Last year, marketplace lenders learned that maintaining diverse sources of funding is just as important as managing the credit risk in their loans.
LendingClub, Marlette Funding and others developed their own securitization platforms, rather than relying on whole-loan sales to large investors. They also invited some of these investors to contribute seasoned loans to collateral pools for these in-house deals.
Mindful of how much this broadened their investor bases, both lenders are looking at additional changes to both their securitization and whole-loan sale programs.
“The ability to manage credit, manage liquidity risk [for investors] and scale distinguished the winners from the losers” last year, Sid Jajodia, chief investment officer at LendingClub, said Wednesday at the Structured Finance Industry Group's annual conference in Las Vegas.
Jajodia said that bringing securitization of LendingClub loans in-house, as opposed to leaving investors who wanted to resell whole loans to their own devices, was a critical step in attracting a new set of investors to the platform. “A number of investors had been looking at the space, but they needed us to hold risk retention for them to get comfortable," he said.
Jajodia said other new structures will also drive acceptance by investors, including banks. In December, LendingClub completed its first whole-loan transaction structured as a tradeable, pass-through security, and other marketplace lenders are looking at similar transactions.
While some banks invest in marketplace loans, banks also compete with online lenders for borrowers.
At some point, Jajodia said, it might make sense to structure securitizations with revolving periods during which additional collateral can be contributed to the trust. This is a feature common to some other asset classes, notably auto loan ABS.
Marlette is also making changes to its whole-loan program, according to Karan Mehta, the company’s head of capital markets, Mehta, who was speaking at the same panel, said Marlette has started to aggregate loans and deliver them to these investors periodically, rather than one at a time, “It takes away a lot of the noise in the form of one-sy and two-sy loans, which may be canceled, and opens [the product] to investors who may not have the operational capabilities” to take loans one at time, he said.
Another innovation Marlette is contemplating is breaking its whole loans into interest-only strips, similar to the mortgage market. “We do hear from investors that uncertainty around prepayment speeds is high on their minds,” he said.
Ashish Dole, head of research at PeerIQ and another panelist, said there is also talk about introducing exchange-traded products that invest in marketplace loans in order to make them accessible to retail investors.
Marketplace lenders are also looking at new ways to comply with risk retention. Mehta said that Marlette initially opted to comply with a requirement to keep skin in the game of deals by holding a portion of each tranche of securities issued. The company has set up majority- owned affiliates for all of its transactions, and is in the process of moving assets between these entities.
Marlette is eyeing other techniques for risk retention compliance being developed by collateralized loan obligations managers. "There's a lot that could happen," Mehta said. "Risk retention is a pretty big chunk of our balance sheet."