Marketplace Lending: 60-Second Market Review and Insights

ABS Issuances, by the Numbers

Nine ABS deals totaling $3 billion closed in Q2 2017, a 76% increase from Q2 2016. Q2 ABS issuances included approximately $2 billion in consumer (up 28% versus Q1 2017) and approximately $1 billion in student (down 5% versus Q1 2017). All deals were rated. Total ABS issuance is expected to be over $11 billion in 2017.

Performance and Practices

Performance continued to weaken as delinquencies and charge-offs increased in Q2 for personal, student, and subprime auto loans. Prime credit card portfolios are showing multi-decade delinquency rate lows….

As lenders lean on data, algorithms and automation for more efficient loan underwriting, observers have noted that these largely untested tools have yet to go through an economic cycle. The greatest challenge for automated lending, however, may lie in the very technology that drives it. Artificial intelligence and automation aren’t just for lenders, after all—and as companies across industries adopt them in the coming years, the impact on borrowers’ economic stability could be severe.  But online lenders, with their fast-moving, adaptable techniques, may be in the best position to respond to these market changes. Their flexibility and responsiveness may put them far ahead of their more traditional lending rivals….

Act more like a traditional bank, and less like a tech start-up. That’s what some marketplace lenders are trying to do to appease some critical investors. Acting like a traditional bank, however, could be a slippery slope. Operational changes may be enticing to some investors, but they threaten the very foundation of marketplace lending, potentially shutting out the segment of the population marketplace lending was meant to serve. Evolution was expected.  Regression was not. The way forward lies somewhere in the balance.

The moves toward more traditional banking are rooted in marketplace lending’s recent wild ride. …

Beneath all the excitement surrounding the fast-growing “fintech” industry has been a more practical question: who, exactly, is going to regulate this new breed of enterprise?

The U.S. Office of the Comptroller of the Currency offered one answer recently, announcing its intention to grant national bank charters to fintech companies. The OCC action would allow companies that gain charters to operate nationwide. Equally significant, it would result in state-level preemption. Chartered fintech companies could be free of capital requirements imposed by states, for instance, as well as state consumer protection laws such as those prohibiting usury,…

In “Madden Creates More Uncertainty for Marketplace Lenders,” a Law360 article, Joseph Cioffi and Massimo Giugliano discuss the ongoing case of Madden v. Midland Funding and its impact on the marketplace lending. The authors explain the significance of the initial decision by the Second Circuit in 2015, which created substantial risk for marketplace lenders that rely on a partner bank origination model to avoid state usury caps, and analyze the potential impact of a subsequent decision striking down a choice of law clause often relied on by lenders to guard against usury claims….

In this Structured Credit Investor article concerning the potential effects of Madden v. Midland Funding on marketplace lending platforms, Joseph provides suggestions for platforms seeking to adapt to the ruling and the potential for the ruling to shape the industry. Joseph notes, “if partner banks start to get more involved in the origination process so as to avoid the problems of Madden, these banks may start to question why they need the platforms at all and there is the potential that they may simply take over the process entirely.” Click here to view the full article….