When online and peer-to-peer (P2P) lending became trendy, it was hailed by some as a revolution to consumer loans, offering a viable alternative to standard bank loan proceedings. However, it seems that things are not entirely as they should be in that industry, as a surge in defaults has sent analysts into a panic about the future of the burgeoning area. There have been signs that trouble was on the horizon for several months, starting with concerns throughout the industry about LendingClub, a leader in the P2P lending area.
Difficulties With Credit Risk
Beginning in early 2016, some critics of LendingClub and other P2P services began to notice that the company and others like it had some difficulty in assessing the credit risk associated with borrowers utilizing its service. The result was that those companies, and LendingClub in particular, experienced a higher rate of loan write-off than they had expected in initial forecasts. While LendingClub had expected write-off rates to hover in the area of 4%, it turned out that the figure was closer to 7-8% in the company's early months. While it can be difficult to say whether that rate is bad industry-wide, as P2P is still very new, it nonetheless indicated that LendinClub was likely not doing a good job of estimating its own risk.
By May of 2016, LendingClub had seen substantial internal problems. Though it remained the largest online lender in its class, it suffered a double blow when its CEO resigned after an internal review, causing its stock to tumble immediately after.
Now, just a few months later and with little to show in terms of a downward trend in LendingClub's fortunes for the past several months, analysts learned through a Bloomberg report that online loan defaults have spiked sharply in recent memory. In spite of adjusted predictions attempting to take into account volatility in the P2P market, a set of online loans grouped into bonds has been turning bad even more rapidly than expected. According to Bloomberg analysts, "some startups that aimed to revolutionize the banking industry underestimated the risk they were taking."
At this rate, lenders and underwriters may be forced to begin paying down bonds too early. In spite of efforts by LendingClub and some of its competitors to tighten lending standards and raise interest rates, it may be too late to counter the trend of defaults and the longer term repercussions this had. The entire situation has prompted some analysts to draw comparisons with the subprime mortgage disaster of several years ago, and talk of a P2P bubble has coalesced even more than it had earlier in the life of the new banking alternative.