NEW YORK ( Breakingviews) – Everything old is new again in finance. Navient, which services debt, is buying startup student-loan refinancer Earnest for less than half its 2015 valuation. Even then, it’ll eat into the new owner’s earnings and share buybacks. Worse, Navient faces a fresh lawsuit over dodgy practices.
The Pennsylvania attorney general’s office filed charges on Thursday that follow ones from the U.S. Consumer Financial Protection Bureau in January with Illinois and Washington. All allege that Navient in some way or other cheated borrowers paying for college, which the company denies.
Regardless of how the cases turn out, the $3.5 billion company spun out of giant lender Sallie Mae in 2014 makes a strange bedfellow for Earnest. Like other startups in the sector, its founder Louis Beryl aimed to take advantage of not just the technological and marketing shortcomings of older financial institutions but also the post-crisis reputational damage they suffered.
Instead, it’s like déjà vu all over again. Two of the bigger breakout fintech firms have been embroiled in scandals. A mis-selling fiasco cost Lending Club its founder and boss Renaud Laplanche last year, evoking the mortgage misdeeds of earlier this century. And over the summer SoFi parted ways with its top executive, Mike Cagney, after he was accused of the same sorts of sexual harassment allegations that have plagued Wall Street for decades.
What’s more, the business model for many of these entrepreneurial ventures has been challenged by interest-rate concerns and rising defaults. Some, like Avant, Prosper and Vouch had to close or significantly scale back operations.
Earnest was one of the few that powered through, thanks in part to its focus on borrowers with decent credit ratings and salaries. It had long-term funding from New York Life and got ever better rates on its asset-backed deals. Even so, Earnest’s $155 million price tag suggests most in the industry have downgraded their expectations about profitable growth.
The reaction of Navient shareholders is informative. A couple of years ago, buying a well-run fintech lender probably would have sent the stock soaring, perhaps even drowning out news of a regulatory probe. Instead, Navient shares tumbled 12 percent, erasing market value more than three times the value of the acquisition. Modern finance is starting to feel a lot like the kind it’s supposed to replace.