Prosper Marketplace, the first peer-to-peer lender in the U.S., is planning to charge an extra fee to investors who want to bundle its loans into bonds in order to offset its increased costs from the securitization process.
"When we are doing this stuff, we're kind of in the vanguard because no one has done this before," Prosper Chief Executive Officer Aaron Vermut said in an interview. "Where we have more work, we do charge for our services. We're also not in the business of taking extra risk for nothing."
The peer-to-peer loan market is taking off as underwriters increasingly seek to use new platforms and online technology to directly connect borrowers with lenders. In recent years, the nascent industry has attracted interest from big institutional investors that have sought higher yields by buying the loans.
Securitizing such debt enables big investors to boost their returns or tap new sources of demand from large buyers such as pension funds and insurers. At least 10 securitizations of marketplace-arranged credit have been sold so far, according to Autonomous Research and data compiled by Bloomberg. Bond buyers, bankers and ratings firms, however, are still trying to figure out how to adapt the securitization process to the new asset class.
Vermut said that the extra costs San Francisco-based Prosper incurs from securitizing loans includes time spent with rating companies, who must consider the quality of the underlying loans in the bonds, and increased legal risk stemming from protections — known as representations and warranties — that lenders must provide to investors.
He declined to specify how much the extra charge might be, but he said the company probably would charge a percentage fee based on the amount of loans being securitized.
"It's very unlikely that this would have a significant impact to our bottom line," Vermut said. "We are charging a basis point fee in exchange for doing a lot of work."