CircleBack Lending has entered into an agreement with Jefferies Group to finance, and eventually securitize, up to $500 million of unsecured consumer loans.
The arrangement could vault CircleBack, which has only originated some $4 million of loans to date for purposes such as debt consolidation, home improvement and small businesses, into the big leagues of peer-to-peer finance.
“These transactions through Jefferies will allow us to provide our loans to a much wider segment of the U.S. population, which remains in need of responsible alternatives to traditional bank loans and credit cards,” CircleBack co-founder and Chief Executive Michael Solomon said in a press release.
The broader P2P industry has evolved rapidly from its beginnings in 2005-2006; billions of dollars of loans are now being originated and purchased by institutional investors each year across multiple lending platforms. Securitization is seen as key to further growth. To date, there have only been a handful of deals. The first, backed by unsecured consumer loans originated through LendingClub Corp., was completed in 2013 by Eaglewood Capital Management. It was unrated.
Social Finance, which specializes in student loans, has completed two deals this year; the second was rated by DBRS and Standard & Poor’s.
Jefferies aims to securitize the loans that it acquires from CircleBack and to obtain credit ratings for the deals, allowing them to be more easily marketed to a wide array of fixed income investors, including insurance companies, asset managers, endowments, and even the banks that marketplace lending platforms are competing with for borrowers.
In a telephone interview from the ABS East conference in Miami, Solomon said that CircleBack is also in talks with other institutions interested in buying and securitizing large portfolios of its consumer loans. The lender is targeting over $500 million in originations over the next 12 months. “If you look at the growth of the two market leaders [Lending Club and Prosper] over the last 18 months, it’s not too far-fetched to imagine our bigger goals will be met,” he said, but conceded, “I’d be happy if we did 50%” of that.
While the arrangement with Jefferies kicks off Oct. 1, Solomon said that CircleBack has been scaling up its operation over the past two years. “We’ve built out the necessary infrastructure, partnered with vendors and attracted the talent to make this happen in a responsible manner,” he said.
CircleBack’s fixed-rate installment loans that range in size from $3,000 to $35,000, and are only made to consumers at the higher end of the credit risk spectrum. A borrower needs a FICO score of at least 660 to qualify, and must also pass a thorough interview and verification process conducted by a CircleBack loan analyst.
“We are taking a rigorous approach to credit underwriting and want to make sure we know our customers before issuing any loans,” Solomon said in the press release.
In the telephone interview, he said the plan is to stick to this kind segment of the market, even as it expands. “Clearly there is a lot of room just for prime and super prime space. If that market got exhausted, we’d rather move into a different asset class than allow a deterioration in the quality of loans.”
If CircleBack signs on additional institutional investors, it will evenly distribute whole loans of all credit grades to all, rather than allow investors to “cherry pick” loans, the executive said.