The jury’s still out on marketplace lending.
Since 2015, more than $5 billion in consumer loans originated through online marketplace lenders have been bundled into collateral for bonds.Yet it’s unclear whether connecting lenders and borrowers over the internet offers any advantages over more traditional forms of lending, such as inherent credit-quality, servicing or cost-savings, according to panelists speaking at the Structured Finance Industry Group’s annual conference in Las Vegas on Sunday.
Rather, what many see is more or less a mirror of what’s being done in traditional lending channels, according to Tracy Wan, a senior director at Fitch Ratings. Companies such as SoFi, Prosper, Marlette Funding and Avant are underwriting primarily on the basis of third-party FICO credit scores, rather than any proprietary scoring. And they draw consumers using the same direct-marketing techniques as traditional banks.
“We think in many ways, they share more similarities than differences,” Wan said, speaking during a panel rom a conference room at the Aria Resort & Casino in Las Vegas.
Marketplace lending has been a major focus of Fintech investors in the last two years (accounting for $12 billion out of $17 billion invested, according to panelist Mahesh Pakianathan of BNY Mellon). It’s also been a major topic of discussion at previous asset-backed industry events.
This year’s SFIG conference (which is co-hosted by Information Management Network) is no exception. There were two panels that touched on Sunday, one that focused on best marketplace lending disclosure practices and one that looked more broadly at the true meaning of Fintech in the context of structured finance.
And on Monday there will be a roundtable discussion by marketplace lending executives, including principals from Funding Circle, Lending Club, Prosper and Marlette..
But on Sunday, the focus was on the credit performance of securitized loans made by marketplace lenders, which, to date has been lukewarm, according to Fitch’s Wan. In the four Prosper deals that Fitch has rated since 2015, performance has been “slightly weaker” than initial expectations. While Fitch has yet to downgrade and bonds, it has a negative outlook on the subordinate tranche of one of the Prosper deals, CHAI 2015-PM3. Cumulative net losses on the collateral for that transaction are approaching 9%, according to a slide in Wan’s presentation.
Grading bonds backed by marketplace loans is a challenge due to the short history of originating and servicing these assets. There’s no indication of how they sector might perform in an economic downturn. For this reason, Fitch caps its structured finance ratings for the entire sector at single-A, won't consider an investment-grade ratings without "robust" data, "meaningful" origination models and consistent credit scoring models, Wan said.
Matt Wong, chief executive of software firm Liquidaty, added it is difficult to ascertain whether there are sustainable long-term advantages – a “special sauce” – that gives marketplace firms any leg up on banks at the moment, or are developing new data tools and analytics that will be adopted and outsourced by traditional lenders. “I don’t know how it’s going to play out,” said Wong.