What’s Wrong With Online Loans


A games room in the Avant office.

Ramzi Dreessen / Before

The peer-to-peer lending industry is in free fall.

Major players, many valued at $ 1 billion or more, are cutting jobs. Loan volumes are in free fall.

A Wall Street stock analyst summed it up in two blunt sentences.

“I used to think that online lending startups would explode when the credit cycle reversed,” the stock analyst told Business Insider.

“Now it looks like they won’t even get there until the market turns.”

The point here is that a lot of people expected online lenders who started during the zero interest rate period to struggle when rates started to head north. It is now clear that they started to suffer even before it got there.

According to Bloomberg’s Dakin Campbell and Matt Scully, the Chicago-based online lender Avant is laying off people and expects fixtures to be cut in half. This follows the announcement earlier this week that LendingClub, a rival online lender, is considering cutting 12% of its staff amid declining lending volumes.

The slowdown came as the market for bonds backed by these types of loans weakened and concerns grew about lending standards. The number of defaults also appears to be on the rise.

“Default rates on subprime and quasi-prime personal loans issued by financial technology and finance companies were up to twice those issued by banks for recent vintages,” UBS analysts wrote in a recent note. “This illustrates the fact that non-banks give riskier loans, even when credit ratings are normalized, compared to banks.”

LendingClub has encountered a number of issues since its CEO, Renaud Laplanche, unexpectedly resigned in May.

His departure follows an internal investigation which found the company had changed the dates of $ 3 million of loans sold to Jefferies in “violation of the company’s business practices as well as a lack of full disclosure during the review. “, according to a statement.

Goldman Sachs and Jefferies, who bought the loans from LendingClub and packaged them and sold them as bonds to investors, both stopped making deals with the startup.

And federal and state regulators have since taken action against the company, which was already facing two class actions in the United States.

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David A. Albanese