Marketplace lenders started 2015 as darlings of securitization, but their white hot growth started to attract calls for more regulations as the year unfolded.
New issuers, such as CommonBond and Circleback, entered the field; student-loan lender SoFi kept up its asset-backed program launched in late 2013; and a receptive audience pounced on some deals, such as a $345-million bond backed by Prosper-sourced loans that was five-times oversubscribed.
The industry’s heady growth, both past and projected, pointed to growing funding needs.
But regulatory scrutiny and legal challenges since the summer have damped enthusiasm. Treasury launched an inquiry into the marketplace lending industry on July 16 and a chill came over parts of the industry when a court ruling called into question the legality of marketplace lenders charging interest rates that exceed usury laws in some states.
In late August, Bloomberg reported that Wall Street banks were scaling back their funding of the sector, at least those focusing on higher risk borrowers.
Still, deals are getting done. We’ve seen more than $3 billion in MPL securitizations since late 2013.
To be sure, marketplace lending is a hodgepodge of players, focusing on vastly different market segments. And while some, like Prosper or Lending Club, are “purchasing platforms,” brokering loans originated by a 3rd party bank; others, like SoFi, lend directly. So while they don’t all face the same regulations, they’re generally more lightly regulated than banks, without, for instance, the same capital requirements.
That doesn’t sit well with everyone.
Todd Baker, a managing principal at Broadmoor Consulting, penned an op-ed published in American Banker in August arguing that marketplace lenders posed a systemic risk under the regulatory status quo. He pointed to their brisk growth, which will earn them an 8% share of total consumer unsecured lending and 16% of small business lending by 2020, according to JPMorgan.
Baker also enumerated the way MPLs differ from traditional banks: many are matchmakers and don’t keep any credit risk on their loans; likewise, they don’t issue loans themselves, relying on a bank to do that; and they don’t have much in the way of assets or capital.
With revenue drawn from transaction fees instead of repayments on loans it doesn’t own anyway, an MPL, in Baker’s eyes, “can operate at levels of financial leverage unheard of in the banking industry.”
The editorial was widely read. It also touched a nerve. A day after it was published, Mike Cagney, the CEO of SoFi, offered a rebuttal. Using Lending Club as an example he said the platform “originates loans and offsets them with notes tied to the loans. While these are on-balance sheet, the firm has immaterial credit risk.” The leverage of the platform’s balance sheet, he said, isn’t even at a one-to-one against the loans to which it has credit exposure, in contrast to Wells Fargo’s 9.1x balance-sheet leverage or JPMorgans 10.2x. “It’s clear,” he added, “where there is greater financial risk.”
For Cagney, the regulations under which MPLs operate — and they are, as both authors point out, a diverse lot — are adequate.
Many in the financial industry agree, including the Structured Finance Industry Group, which responded to Treasury’s inquiry with a letter asserting that more regulation of MPLs was unnecessary.
But Baker believes regulators now overseeing MPLs are too narrowly focused when the issue should be “ensuring that the MPLs’ inherently fragile business model doesn’t threaten the continuing flow of credit to the economy during good times and bad.”