The troubles that emerged at Lending Club on Monday unleashed new worries about online lenders, which have been struggling to keep the confidence of investors in the ABS market.
CEO Renaud Laplanche resigned after the market leader in so-called peer-to-peer lending acknowledged it had sold a $22 million pool of loans that did not meet the buyer’s criteria.
While the company was seen to have acted quickly—it bought the loans back from the buyer, investment bank Jefferies, at par—the news will come as a setback for peer-to-peer ABS.
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“This is the last thing this segment of the market needs,” one investor, who has bought previous securitization deals from marketplace lenders, told IFR.
“All of these things are definitely going to make investors ask for more scrutiny.”
Trouble Ahead, Trouble Behind
The incident was merely the latest bit of negative news for a sector buffeted by setbacks over the past year and half that have made the buy-side increasingly wary about marketplace ABS.
Lenders have faced legal challenges over rates deemed potentially usurious in some securitized loans, while the U.S. government is studying tougher new regulations for the sector.
Meanwhile Moody’s has threatened downgrades on a trio of online lending securitization deals it has rated, because the performance of loans was worse than they had anticipated.
Those woes have helped translate to higher funding costs for borrowers, who have been punished by the buyside on deals coming to market so far in 2016.
Citigroup (CITIC-GROUP), for example, had to offer investors a 12.5% yield to offload BB-/B notes from its final securitization of loans from Prosper in March.
That was more than double what BlackRock paid on similar notes last year, and Prosper and Citi terminated their ABS issuance partnership thereafter. Prosper cut 170 jobs in May.
Lending Club (LC) and rivals Avant, CircleBack, OnDeck, and Prosper have also sold securitized deals, but online lending still accounts for just a tiny part of the broader ABS market.
According to data research company Peer IQ, only around $4 billion of marketplace loan ABS have been sold in total through the first quarter of this year, compared to some $1.4 trillion outstanding in mainstream consumer ABS such as auto loans.
Still, the fact that it was Jefferies that got caught out—the bank has been one of the biggest buyers in the nascent sector—will likely make other investors even more wary.
“Clearly it’s not a good thing when the market leader suddenly turns out, at a minimum, to have less than pristine procedures in place,” said Richard Kelly, a managing director at NewOak Capital Markets.
“For anyone who hasn’t been approved for buying this asset class, this isn’t likely going to precipitate a wave of new interest.”
Further details on what exactly went wrong with the Lending Club loan pool that Jefferies bought had yet to emerge by Monday afternoon.
But it was enough to send Lending Club shares plummeting 35% to $4.62, valuing the company at about $1.75 billion compared to $9 billion when it went public in December 2014.
“It does underscore the importance of transparency and trust in this industry,” David Snitkof, a co-founder of Orchard, an online lending technology company, told IFR.
“This is a learning moment for marketplace lending, and an opportunity for all participants to set the bar even higher in order for our industry to thrive.”