The conventional wisdom has stated for some time that marketplace lenders will be hurt when the credit cycle takes a downward turn.
There may be signs that is beginning to happen with the raise in rates announced yesterday by Prosper. In a note sent to investors, Prosper announced higher estimated loss rates, and as a consequence, higher loan rates. The news follows a downgrade of Prosper-linked bonds by Moody’s at the end of last week.
The rate table is on the right, as published by CrowdFundInsider. By comparison, Lending Club’s interest rate range for Grade A borrowers is 5.32% – 7.89%. Its rate for its worst borrowers was similar to Prosper’s old figure – 28.99%.
The uptick in expected losses is one thing, and it’s troubling enough. But rising interest rates, and the resulting compressed spreads for investors, is another.
“The spreads are getting less attractive,” Dave Gilbert, CEO of National Funding, told Bank Innovation. “The demand for loans will still be there, but will the investors?”
“I think it is cause for concern since it is not good news to investors that the loans are not performing as expected and are not providing the expected returns,” said Christine Pratt, senior analyst with Aite Group. “It also may signal challenges in the identification and management of credit risk in underwriting and/or servicing of these loans. Loans written 18 months to 24 months ago are just now seasoned enough to be indicative of ongoing portfolio performance.”
Prosper appears to be addressing this concern with its rate raise. But marketplace loan rates are already high — they have to stay cheaper than credit card rates to keep the lucrative refinancing market.Like This Post