Is peer-to-peer lending out of control?
There’s certainly some cause for concern. Consider these facts: P2P loan volume is poised to hit $77 billion this year, a 15-fold increase from just three years ago. LendingClub, the No. 1 player worldwide, is trading at a market value of about $7 billion even though it lost $33 million last year. And in a flashback to the subprime mortgage boom, P2P startups have begun bundling and selling off loans through securitizations.
The business of matching lenders with borrowers online—which still amounts to only 0.08 percent of the $96 trillion in global corporate and household outstanding debt...
...pursuing loans that are generating 5 to 12 percent annual returns in an era of nonexistent interest rates. Goldman Sachs, BlackRock, Alibaba, and even Google are making deals in the space.
In the U.K., holders of tax-free savings accounts known as ISAs may even soon be allowed to invest in P2P loans, a move that could draw Britain’s top asset management houses and provide £150 billion ($220 billion) in fresh cash by 2020, according to Liberum Capital, a London investment bank. “Every single lending product that a bank provides is vulnerable to this model,” says Cormac Leech, a senior analyst at Liberum.
And now Wall Street is cranking up the volume by running these loans through its securitization machine. In November, Morgan Stanley and Goldman led the sale of securities backed by $303 million in student loans originated by SoFi. In February, BlackRock unveiled the first investment-grade-rated package of P2P consumer loans with a $281 million offering of notes from Prosper Marketplace, a site that lets users apply for loans as well as back them.
Such deals will help P2P platforms spread risk and multiply loan volume, which isn’t necessarily a bad thing. Growth is good, right? Still, the specter of the subprime-mortgage bust looms over this nascent market.
...London-based RateSetter maintains a “provision fund,” which stood at £13 million as of May 14, to make lenders whole should borrowers default, a feature other sites are now imitating.
Most P2P firms also shun subprime borrowers. Zopa, a 10-year-old British firm that’s issued more than £800 million in consumer loans, approves only one out of five applicants. Both Zopa and RateSetter have default rates of less than 1 percent, while bad loans at LendingClub and Prosper are below 3 percent.
In the U.S. market, LendingClub and its brethren have enabled consumers to pay off pricey credit card balances with cheaper P2P term loans.
Renaud Laplanche, the founder and CEO of LendingClub,...says, the global lending market is so vast that platforms like his, which is multiplying its volume by 20 percent a quarter, won’t have to take on riskier borrowers for years....“There’s no need to loosen standards,” Laplanche says.
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