“Defaults in the general unsecured consumer credit market (which includes marketplace loans) have been on the rise,” Prosper said in a emailed statement. “Prosper has been watching this trend and tightening credit since 2017, and we expect credit tightening to continue in 2018.”
The second-largest lender, SoFi, increased the weighted average of its FICO credit scores to 744 in a sale earlier this year from 732 in a deal at the start of last year. The company declined to comment.
Bonds sold last week showed the safer structures are paying off. Avant, the fourth-largest online-lending platform, increased the size of its sale by about $60 million and saw spreads narrow to 70 basis points in its top shelf of debt from 80 basis points in a previous deal in April. That came after the firm cut the average duration of the loans to 36 months in a deal this month from 43 months two years ago.
LendingClub, the largest of the group though a relative newcomer to the ABS sector, has also responded by eliminating the riskiest borrowers in its loan offerings.
“Investors are changing their behavior on the margin and tending to gravitate toward higher quality, lower risk grades,” Jessie Szymanski, chief of staff to LendingClub’s capital officer, said in a phone interview.
The expansion of online lending has led directly to an expansion of securitization as companies become more dependent on it for revenue. The sector is expected to increase the amount of loans it turns into securities by 29 percent from a year earlier to $18 billion this year, according to New York-based research firm PeerIQ.
Some investors still aren’t convinced.
Tracy Chen, a Philadelphia-based portfolio manager at Brandywine Global Investment Management, said her firm doesn’t invest in marketplace lending because there is not enough data on the sector.
“This market hasn’t gone through a credit crisis so it’s hard to find conviction of how it will perform,” Chen said.
This article was provided by Bloomberg News