Marlette Trust - KBR Report PDF

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Structured Finance ABS New Issue Report

Marlette Funding Trust 2018-1 $464,362,000 Asset Backed Notes

Analytical Contacts: Eric Neglia, Senior Director [email protected], (646) 731-2456

Rosemary Kelley, Senior Managing Director [email protected], (646) 731-2337

Jenny Ovalle, Associate Director [email protected], (646) 731-2309

Andrew Silverhardt, Analyst [email protected], (646) 731-2492

January 24, 2018

Table of Contents Executive Summary ........................................................................................................................ 3 Transaction Overview .................................................................................................................. 3 Transaction Summary ................................................................................................................ 12 Key changes From Prior Securitizations ..................................................................................... 12 Performance of Prior Securitizations rated by KBRA .................................................................... 15 KBRA Process .............................................................................................................................. 16 Marlette’s Marketplace Lending Process ........................................................................................... 16 Marketplace Lender Review ........................................................................................................... 17 Originations & Underwriting ........................................................................................................ 18 Cross River Bank .................................................................................................................... 19 Marlette’s Credit Scoring Model ................................................................................................ 19 Verifications .......................................................................................................................... 19 Fraud Detection ..................................................................................................................... 20 Minimum Credit Requirements ................................................................................................. 21 Post Charged-Off Collections ....................................................................................................... 21 Receivables Servicing & Collections ............................................................................................. 22 Regulatory ............................................................................................................................... 22 Historical Performance .................................................................................................................. 23 Collateral Analysis ........................................................................................................................ 26 Marlette Peer Comparison .......................................................................................................... 26 KBRA Loss Expectation ................................................................................................................. 31 Cash Flow Modeling ...................................................................................................................... 31 Scenario/Sensitivity Analysis ......................................................................................................... 32 Transaction Structure ................................................................................................................... 33 Appendix A: Transaction Synopsis .................................................................................................. 39

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Executive Summary This new issue report is based on information regarding the underlying unsecured consumer loans and the terms of the securitization as of the January 24, 2018. The ratings shown are final. This report does not constitute a recommendation to buy, hold, or sell securities. Rated Notes Class Class Class Class Class Total

A B C D

Initial Amount ($)

Interest Rate

$308,914,000 $69,308,000 $45,793,000 $40,347,000

2.61% 3.19% 3.69% 4.85%

Legal Final Maturity Date Mar Mar Mar Mar

15, 15, 15, 15,

2028 2028 2028 2028

Initial Credit Enhancement (%) 38.10% 24.10% 14.85% 6.70%

KBRA Rating AA (sf) A (sf) BBB (sf) BB (sf)

$464,362,000

Transaction Overview Founded in 2013 in Wilmington, DE, Marlette Funding, LLC (“Marlette”, the “Sponsor” or the “Company”) operates an online marketplace lending platform, operating under the Best Egg brand (www.BestEgg.com) (the “Marlette Best Egg Platform” or the “Platform”). Personal installment loans are offered to prime customers through the Platform. The loans on the Platform are originated by Cross River Bank. Typical customers are between 35-68 years old, have an average income of approximately $92,000 and an average FICO score of 710. Loans have a 3 or 5 year term, an original balance between $2,000 - $50,000, a fixed APR between 4.99% - 29.99% and up to 5.99% origination fee based on the borrower’s risk profile and loan term. Borrowers are not charged any prepayment penalties on the loans. Generally, the borrower’s primary purpose for the loans is for debt consolidation. As of November 30, 2017, the Company has approximately $2.45 billion of loans under management. Marlette purchases and retains for its own balance sheet a portion of the loans originated through the Marlette Best Egg Platform. The Platform does not offer Peer-to-Peer funding, but instead partners exclusively with institutional investors for whole loan sales. All whole loan purchasers receive a random allocation of originations. Loan retention from Cross River Bank, loan purchases from Marlette and whole loan purchasers from institutional investors creates an alignment of interest among stakeholders. Over the last year, approximately $300 - $500 million of loans were originated through the Platform per quarter. Since March 2014, over $4.5 billion of loans have been originated though the Platform, and as of November 30, 2017, Marlette has approximately $106 million of loans on its balance sheet. This transaction represents the sixth securitization collateralized by unsecured consumer loans originated under the Marlette Best Egg Platform. The first securitization, Citi Held for Asset Issuance 2016-MF1 (“CHAI 2016-MF1”), was rated by KBRA, closed on March 4, 2016 and was used to securitize loans purchased from the Marlette Best Egg Platform by an indirect wholly owned subsidiary of Citigroup, Inc. Marlette issued its first multi-seller securitization from its Marlette Funding Trust shelf in August 2016. Under the multi-seller securitization program Marlette is the Sponsor and the collateral is contributed from Marlette and whole loan buyers of loans originated under the Marlette Best Egg Platform. All four MFT securitizations were rated by KBRA. This securitization, Marlette Funding Trust 2018-1 (“MFT 2018-1” or the “Issuer”), will again be collateralized by loans originated under the Marlette Best Egg Platform. All of the Loans were originated by Cross River Bank, and except for those retained by Cross River Bank and Cross River Bank JV, sold to Marlette or its affiliate and then sold to third party loan buyers. Loan buyers often sell their loans to facilitate

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the securitization. On the closing date, the depositor will acquire loans from up to nine Loan Sellers (“Loan Sellers”). The Loan Sellers will include i) the Marlette Loan Seller, ii) the CRB JV Loan Seller iii) Cross River Bank, iv) two affiliates of Goldman Sachs, v) the Colchis Loan Sellers and vi) the Fund Loan Sellers. Marlette Funding Trust 2018-1 will issue four classes of notes totaling $393.6 million. The proceeds from the sale of the notes will be used to fund the reserve account and pay a portion of the purchase price for the loans, fees and expenses related to the transaction. The transaction has initial credit enhancement levels of 38.10% for the Class A Notes, 24.10% for the Class B Notes, 14.85% for the Class C Notes and 6.70% for the Class D Notes. Credit enhancement consists of overcollateralization, subordination (in the case of the Class A, Class B and Class C Notes) and a reserve account funded at closing. Transaction Parties Operator / Servicer /Sponsor

Marlette Funding, LLC

Depositor

Marlette Funding Depositor Trust

Marketplace Lending Platform

Best Egg (www.BestEgg.com)

Funding Bank / Originator

Cross River Bank

Issuer

Marlette Funding Trust 2018-1 (“MFT 2018-1”)

Back-Up Servicer

Systems & Services Technologies, Inc. (“SST”)

Indenture Trustee

Wilmington Trust National Association

Loan Data Agent

DV01

Key Credit Considerations Alignment of Interests Marlette’s business model ensures an alignment of interests among the Company, the originating bank and institutional loan buyers. Best Egg is a lending platform that utilizes a hybrid approach to financing the loans originated on the Platform. With the exception of loans made to borrowers in certain states, Marlette places loans originated through the Platform using a random allocation process whereby the vast majority of its loans are sold via whole loan sales to institutional loan buyers, and a material portion is retained by the originating bank and the Company.

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In addition, Marlette expects that its wholly-owned subsidiary will acquire at least 5% of the initial principal balance of each Class of Notes and at least 5% of the par amount of the residual certificates in connection with the U.S. Risk Retention Rules that went into effect on December 24, 2016. Under this rule, additional Notes may be acquired or retained by Marlette, the Loan Sellers or their Affiliates. Loans originated through the Marlette platform are originated by Cross River Bank, a New Jersey chartered commercial bank insured by the FDIC. Cross River Bank (“CRB”) began

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retaining loans in July 2014 and also receives an oversight fee for all loans originated on the Marlette Best Egg Platform to compensate it for its ongoing oversight of the lending program. CRB has retained a material portion of loans originated through the Platform. KBRA views the risk retention by CRB as a credit positive from both an alignment of interest and regulatory/true lender perspective. While a pure marketplace approach is becoming less common as market place lenders (“MPLs”) are now using a hybrid approach to financing, Marlette’s random allocation and loan retention by the originating bank and retention on Marlette’s balance sheet is a credit positive relative to other pure marketplace lenders. Experienced Management Team and Board Oversight Marlette’s senior management, led by CEO Jeffrey Meiler, has significant experience in the US and UK credit card industry at Barclaycard, Citigroup, and Chase Bank. On May 5th, 2016, Marlette announced that Josh Tonderys, former COO and CRO at Prosper Funding joined Marlette as President. Mr. Tonderys joined Prosper Funding at the end of 2012 and played a key role in developing their scorecard and contributed to Prosper’s improved loan performance. On January 9, 2018, Marlette announced that Mark Elbaum, joined the Company as CFO. Most recently Mr. Elbaum was CFO for Merrill Lynch Wealth Management for six and a half years and prior to that held CFO positions at both Bank of America’s Mortgage Division and Countrywide Financials’ Residential Lending Division.

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Members of Marlette’s senior management team have managed loan portfolios through favorable and unfavorable economic credit environments and have worked at both startup and established companies. Management has extensive consumer finance experience in risk management, legal and regulatory compliance, developing comprehensive underwriting processes and credit scoring model s, and marketing. Many of the Platform’s operations, such as verification, customer service, and servicing and collections are outsourced to experienced, third party service providers. Limited Asset Performance Data The Marlette P l at f or m originated its first loan in March 2014 and has limited operating history. KBRA reviewed 36 - 41 months of static pool gross loss data, aggregated into quarterly vintages and segmented by original loan term and Marlette’s internal credit grade. To account for limited asset performance data for 5 year term program, KBRA analyzed publicly available static pool loss data for comparable consumer loan and marketplace lending programs. This proxy data was used to help derive and validate the base case loss assumptions for each of Marlette’s credit grades and original loan terms. Additional stresses were applied to the base case assumption and break-even loss multiples were stressed to KBRA’s loss multiple range for each note rating category.

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Transaction Structure Credit enhancement for the Notes consists of overcollateralization, subordination and a reserve account funded on the closing date. Initial credit enhancement levels are 38.10% for the Class A Notes, 24.10% for the Class B Notes, 14.85% for the Class C notes and 6.70% for the Class D Notes. The reserve account will be funded at closing in an amount equal to approximately 0.50% of the cutoff date collateral balance and will not decline unless draws are made to cover shortfalls.

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January 24, 2018

The transaction includes a 10% clean-up call related trigger and a cumulative gross default trigger, that if breached will cause the transaction to enter full turbo amortization. The credit enhancement levels are sufficient to cover KBRA’s corresponding stressed cash flow assumptions for each class of Notes. Outsourced Service Providers Marlette uses outsourced service providers for customer service, technical issues, loan sales and loan servicing. The customer service and technical assistance function is outsourced to third party service providers with demonstrated capabilities. KBRA believes Marlette has outsourced services to experienced companies that provide similar services to larger, more established finance companies. The outsourced business model allows the Marlette Best Egg Platform to be scalable through both growth periods and contractions. The outsourced business model allows the Company to increase or decrease operations without incurring additional fixed costs, growth problems and negative profitability that may be experienced by other start-up companies that cannot spread the fixed costs across a smaller portfolio. Approximately 93% of loan balances serviced by Marlette that are not delinquent are collected through ACH.

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Experienced Sub-Servicer is also the Back-up Servicer Marlette is the named Servicer and will maintain control and oversight of all servicing, but has outsourced the servicing operation to the Sub-Servicer, SST. Marlette’s current agreement with SST provides for automatic, successive one year renewal terms unless terminated by either party with at least 90 days advance notice. The agreement between Marlette and SST was extended to January 1, 2019. The expiration of the sub-servicing contract prior to the maturity of the securitization provides uncertainty related to the Sub-Servicing arrangements and Marlette may need to enter a new agreement with SST at potentially less favorable terms, enter alternative arrangements with another Sub-Servicer or service the portfolio internally. Marlette remains responsible for the proper performance of the servicing duties as though it had not delegated them to SST. Marlette maintains ongoing communication with SST regarding loan performance or possible servicing improvements. Marlette will receive a 1.10% servicing fee and will pay any compensation due to the Sub-Servicer from its own funds.

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The outsourcing agreement allows Marlette the ability to leverage SST’s experience and systems without having to make large investments in infrastructure and without the pressure to grow originations to achieve economies of scale. KBRA performed a due diligence call with SST in January 2016 and believes SST has sufficient servicing, collections and payment processing capabilities as well as regulatory and compliance oversight to fulfill its responsibilities under the Sub-Servicing Agreement. SST will also serve as Backup Servicer for the transaction. The Backup Servicer has agreed that, notwithstanding any default, that the Backup Servicer shall continue acting as Backup Servicer or enter into a new agreement with substantially similar terms. Having SST act as the Sub-Servicer and Backup Servicer helps address possible servicing transfer risk and allow as seamless a transfer as possible should the need arise.

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Diversified Funding Sources Marlette finances a portion of its loan purchases from CRB through warehouse facilities, and then securitizes those loans through long-term securitizations, similar to traditional finance companies. Marlette also sells a random allocation of whole loans to qualified institutional investors and financial institutions. The group of loan buyers is diversified and consists of large, well established companies. Marlette has $385 million of multi-year warehouse facilities from three large financial institutions. The warehouse facilities will expire in Q3 of 2019, Q4 of 2019 and Q3 of 2020.

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Prime Quality Unsecured Consumer Loans Marlette seeks to provide borrowers access to a transparent loan product that is efficiently delivered. This includes a simple and streamlined borrower application process coupled with robust underwriting and verification processes. The loans were originated by CRB using the Marlette Best Egg Platform . The collateral pool consists of 36 and 60 month, fixed rate, fully amortizing, unsecured consumer loans made to prime and nearprime borrowers with FICO scores in the range of 640-850. There is approximately a 50% - 50% split between 36 and 60 month loans. The loan pool is geographically diverse with the top three states based on current balance (CA, TX & FL) representing 29.92% of the total loan pool for the securitization. In addition, all eligible loans were less than 30 days delinquent as of the pool statistical cut-off date. The loan pool is seasoned 5 months, with a range of 0-38 months seasonings, indicating that the majority of borrowers have made several payments.

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Seasoned Collateral The collateral in MFT 2018-1 is seasoned an average of 5 months, similar seasoning to MFT 2017-3. All else being equal, seasoned loans will generally perform better than unseasoned loans because the borrower has demonstrated an ability and willingness to pay. Seasoned collateral may have an impact on the timing and ultimate levels of losses and prepayments. While KBRA did not provide seasoning credit in its base case ultimate loss assumptions, it did adjust default timing curves.

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Regulatory Environment for Marketplace Lenders The marketplace lending industry is a high-growth, high-profile sector that has attracted the attention of various regulators. Although there have not been any statutory or regulatory requirements imposed specifically on marketplace lenders to date, in 2015, the U.S. Treasury Depa...