p2p lending

Will Marketplace Lending Revert Back to Peer-to-Peer Lending?

Institutional investors wanted higher yields on Prosper’s latest bond offering, an entire five percentage points higher, according to the WSJ. This wasn’t necessarily brought on by performance either. Instead the once voracious appetite for all things online lending is being tempered by uncertainty.

Bain Capital Ventures partner Matt Harris told the WSJ that online lenders will need to replace the easy hedge fund money by “longer-term capital.” Normally, that would include traditional bank lines and credit facilities, but moving that direction could irreversibly sever the ties with their peer-to-peer roots and image.

Peer-to-peer (p2p) lenders embraced Wall Street’s easy money to scale, rationalizing to the peers on which they were founded that this was all necessary to change the status quo. The road to the sharing economy utopia required hobnobbing with the very institutions they were set on disrupting, they said. The P2p term wasn’t compatible with this narrative so it was replaced with “marketplace lending,” which helped it retain its Silicon Valley feel and gave it the range to argue that hedge funds and peers were virtually the same thing since they were both buyers in a new-age marketplace.

But early this year, something started to happen. Loan originators like SoFi (which was never peer-to-peer) could not sell loans fast enough. One solution they came up with was to launch their own hedge fund to buy their own loans. SoFi CEO Mike Cagney said, “In normal environments, we wouldn’t have brought a deal into the market, but we have to lend. This is the problem with our space.”

But blaming financial institutions for pulling back credit is a scenario that has played out thousands of times in history. One only need watch The Big Short to connect why it’s dangerous for a lender to depend on the institutional credit markets. That’s where the peer-to-peer model was supposed to come in, a new way for a new day without Wall Street to prevent these problems.

But it’s not too late to go back. Lending Club for example, has capped their wholesale channel (the institutional portion) at 50%. They’ve kept more than 100,000 retail investors and intend to grow that even larger. “We’ve always been more exposed to retail, and I think we want to keep it that way,” said Lending Club CEO Renaud Laplanche to the Financial Times. “We’ll probably see that as a competitive advantage, as a source of stability and predictability, particularly in an economic downturn,” he added.

Prosper meanwhile has depended almost entirely on the institutional channel, an astounding 92% of their loans were sold to that category of investors. It’s a far cry from the slogan that appeared on their website back in 2007. “People-to-people lending. It’s an old idea that’s new again,” it said. Today it says, “We connect people looking to borrow money with investors.” Those investors are predominantly Wall Street.

But what to do when Wall Street will one day no longer be interested? It’s not too late to go back in time.

“Borrow money from people just like you,” said Prosper’s website nine years ago. People just like you might not suddenly decide they want five percentage points more. Peer-to-Peer implied a human aspect to the marketplace, that empathy played a role in a world where Wall Street had always been stone cold.

Will the industry revert back to the people? Or will ideas such as starting your own hedge fund to buy your own loans rule the day?

Lending Club Loan Size Cap Raised to $40,000 (Should Investors Be Worried?)

Consumers can now borrow up to $40,000, an increase from the previous cap of $35,000.

The new maximum should raise eyebrows. That’s because while one of Lending Club’s biggest allures is the ability to refinance credit cards into a lower rate over a fixed term, there are zero safeguards in place to ensure that the borrower actually uses the proceeds to do just that. Instead, the applicant simply checks a box and if approved, gets the loan minus the origination fee wired to their bank account. That means today’s consumer can obtain 40 grand in one lump sum online. Unsecured. In their bank account. For whatever purpose. From a lending marketplace that puts none of their own money in the loans.

No Recessionary Data for Loans Over $25,000

The numbers look okay, for now. Using NSR’s backtesting tool revealed that loans of exactly $35,000 have generated higher returns for investors than loans of smaller sizes, but have a higher loss rate. This is because the interest rate increases with loan size. The all time loss rate on $35,000 loans is 6.60%, according to the tool, but Lending Club didn’t start making loans this big until February 2011, after the recession had already ended.

That in itself should be alarming because when we examine the time period of June 2007 through June 2010, when the Great Recession occurred, loss rates hit the largest loans the hardest. At that time, the maximum loan size was $25,000 and the loss rate on those was 11.54%.

With the maximum size having increased to $35,000 and now to $40,000, there is no recessionary data to indicate how these large loans will perform.

The Temptations of a Cash Windfall?

Credit cards can moderate spending habits because there is a limit on the type of goods and services one can acquire with them. With cash, consumers may be tempted to indulge themselves in other things. One has to wonder if the average consumer really needs 40 grand wired to their account on an unsecured basis with no strings attached on what to do with it.

Lending Club might have considered this already though. In December, they announced Direct Pay, a pilot program in which Lending Club actually requires borrowers to use up to 80% of the proceeds to pay off their outstanding debt. There’s one caveat, it’s only open to a category of the most risky borrowers, those with Debt-to-Income (DTI) ratios of up to 50%. Lending Club’s traditional DTI cap is 30%.

That means that investors have to rely on the ability of borrowers to do the right thing with 40 grand in unsecured cash. Should they trust them?

Real Estate Lender Patch of Land Sells $250 Million in Loans

Real estate lending platform Patch of Land announced that it signed a $250 million agreement with an east coast based credit fund to purchase its loans in a forward flow arrangement.

The reluctance to name the city or state of the fund suggests that in doing so would too easily reveal who it is.

Patch, an LA-based lender which uses a data-driven underwriting model, promises investors a risk adjusted return with extensive available data to support the underlying credit decision on each loan.

The company founded in 2013 had raised a million in seed funding and $125,000 in debt in 2014, followed by $23 million in Series A funding last year. And it has funded more than 200 projects, with an average blended rate of return to investors of 12 percent

This is continued evidence of institutional interest in loans generated by marketplace lenders. JP Morgan Chase bought loans worth a billion dollars from Santander Consumer USA Holdings Inc earlier this month. The bank also partnered with OnDeck in December of last year to facilitate the underwriting of the bank’s small dollar small business loan program.

In an interview with Bloomberg, Funding Circle’s CEO Sam Hodges said that it’s the first of many such partnerships to come where big banks will realize the potential of fast-growing fintech startups.