Fitch: Confidence in US Marketplace Lending ABS Takes a Hit
OREANDA-NEWS. Investor confidence in US marketplace lending ABS tumbled last week on events surrounding the industry's largest player, Fitch Ratings says. The latest news adds to other significant challenges facing the sector, including limited history, management of rapid growth, the recently volatile capital markets, and growing legal and regulatory risks.
Fitch rates two marketplace ABS deals backed by loans originated through Prosper. Their performance, to date, has been within expectations and we do not expect recent events to affect the ratings of these deals. However, last week's events will result in heightened scrutiny from investors and regulators, as they involve Lending Club. This comes at a critical stage in the development of the burgeoning marketplace lending ABS market. Building and maintaining investor confidence is vital if marketplace lenders are going to have access to long-term, stable funding sources.
Fitch estimates that, in 2014 alone, the industry originated approximately $11 billion in loans ($7 billion in personal loans, $2.4 billion in small business loans and $1.7 billion in student loans). For 2015, the industry likely doubled in size. Fitch believes marketplace lenders have generally employed underwriting standards similar to those of traditional lenders -- mostly lending to prime customers with relatively strong credit. However, the rigor of their underwriting has not been tested through a full credit cycle.
The recent volatility in the capital markets has also raised the risk that limitations in funding access for their loans could slow origination fees, further constraining profitability and affecting the quality of servicing operations. Sponsors and issuers have utilized back-up servicers to mitigate servicer operational risks in the deals we rate.
Recent events will no doubt further heighten regulatory scrutiny of marketplace lenders. This will continue to erode one of their most valuable advantages over traditional banks -- passing the savings of low regulatory costs on to borrowers. This week, the Treasury Department identified several risks specific to marketplace lenders; namely, that although data-driven algorithms can lower the cost of underwriting and reduce costs, they can also produce a variety of credit outcomes and raise the risk of fair lending violations.
In our view, marketplace ABS may be able to overcome recent headline risk if they can demonstrate predictable asset performance, navigate increased regulatory pressure and maintain appropriate control frameworks to support their growth. However, marketplace lenders face an uphill battle in winning back investor confidence.
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