Unlike the predictability (or recent unpredictability) of credit cards, marketplace lending has issues of its own. And, today we read that LendingClub is exiting the business, as P2P Finance reports.
- In light of recent news that LendingClub is closing its platform, investors can be assured that Prosper remains committed to growing its retail notes offering.
- Small business loans will be referred to Funding Circle
One of the reasons for the shift has to do with marketplace lending itself. From where I sit, part of the problem comes from optimistic credit standards, booking accounts that are not often bank-grade investments. The U.S. Department of Treasury summarized marketplace lending risks in this document written four years before the COVID crisis, and here we are with a recession on our hands.
- Use of Data and Modeling Techniques for Underwriting is an Innovation and a Risk: RFI commenters agreed the use of data for credit underwriting is a core element of online marketplace lending, and one of the sources of innovation that holds the most promise and risk. While data-driven algorithms may expedite credit assessments and reduce costs, they also carry the risk of disparate impact in credit outcomes and the potential for fair lending violations. Importantly, applicants do not have the opportunity to check and correct data potentially being used in underwriting decisions.
- There is Opportunity to Expand Access to Credit: RFI responses suggested that online marketplace lending is expanding access to credit in some segments by providing loans to certain borrowers who might not otherwise have received capital. Although the majority of consumer loans are being originated for debt consolidation purposes, small business loans are being originated to business owners for general working capital and expansion needs. Distribution partnerships between online marketplace lenders and traditional lenders may present an opportunity to leverage technology to expand access to credit further into underserved markets.
- New Credit Models and Operations Remain Untested: New business models and underwriting tools have been developed in a period of very low interest rates, declining unemployment, and strong overall credit conditions. However, this industry remains untested through a complete credit cycle. Higher charge off and delinquency rates for recent vintage consumer loans may augur increased concern if and when credit conditions deteriorate.
- Small Business Borrowers Will Likely Require Enhanced Safeguards: RFI commenters drew attention to uneven protections and regulations currently in place for small business borrowers. RFI commenters across the stakeholder spectrum argued small business borrowers should receive enhanced protections.
- Greater Transparency Can Benefit Borrowers and Investors: RFI responses strongly supported and agreed on the need for greater transparency for all market participants. Suggested areas for greater transparency include pricing terms for borrowers and standardized loan-level data for investors.
- Secondary Market for Loans is Undeveloped: Although loan originations are growing at high rates, the secondary market for whole loans originated by online marketplace lenders is limited. RFI commenters agreed that active growth of a securitization market will require transparency and significant repeat issuances.
- Regulatory Clarity Can Benefit the Market: RFI commenters had diverse views of the role government could play in the market. However, a large number argued that regulators could provide additional clarity around the roles and requirements for the various participants.
Financial Times covered the topic of credit risk on marketplace loans and showed sky-high risk before the recession. Most charge-offs trend above 10%.
A recession can really tilt the market, and with capital markets worried, funding can quickly dry up. There are two big questions here. When will the economy stabilize, and will fintech lenders, who optimistically put their clients money into the market, survive the long term?
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
