Rated bonds backed by online marketplace loans might include consumer subprime for the first time next year.
This is one of predictions that analysts at Moody’s Investors Service made in a recent report on the sector.
More broadly, they see greater variety in collateral types and deal quality in 2016 as compared to 2015.
That’s partly because the firms that have been purchasing these loans and securitizing them will source them from a more diverse set of lending platforms. But the platforms themselves have been diversifying their offerings as well, as the analysts pointed out.
Originally focused only on generic consumer loans, Lending Club has introduced loans to small businesses as well as loans meant to finance an elective medical procedure. Meanwhile, SoFi, which started as student loan lender, has branched out into consumer loans and mortgages.
So far the market’s seen bonds backed by student loans, personal consumer loans, and small business loans.
Marketplace online lending now consists of about 100 companies. From its roots in the peer-to-peer economy—individual investors funding loans for consumers—the sector has transitioned to one dominated by large players—financial institutions, professional money managers and institutional investors.
The analysts, however, couldn’t fail to mention the regulatory challenges facing the industry, particularly those that are purchasing platforms, basically brokering loans originated by a third party bank. This category includes giants Lending Club and Prosper, both of which have seen their outstanding loan volume explode over the last few years.
“Questions remain about the viability of the origination model that many marketplace lenders currently use, in which a partner bank originates the loans, then promptly sells them to the marketplace lender,” the analysts said.
One of practices that may lead to more regulation down the road is the origination of loans that don’t observe usury laws in certain states. What the purchasing platforms do is take advantage of federal “rate exportation” laws, offering loans that breach the maximum rate at the state level.
A court decision this year, Midland vs. Madden, has called into question the legality of that practice. Last May, a court ruled that Midland, a unit of Encore Capital Group, could not charge the same interest rate as a bank, on bad credit card debt that it acquired. Basically, the court determined that the debt collector was not entitled to the usury law carve out enjoyed by banks. Many observers believe that this decision could apply to marketplace lenders as well.
Defendants in the case have petitioned the Supreme Court to review the ruling.
In addition, Treasury put out on inquiry on the industry in July, receiving nearly 100 responses, including a letter from the Structured Finance Industry Group. Its message? “No additional regulation is necessary.”
Not all marketplace lenders are feeling the regulatory heat in the same way. The ones that lend directly, like SoFi, already follow regulations that the purchasing platforms would rather avoid.
All the same, there are calls for tougher regulations in the industry as a whole.