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Report highlights marketplace lending slow-down in US




By Ryan Weeks on 25th August 2016


Orchard’s Q2 2016 numbers cap off a sobering quarter for marketplace lenders.

 

The latest quarterly data on unsecured consumer marketplace lending in the US confirms what the majority of industry observers already knew; origination has slowed down across the board, while charge-offs and interest rates are rising. Orchard’s numbers show that the sector originated $2.342bn in Q2, down 34 per cent from the first quarter of the year and down 16 per cent from the corresponding quarter in 2015. This comes after years of quarter-on-quarter growth. But Orchard is “not ruling out an uptick in growth” for later on this year, as “confidence and capital” return to the platforms.

 

Source: Orchard Quarterly Industry Report

 

While 2015 and 2016 loan vintages have not yet matured to the point where a meaningful comparison of charge-off rates can be made, the report shows that the sector’s 2014 vintage is comparable to 2011 and 2012 vintages in terms of charge-offs. Orchard sees this as in part due to “deteriorating loan performance”, but mostly due to “the continued growth of subprime loan origination platforms”.

 

Source: Orchard Quarterly Industry Report

 

Borrower rates are also on the up. Interest rates rose by 96 basis points across the sector in the second quarter, as several originators raised rates in an attempt “to reignite investor demand in loan purchases”. An example of that strategy working is provided by Prosper. The platform raised rates by 29 basis points in late May for the second time this year. Only a day later it was revealed that Blue Elephant had resumed its loan purchasing programme with the platform, with the fund's chief investment officer Brian Weinstein saying that "tighter models" and "higher rates" were the key factors in the decision. Interestingly the Orchard numbers reveal that interest rates rose most sharply for smaller loans. Loans of less than $5k saw rates rise from 23.6 per cent to 26.5 per cent across Q2, while rates for $5k-$9,999 loans climbed from 19.1 per cent to 21.1 per cent.

 

Source: Orchard Quarterly Industry Report

 

Also noteworthy is the seemingly backwards relationship between loan sizes and interest rates in the sector. One might expect larger loans, which carry greater risk, to also carry higher interest rates. But in reality the reverse is true. Orchard states that this indicates that originators “employ stricter underwriting criteria for borrowers at higher loan amounts”. The numbers also show that average loan size in the second quarter was its lowest since Q4 2014, at $11,848.

 

Originators on both sides of the pond have been dealing with considerable market turmoil since the early stages of the year, facing both a waning in investor demand and questions around the sustainability of the marketplace model. AltFi Data cut its 2016 origination projection for the UK marketplace lending sector by 14% in early July, from £4.3bn to £3.7bn, as shown in the chart below.

 

Source: AltFi Data

 

Orchard tells us that the report encompasses data from "a handful of leading originators in the space" which is indicative of "market level trends", rather than trends that originator-specific trends. Furthermore, we're told that the origination data is sourced from static loan tapes which are provided by the originators themselves, while charge-off data is constructed "using loan-level payment data". 

 

 

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