Unfavorable court decisions, heightened regulatory attention and a thumb’s down from a famed “The Big Short” personality are making no dent in the enthusiasm for marketplace lending (MPL) securitization.
At an MPL panel discussion that helped kicked off the first day of the 2016 ABS East industry confab in Miami, on-stage speakers and audience poll participants shared a consensus view that the near-term securitization volume of online lending platform originations for consumer, business, student-loan and other asset classes will surge to $10 billion and beyond.
“I think the market is going to double in 2017,” predicted James Alexander, the head of research for asset management fund Direct Lending Investments, Inc.
Alexander was referring to securitization volumes of $3.2 billion through the first half of 2016 (according to PeerIQ).
A large subset of fellow asset managers, lawyers and other asset-back professionals from the audience agreed with him in live online polling by ABS East host Information Management Network: the preliminary results showed 37% projected the market could reach $8-$10 billion in deal volume by 2017, and 21% see between $5 billion-$8 billion, a figure that could still eclipse the 2016 annualized rate.
Those views are supported by recent trends in MPL securitizations, in which average deal size has grown substantially to $267 million and tranche ratings improve. Student loan refinance issuer Social Finance, for instance, attained the first-ever triple-A rating for an MPL in May with its $380 million SoFi Professional Loan Program 2016-B transaction.
But another 21% of the audience opted for selecting a slowdown, choosing a range between $2-5 billion. The more pessimistic view could be a result of the expected decline in originations (which were $23 billion in 2015), as well as legal and regulatory headwinds facing the industry’s growth and reputation.
No one at the panel raise the specter of Lending Club chief executive Renaud Laplanche, who was fired earlier this year for falsifying loan asset details to an investor (reportedly Jefferies, according to the Wall Street Journal), as well as hiding his stakes in an external fund he was recommending to his company’s board as an investment opportunity.
But there was plenty of talk about the Consumer Financial Protection Bureau and the Federal Trade Commission settling in for a deep investigatory drive into the industry – with the CFPB launching plans to bring online platforms under its supervisory umbrella by next year.
No “fewer than seven regulators” are looking into marketplace lending, said Alexander, who chose to view that as an indicator of the space’s success – but also a restraint harness keeping players from fulfilling a lending mission that regulated banks are failing to deliver to consumers and small businesses.
“Let’s take a minute to look at the innovation going on here. These lenders wouldn’t exist and they wouldn’t be thriving if there wasn’t a need,” he said. “If there weren’t seven regulatory bodies here, a lot of this change would have already happened and it would have happened faster.”
Besides the regulators, courts are also running interference. A recent case of a California-based lender may have put on notice multi-state lenders who use Native American tribal connections to evade local usury laws. Last month a federal court decision sided with the CFPB on a decision that nullified online lender CashCall’s self-proclaimed exemption from usury laws in 16 states, through its use of a partnering issuer based at a Sioux reservation in South Dakota.
CashCall was designated as the “true lender” by the court, which ruled CashCall’s high-interest loans illegal (and uncollectable) in those states. The court also held the CashCall CEO personally liable, said panelist Matthew Hays, a partner at Kirkland & Ellis.
The impact of the court’s decision for marketplace lending’s legal standing will probably be an extended affair (with at least four other ongoing cases cited by the panel). But one well-known critic’s slam of the industry hype Sunday at the Fontainebleau Miami Beach hotel was more immediate.
Steven Eisman, a central figure in the 2010 Michael Lewis best seller and 2015 Oscar-winning movie (best adapted screenplay) that retold how subprime housing market naysayers recognized (and profited from) the eventual calamity, delivered an end-of-day keynote address that concluded with a takedown of MPL as an up-and-coming ABS asset product.
Eisman took his cue from an audience member’s question on the fast-growing (but albeit very small) ABS market segment.
“Steve, I was interested in your views on fintech, particularly marketplace lending and the benefits...”
“Or lack of benefits,” interrupted Eisman, with the same abrupt and unfiltered mannerisms audience members saw in actor Steve Carrell's portrayal of Eisman in the movie trailer that preceded his speech.
“How do I put this kindly,” said the former Oppenheimer all-star asset manager who is now managing director at Neuberger Berman. “I’m not a big believer in the whole marketplace lending.”
The issue, he argued, is whether the credit quality of the underlying assets will be adequate enough to navigate the demands of the usual ABS investor population of insurance companies, banks, hedge funds, asset managers, etc..
“If you’re going to originate it and sell, the problem is, who are they going to sell it to? They’re going to sell it to people like you, and if there’s one thing we know about people like you, you’re fickle,” he told the packed room of ABS professionals (nearly 4,000 attendees had registered for the conference).
Eisman said he didn’t mean it as criticism, but as a reality of what happens when these clients buying collateralized investment products see the “first sign” of credit issues in a portfolio: its “see ya, call us when it’s good again,” he said.
“Not that it can’t be a business; it’s never going to be a big business,” said Eisman. “This is where Silicon Valley I think is clueless.”
