Marketplace Lending: 60-Second Market Review and Insights

ABS Issuances, by the Numbers

Seven securitizations totaling $4.3 billion closed in Q1 2018, up 34% versus a year ago and representing the second-highest issuance in any quarter (after Q4 2017). Q1 issuances comprised $2.1 billion in student loan ABS, more than double Q1 2017 and the highest ever quarterly issuance of student deals. Total ABS issuance is expected to climb to $18 billion in 2018, up 30% from 2017.

Performance and Practices

Delinquencies increased in Q1 2018 across the consumer credit space, and reports of an influx of defaults on marketplace loans have prompted online lenders, including Lending Club and Prosper, to tighten their underwriting guidelines. The bright spot has been the student loan sector. The sector, led by SoFi which issued its largest ever student deal in Q1 at $1 billion, has been performing well, driven by refinance loans made to borrowers with strong credit profiles.

But allegations of misconduct that have plagued some in the student loan servicing industry of late appear to be creeping into the marketplace lending space. Lending Club was recently accused by the FTC of deceptively charging consumers “hidden fees” on loans, despite making promises to the contrary. In addition, reports of bond issuers engaging in “ratings shopping” is reminiscent of accounts of pre-financial crisis practices at certain subprime mortgage issuers and may be understating projected default and loss rates on deals.

Looking Ahead

Regulatory uncertainty remains following the 2nd Circuit’s decision in Midland v. Madden, and while the “Madden Fix” bill was passed in the House, it will face tough challenges in the Senate. Marketplace lending may not be able to reach its full potential, restricting the availability of affordable online credit products, if the ambiguity left by Madden as to validity of interest rates and ultimately the enforceability of loans backing deals is not resolved.  However, those opposed to the bill are concerned that it may encourage predatory lending practices by allowing lenders to bypass state interest limits. The Treasury’s proposals for fintech regulation may also impact the industry, and the OCC is expected to make a decision in July on whether to grant a national bank charter.

Despite the uncertainties, high issuance volumes indicate strong investor demand for marketplace lending securitizations, with interest in the student loan sector in particular continuing to grow. Rising interest rates could result in higher financing costs and could potentially affect securitization performance, if costs are passed on to borrowers. As we have seen with auto loans, credit enhancements, in the form of excess spread and high subordination levels, are creating a buffer against losses, but as noted above, it seems that in some cases investors’ expectations are not being appropriately managed. If defaults rise further, higher-than-expected losses cannot be ruled out. These dynamics will play out against the backdrop of continued regulatory uncertainty.