Peer-to-peer (P2P) lending platforms in the United States have grown, in terms of loan origination volumes, an average of 84 percent per quarter since 2007. American P2P platforms issued approximately $5.5 billion in loans in 2014, and Bloomberg Markets estimated that global P2P loan volume could hit $77 billion in 2015. The market for personal debt in the United States alone is $3 trillion, so there is still plenty of room for further P2P growth.
The volume of P2P loans has become so massive that the largest platforms (led by LendingClub in 2013, SoFi in November 2014, and Prosper in February 2015) have begun securitizing bundles of loans and selling them to banks such as Morgan Stanley, Goldman and BlackRock.
In its June 2015 article “Peer Pressure,” Bloomberg Markets points out that the big banks’ appetite for securitized debt creates pressure on P2P platforms to issue more loans, and maybe to “relax their credit criteria and welcome riskier borrowers to accommodate the flow.” And why shouldn’t they, when they can “offload risk through securitizations”? I’m sure I don’t have to remind you of the sub-prime mortgage crisis that began in 2007.
Renaud Laplanche, CEO of the P2P industry leader LendingClub, told Bloomberg that the global lending market is so vast that his platform “won’t have to take on riskier borrowers for years. There’s no need to loosen standards.” To be sure, that timeline estimate is vague and subjective (and self-serving) – did Laplanche factor in, for example, the potentially intense competition for borrowers created by a surge of new P2P platforms? (Laplanche declined my invitation to comment.)
No matter how emphatically today’s P2P leaders say they won’t loosen their credit standards, huge pots of gold from Morgan Stanley and Goldman can be very hard to resist, especially for a publicly owned platform like LendingClub. Even if they won’t take on riskier borrowers for “years,” well, sooner or later they probably will. We are, of course, assuming P2P is still thriving after a few more years – the industry has not been tested yet through a full credit cycle, and interest rates won’t stay crushed forever.
Don’t Chase Spectacular Yield
I discussed this subject with Jorge Newberry, the founder and CEO of American Homeowner Preservation LLC, a hedge fund here in Chicago that buys pools of non- and under-performing mortgages at big discounts from banks, and provides homeowners with sustainable solutions to keep their homes and prevent foreclosure. Jorge wrote a Huffington Post article, “P2P Lending is Not Dead,” about how institutional investors seem to be crowding out “peers” on some, but certainly not all, platforms.
On the topic of investing on P2P platforms, Newberry (who has a Series 65 securities license as well as a real estate broker’s license) suggests that “retail” investors, i.e., the crowd, should avoid lending to the riskiest borrowers, which of course means not chase the highest-yielding deals. You don’t have to take on crazy risk to earn pretty good yield.
I don’t have any kind of securities license, but it seems to me that we shouldn’t wait until P2P platforms loosen their credit standards “years,” or maybe months, from now to exercise this sort of caution.
Continue with the next article in the series, “Wisdom of the New Crowd,”
or read the previous article in this series, “Emerging Secondary Market for Crowdfunded Securities,”
David M. Freedman, a financial and legal journalist since 1978, writes a weekly column on crowdfunding for Accredited Investor Markets. He is a coauthor of Equity Crowdfunding for Investors, published by Wiley & Sons.