obviously SunTrust so we cross sell to the SunTrust customer base and that’s a big piece of our business, we also have a number of partnerships and affiliates who refer their customers to us so that’s a big chunk of our business, we do a fair bit of SEM so if you’re on Google or Bing and searching for different types of loans, you can find us that way.
We also have started doing direct marketing including mail so leveraging again that same playbook finding those borrowers and making them offers via mail and then there’s a fair bit of repeat and referral business. We do things in social media, and other things that are a little harder to track so that’s kind of the balance for our business.
Peter: Okay, so then are you available to borrowers in all 50 states or do you have…
Todd: We are.
Peter: Okay, that’s cool. So I just want to switch and talk about the funding side. Obviously, you’re not a marketplace, you don’t have investors per se so are these loans held on the LightStream/SunTrust balance sheet, are you securitizing these, what are your funding sources?
Todd: We’re a bank, we’re part of SunTrust so our funding sources are our deposits from the banking side of our business so all the loans are SunTrust loans, we hold everything today. I don’t know if the bank has done a securitization recently, I think we still have an appetite for assets so as far as I know we’re holding everything and we service all the loans that we originate so everything stays in-house.
Peter: Right, right, okay. So who do you see then as your main competitors because I look at this and there’s some crossover with a Lending Club or SoFi or Prosper, but who do you see as your main competitor?
Todd: You know, certainly those marketplace lenders are competitors to some extent. I think the reality is if we want the same customers as one of those guys and we both make an offer. Generally speaking our rate is always going to be lower, we’re not going to charge them a fee and we’ve got a far more efficient, transparent process than they do so I don’t mind them as competition because frankly, I feel like we win head-to-head every time. The difference is that they will go further down the credit spectrum than we will so there’s that advantage that they have and serving what we would refer to as non-prime borrowers.
The other sort of competitors I mean really it depends on the category that we lend in and I think this is where we’re really different than the marketplace lenders. For us, this category isn’t really exclusively about debt consolidation, it’s about trying to serve consumer needs kind of much more broadly. We don’t think about this as sort of just an unsecured generic loan, for us it’s really more about what does the customer want to do?
If they want to buy a car then we’ve got a product for that which is interesting because if you think about how banks have always historically lent, it’s always been collateral specific. If you want to buy a house, you go to your bank and you say I want to buy a house and they say, okay, we’ve got a mortgage; if you say I want to buy a car, they say okay, we’ve got a car loan and then you say, I want to buy a motorcycle and they may or may not have a motorcycle loan it just depends on whether or not they’ve decided to play in that collateral category.
For us, because it’s unsecured we can play in just about every category so we really think about the customer need because if I go to a customer and say, hey Peter, do you want to consolidate your debt and you say, I don’t have any debt…then what else can we help you with? Well I’d like to buy a horse. We can help you with that. So for us it’s really trying to find that consumer need and it’s not limited to debt consolidation so we tend to market around those needs which for many other lenders historically has always been very collateral driven, but for us it’s just about customer need, what do you want to do?
The over arching value proposition is for those consumers that have good to excellent credit, they deserve a loan process like this, they deserve the ability to borrow money without a lot of hassle at very competitive interest rates in a really easy process. The limitation of our business is that we’re not going to approve everybody, we’re pretty comfortable with the credit risk that we take, but that means we don’t approve everybody. But for the ones that we will, we guarantee it’s the best loan experience they’ll ever have. In fact, we’ve got a $100 loan experience guarantee that’s part of the process so if a consumer funds a loan with LightStream and they’re not happy with anything that we do, we’ll pay them $100 to fill out a survey and tell us about it.
Peter: Okay, interesting, very interesting. So you guys are part of a bank, it’s curious to me that there’s not 50 different banks that have a similar offering to what you guys have. I mean, LightStream has been around for a while and are you surprised that other banks have not really decided to do exactly what you’re doing? I’d also like to get your perspective on why you think other banks haven’t done what you’ve done.
Todd: I think it’s hard. You know, I give our operations team and our credit team a lot of credit for what they do because they make something that’s really, really hard look really, really easy and I think that’s the biggest reason. If this were easy and it were simple then to your point every bank would be doing it, but it’s not, and I think for banks too…SunTrust made a really kind of big leap of faith kind of moving into this category, but I think they understood that with the company that they acquired they got a lot of knowledge and insight into consumer lending and it enabled them to buy a piece of technology to bring them very quickly to a leading position in a category where if you were a bank and you’re wanting to do that, it’s really expensive to build out technology. It’s very hard to leverage your existing technology because most banks’ technology, frankly, is probably old and not terribly flexible.
Peter: (laughs) Right.
Todd: And so you’ve got to be willing to either blow up what you have or invest very, very heavily in building something that’s completely different and that’s really hard for a big financial institutions to do.
Peter: Right, makes sense. So then speaking of that, do you find that…how much is SunTrust involved in your business? I mean, are you getting strategic direction from them or are you really like an independent subsidiary that doesn’t have a whole lot of oversight, what’s the relationship like?
Todd: You know, we’re a line of business within the bank so we report up into our Consumer Lending and Private Wealth Group. The bank sort of looks at us like some of its other lines of business so, you know, we have a mortgage line of business, we have our dealer financial services business, we have a HELOC business, we have a credit card business, we have a student loan business. So LightStream is just another line of business within the bank so our partners kind of internally, whether they’re legal or finance or compliance, are all from the same sort of shared functions within the bank. So we’re kind of standalone from a business standpoint, but everything we do is still very much a part of SunTrust.
Todd: So while we’re kind of innovative from a technology and sort of service delivery standpoint, we’re still part of SunTrust, all of our loans are SunTrust and everything is done kind of under the guise of making SunTrust loans.
Peter: Right, yeah, that makes sense. So I got to let you go, but before I do, what does the future look like for you guys? I mean, do you want to be the biggest online consumer lender? I mean right now you said you sort of…with the numbers you shared with me, I pegged you about number five in 2015 at $1.5 billion in loans. I mean Lending Club is, despite their challenges are doing a lot more than that, what are your goals here?
Todd: We’re going to grow, I mean, I would tell you that I’m a pretty competitive guy. I like to look at what the other folks in that category are doing and we’ve set our sights far above where they’re at. So they’ve had a nice head start in some cases and they’ve got an interesting business model, but we feel pretty good about what we’ve got, we feel really good about the value proposition for the consumer and at the end of the day, you know, I think there’s room in the market for lots of those companies to be successful and we think that the niche and the process that we’ve developed will serve us well to grow well beyond where we are today. Ideally to be on the top of that leader board if you will.
Peter: (laughs) Okay, on that note, I’ll have to let you go. I really appreciate your time today, Todd.
Todd: My pleasure, Peter, thank you.
Peter: Thank you.
A company like LightStream has an obvious advantage and that is the cost of capital is so low that no non-bank lender, whether you’re a marketplace or balance sheet lender, could really match that low cost of capital. So they have an advantage on price and that’s clear when you go to the LightStream website. You see that their rates start at less than 2% so I expect them to continue to do very well in this space, but price is obviously an important factor when it comes to consumer lending and it’s not the only factor. LightStream feels like they have an advantage in all kinds of different areas so it will be fascinating to see what plays out over the coming years. We’ve got Goldman Sachs coming in soon and no doubt there will be other banks that will be taking on this space so interesting times indeed.
On that note, I will sign off. I very much appreciate your listening and I’ll catch you next time. Bye.[/expand]
Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.