Peer-to-peer lenders turning to ABS market

NEW YORK, Oct 2 (IFR) - Online loan markets in the rapidly growing peer-to-peer lending sector are starting to attract more attention as a potential source of securitisation trades.

Peer-to-peer lenders SoFi and OnDeck have already tapped the ABS market, while CircleBack Lending recently lined up Jefferies to securitize a US$500m batch of consumer loans.

With some companies in the sector seeing up to a 40-fold increase in business, many see the push towards ABS as a natural next step in diversifying.

“We are right at the beginning,” said Dan Ciporin, a partner at venture capital firm Canaan Partners, which provided seed money to two P2P loan platforms, Lending Club and Orchard Platform.

“To use a sports analogy, we are probably 30 seconds into the first quarter.”

Peer-to-peer has evolved quickly over the past few years, stepping into niches in the consumer loan space that traditional banks have steered clear of since the crash.

Growth has been fuelled by big institutional spenders, which have been attracted by the sector’s estimated US$3trn lending opportunity.

“Peer-to-peer brings to mind images of retail investors buying these loans on their home computers,” said a hedge fund investor in the space who asked not to be named.

“But a big chunk are actually institutional investors.”

Orchard Platform, for example, allows hedge funds and institutional investors to buy tailor-made pools of P2P consumer loans from originators based on risk and return preferences.

It offers daily loan-level reports and analytics that help investors manage their risks but which could also ease the way for a securitizer working through the process of getting credit ratings assigned to a pool of loans.

“It could be an alternative to securitization or it could also be a precursor,” Orchard co-founder David Snitkof told IFR.


Peer-to-peer lending started out as just that - matching borrowers to loans financed by their peers - but the surge in P2P platforms has steadily won a broader market.

Lending Club and Prosper, two of the largest names in the business, have grown their combined loan volumes roughly 40 times since 2009 from US$60.7m to US$2.36bn already this year, according to data from both companies.

But it is not just those lenders benefiting from borrowers looking for alternative means of credit.

“There is a lot of opportunity,” said Ryan Randall, the CFO at Upstart, which focuses on recent college graduates who have not yet built up significant credit track records.

Upstart uses non-traditional metrics - grade point averages in school, for example, or even which university they attended - to evaluate loan applicants.

While rates to borrowers range from 7%-25%, returns to investors in these loans are targeted at roughly 10%.

“As the pool of assets are increasing,” Randall said. “Many early purchasers will use securitization as a way to diversify their holdings and also provide a way for different buyers to acquire these assets.”


While peer-to-peer lending has focused on shorter-term consumer loans, other areas including small business loans and student debt and credit card refinancings are gaining ground.

And down the road, the ABS market should see a surge of activity from the P2P sector.

“Securitization ultimately will be a way that a lot of this is financed,” the hedge fund investor said.

But for now, at least, peer-to-peer is still tiny when measured against the US$190bn expected to be issued from the traditional consumer ABS market this year.

To get it right going forward, said Ciporin from Canaan Partners, participants will have to make sure they work within the regulatory framework set up after the financial crisis.

“Traditionally, where people run into problems in building great companies in the fin-tech world is (that) they focus on technology, but have a lack of focus on the regulatory side,” he said. “Now people understand that.” (Reporting by Joy Wiltermuth; Editing by Shankar Ramakrishnan and Marc Carnegie)