Lara Briehl had a desperate client who was itching to accept an offer.
The man was struggling to pay his bills, and an online lender had offered him a personal loan to pay off some 10 credit cards. Accepting, he thought, would help him escape crushing debt. The interest rate offered, however, was about 10 percentage points higher than on his plastic.
“I told him I would not take that deal in a million years,” said Briehl, a Bremerton, Washington-based credit counselor at American Financial Solutions, a nonprofit that helps distressed borrowers repair their finances.
Online personal loans were easy to come by for years, enabling millions of Americans to borrow cheaply to pay down costly credit card debt. In the past year, companies including LendingClub Corp. have been tightening the spigot, following a revolt by investors upset over years of unexpected losses. Easy credit has given way to cautiousness, with financial technology upstarts now seeking households with higher incomes, above-average credit scores and less debt relative to their wages.
“We, together with others, are being increasingly picky about the loans that we are booking,” LendingClub Chief Executive Officer Scott Sanborn told investors last month on the San Francisco-based company’s earnings call. “Across the board, you’re seeing a number of people, LendingClub included, kind of prudently pulling in and tightening a little bit on the credit they’re offering.”
Last quarter, the average personal loan in the U.S. went to a borrower with a 717 credit score, the highest ever recorded, according to preliminary figures from credit-data provider PeerIQ. The typical borrower reported $100,000-plus in annual income, also a record. Fintechs are now so focused on borrowers with pristine credit that only about a quarter of their new unsecured loans this year have gone to households with below-prime credit scores, making the companies more conservative than credit unions, according to TransUnion.
The internet-first financial companies that emerged in the aftermath of last decade’s credit crisis promised to upend the industry by lending to risky borrowers shunned by banks. Instead, online lenders are looking more and more like their old-line rivals. Analysts who follow the companies are split on whether that new-found prudence reflects concerns about where the economy is headed, or an evolution of the lenders’ business models.
No company better exemplifies the trend than LendingClub, the biggest online lender.
Founded in 2006, the company started as a platform for matching borrowers needing credit with individual retail investors willing to provide it. Without branches to operate or thousands of loan officers to pay, marketplace lenders offered the promise of cheaper loans at a time when the biggest U.S. banks were reeling from the financial crisis. Loan growth took off in the wake of the Great Recession, when interest rates hovered close to record lows and banks were choosing their borrowers carefully.
Open Field
“Banks left the playing field open,“ said Nat Hoopes, executive director of the Marketplace Lending Association.
Companies such as LendingClub marketed themselves as better than banks at judging risk, claiming to use all sorts of data that enabled them to give borrowers the lowest rates possible. One investor in marketplace loans, Theorem Partners LLC, claims that bus drivers are 25% less likely to default than administrative assistants (greater job security), while wedding loans are 10% more likely to be repaid than business loans (marriage means financial stability).
Banks generally lend to borrowers with super-prime and prime-plus credit scores. That created an opportunity for new entrants to make money lending to households with prime and near-prime credit scores, said John Wirth, vice president of fintech strategy at TransUnion. These borrowers “were the sweet spot of the market,” he said. LendingClub’s borrowers were often in areas under-served by traditional banks, according to research by the Federal Reserve Bank of Philadelphia.
Until 2018, more than 60% of fintech personal loans went to borrowers whose credit scores were prime and below, TransUnion data show. Some 53% of LendingClub’s borrowers between 2008 and 2015 were rated internally as C, D, and E on an A-through-G scale, according to the Treasury Department. A-rated borrowers enjoyed interest rates as low as 5.99%, while E-rated borrowers paid as much as 28.26%.
Underperforming Lenders
Loss rates on loans fintechs sold to investors ended up much higher than forecast “almost across the board,” said John Bella, who oversees coverage of U.S. asset-backed securities at Fitch Ratings. “Even in a relatively benign economic environment, these issuers are underperforming their own models and expectations.”
Jackson Walker, a 32-year-old San Francisco tech worker, said he started funding LendingClub loans in 2014, drawn in by promises of annual returns as high as 20%. Walker concentrated on funding lower-rated loans, thinking they’d generate the highest profit. He ended up with 4% annual returns before yanking his money and vowing to never again do business with LendingClub.
“It turns out banks are pretty good at lending,” Walker said.
It’s not just investors in loans who are hurting. LendingClub, which went public in 2014 at a market valuation higher than all but 13 U.S. banks -- $8.46 billion -- has since lost almost 90% of its value.
“I’ve been in hundreds and hundreds of meetings, and equity investors are screaming at businesses to take risk off the table,” said John Hecht, a Jefferies analyst who follows consumer lenders. For the publicly traded fintechs, such as LendingClub, “if you look at their stock price, they had no choice but to tighten.”
Fintechs have raised prices on loans to customers with less-than-stellar credit and shut some out completely. On an earnings call in February, CEO Sanborn said LendingClub has cut loan approvals by 17% and raised borrowing costs by almost 1 percentage point.
“We’re being selective about who we’re bringing in,” he told investors a few months earlier, at an industry conference.
The company has since become even more restrictive. It’s stopped lending to borrowers who would’ve received its three lowest internal grades, and more loans are going to top-rated borrowers, company data show. Anuj Nayar, a LendingClub spokesman, said the company’s shift toward less-risky borrowers reflects investor demand.
LendingClub isn’t alone: Competitor Prosper Marketplace Inc. told investors this month that its borrowers in 2019 have the highest credit scores and income, and lowest debt-to-income ratios, in at least six years.
“We have tightened massively,” said Ashish Gupta, Prosper’s chief credit officer. Climbing delinquency rates on Americans’ credit cards -- the lender uses the metric to assess whether households are able to pay their bills -- are part of the reason why Prosper’s loan approval rate has fallen “dramatically,” he said.
For subprime customers, fintechs’ pullback mirrors what they’ve experienced generally when borrowing money in the past several years, according to the Financial Stability Oversight Council, made up of U.S. banking and market regulators. The group said in a report this month that total loan balances for borrowers with subprime scores remain well below pre-crisis levels, which it attributed partly to “somewhat tight” credit availability for higher-risk borrowers.
Briehl said she’s seen this play out in her neighborhood, in the Seattle suburbs. Until recently, subprime borrowers were able to get loans with favorable terms. Now, she said, it’s rare for them to get better rates than they’re already paying on their credit cards.
