Data shows origination volumes down again in third quarter, while subprime growth continues.
Specialist access platform Orchard has unveiled its latest quarterly report on the consumer unsecured online lending sector in the US. The results highlight the continued decline of origination flows across the industry. Originations have now more than halved since hitting their peak in Q4 2014, when $3.8bn was lent.
Just $1.8bn was lent in the third quarter of this year, with volumes falling by 21 per cent against the previous quarter – which in itself saw volumes slow by 34 per cent against the first quarter of the year.
As can be seen in the chart below, volumes have sagged steadily throughout 2016, with the sector suffering from a crisis of confidence among investors. Concerns around credit performance and the resiliency of the sector in less certain economic times precipitated a number of investors to rethink their strategies. Matters were made worse when then-CEO of Lending Club Renaud Laplanche was sacked by the board in May, after it came to light that he had overseen the mis-selling of loans to an institutional investor.
But despite the continued decline in origination volumes, Orchard is not ruling out an uptick in the fourth quarter as “confidence and capital” rebound.
The sector continued its descent into subprime lending in the third quarter. Charge-offs have come in at a higher rate for the sector’s 2014 vintage. Orchard says that while some of this may be attributed to deteriorating loan performance, most is due to “the continued growth of subprime loan origination platforms”. Charge-offs are coming in at higher rates, but loans are also yielding higher interest rates, thereby compensating investors for the additional risk that they’re taking on. The data shows that the 2015 vintage is on track to chart a similar route to the 2014 cohort.
Meanwhile, somewhat counter-intuitively, the average gross interest rates charged to borrowers by the platforms at the point of origination fell by 79bps in Q3, after rising by 96bps in the preceding quarter. The cause of this dip is that subprime origination volumes fell in the third quarter.
While not wholly insulated from developments across the pond, the UK consumer lending platforms have fared remarkably well during a difficult 2016. After a summer lag, both Zopa and RateSetter posted monthly origination records in September, with £67.8m and £74.3m respectively.
Orchard has twice refused to rule out an uptick for the US consumer lenders in the later stages of 2016, each time in ancitipation of the potential return of “confidence and capital” to the major platforms. Either would be a welcome Christmas gift for what has been a beleaguered group these past 12 months.