Marketplace lenders such as LendingClub and Prosper have made strides in improving underwriting standards in the past year.
But it’s not enough to satisfy Fitch Ratings that new collateral pools from those firms and other online lenders will ultimately perform as well as their older asset-backed deals of unsecured consumer loans, the ratings agency warned.
In a report issued Thursday, Fitch said investors should still be wary of assuming new-issue MPL securitizations are a step up in quality over previous ABS deals, even though firms such as LendingClub and Prosper have taken steps to tighten lending standards as well as pool greater concentrations of borrowers with higher credit scores into their recent ABS deals.
LendingClub (NYSE:LC), for instance, boosted the weighted average FICO of its most recent prime/near-prime consumer-loan securitizations in December to 703, compared with 692 in its first asset-backed transaction of 2017.
“While early-stage data, such as delinquency levels, does indicate performance is stabilizing, the incremental improvements have not been commensurate with the large magnitude of the credit cuts,” the report said.
Fitch’s report says the fact that MPL firms tightened standards to overcome rising 2015-16 delinquency levels — during a time of “historically” low unemployment in a “solid” economy —highlights the risk of buying into an asset class with limited historical ABS deal data (under three years for most marketplace lenders).
“If lenders are struggling to catch up with today's deteriorating performance,” the report said, "investors would be exposed to increased loan losses when moderate economic stresses eventually return.”
(The report made no mention of any ABS impact that could derive from an April lawsuit by the Federal Trade Commission alleging deceptive lending practices against LendingClub.)
That, along with a lack of historical data in a fledgling asset class, may explain why MPL securitizations still achieve no better than single-A ratings from agencies, despite improved underwriting and even lower projected loss levels for recently issued 2018 deals.
LendingClub’s most recent self-sponsored transaction, Consumer Loan Underlying Bond (CLUB) Credit Trust 2018-NP1, had its base-case loss range tightened to 13.25%-15.25% by Kroll Bond Rating Agency, compared with 14%-16% in its CLUB 2017-P2 transaction. (In December, LendingClub pooled a collection of subprime loans with credit scores below 660, with a base-case loss range of 19.65%-21.65%.)
Kroll estimated a base-case loss range of only 12.4%-14.4% for Prosper Marketplace Issuance Trust Series 2018-1, tightened from 14.28%-16.28% from its previous deal.
Kroll last week also upgraded the ratings for two of Prosper’s outstanding 2017 securitizations, based upon 15%-15.75% loss trajectories in line with Kroll’s initial projections. Kroll cited the firm’s increased origination volume and improved underwriting for the drop in first-quarter net losses to $11.4 million, from $23.9 million in the first quarter of 2017.
But Fitch cited poorly performing 2017-vintage loans in its decision in April to raise the gross lifetime default assumption on Prosper’s 2017-1 deal to 18% from the original 16.04% when the deal closed in April. In October, Fitch said the 2017 loans were performing no better than the “weaker” historical vintages of 2015 and early 2016, despite underwriting improvements.