P2P Loans are “Predatory,” Have Delinquency Characteristics of pre-2007 Subprime Mortgages, Could Impact Financial Stability: Cleveland Fed

by Wolf Richter, Wolf Street:

They get debt slaves deeper into high-cost debts they can’t handle.

Peer-to-peer lending commenced in the US a decade ago when investors – now mostly hedge funds, banks, insurers, etc. – could lend directly to consumers via online platforms. LendingClub, the dominant player, went public in December 2014. Shares shot up to nearly $30 over the first few days, but are currently at $4.20, after a 23% plunge last Wednesday when it slashed guidance, and after a 2.4% dive this morning.

Now the Cleveland Fed came out with an analysis that focused on the consumer end of the business, called the loans “predatory,” compared them to pre-Financial-Crisis subprime mortgages because they’re now showing very similar delinquency characteristics, and fretted what these P2P loans, given their double-digit growth rates, could mean for financial stability:

Based on our findings, one can argue that P2P loans resemble predatory loans in terms of the segment of the consumer market they serve and their effect on individual borrowers’ financial stability. The 2007 financial crisis illustrated the importance of consumer finance and the stability of consumer balance sheets.

Loan balances outstanding have soared 84% in four years, from $55 billion in 2013 to $101 billion in 2016, according to the study. Nearly 16 million US consumers had personal loans via P2P lenders at the end of 2016.

Given these growth rates, “the P2P industry has the potential to destabilize consumer balance sheets,” the report said. “Consumers in the at-risk category – those with lower incomes, less education, and higher existing debt – may be the most vulnerable.”

And delinquencies have surged “at an alarming rate, resembling pre-2007-crisis increases in subprime mortgage defaults, where loans of each vintage perform worse than those of prior origination years.”

This chart from the report shows the delinquency rates by loan vintage, with each vintage showing higher delinquency rates. Loans issued in 2013, the last vintage examined in the study, show by far the highest delinquency rate after the first year, over 11%:

US-p2p-loans-delinquencies.png

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