Marketplace Lending: 2019 60-Second Review and Insights

ABS Issuances, by the Numbers

Ten securitizations totaling $3.6 billion closed in Q1 2019, down 14% versus a year ago. PeerIQ attributed this decrease to “market volatility,” but noted this still represents the fourth-highest issuance in any quarter. Average deal size decreased to $366 million in Q1 2019, down from $0.6 billion the previous year. SoFi led the way with three deals totaling $1.5 billion in the first quarter, followed by Kabbage with a $700 million securitization.

Performance and Practices

PeerIQ noted that 2017 deals are exhibiting higher delinquency rates compared to 2015 and 2016, despite tightening underwriting standards. Credit enhancement levels have also declined across marketplace lending (MPL) transactions since 2017, according to Fitch. For example, Avant’s 2019-A securitization benefited from credit enhancement of 31%, down from 43% in 2017, even though the newer deals contain a greater share of subprime loans. SoFi’s 2019-1 deal also included a higher percentage of Tier 7 loans, which are available to borrowers with negative personal net income.

Meanwhile, fintechs are expanding their presence in the credit market – last year, 38% of personal loans were made by fintechs, up from 21% in 2015. Small businesses, in particular, are increasingly seeking financing from online lenders, but with this has come a rise in fraud. Technology giants, including Amazon and Apple, are driving competition by offering credit cards and small business loans, and regional banks such as PNC Financial are entering the digital lending space.

Looking Ahead

Madden v. Midland Funding is approaching conclusion following a proposed settlement agreement, which would provide $9.8 million in relief to consumers. However, ambiguity surrounding the enforceability of loans sold to third-party investors remains. Given that a legal fix is looking less likely, regulators may play a more central role going forward in addressing industry concerns and providing clarifying guidance on the “valid-when-made” rule. The Office of the Comptroller of the Currency (OCC) began accepting national bank charter applications last summer, but firms have so far been reluctant to pursue this status, in order to preserve relationships with state regulators and avoid becoming embroiled in lawsuits pending against the OCC.

Despite negative trends in the secondary market, ratings agencies are conflicted over the level of risk that exists in MPL deals. While Kroll has upgraded tranches, citing to improved performance, Fitch has questioned these positive ratings, cautioning that investors have less loss protection for the same amount of asset risk. Against the backdrop of continued regulatory uncertainty, lower quality collateral and declining credit enhancements could leave investors exposed to higher-than-expected losses in the event of an economic downturn.

Emily Hatchett, a paralegal in the Insolvency, Creditor’s Rights and Financial Products Group, assisted with this post.

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