SAN FRANCISCO–Charge-off rates at some of the peer-to-peer lenders—companies that credit unions have watched warily as they “disrupted” the market–are on the rise, according to one report. But the companies are responding by saying the rates are not out of line.
Since 2013, charge-offs at LendingClub Corp., for instance, are up as much as 38%, according to the Wall Street Journal. The sour loans are increasing at the same time the companies have been reporting job cutbacks, as CUToday.info reported here earlier, LendingClub’s CEO, Renaud Laplanche, was forced to resign following alleged loan-sale improprieties.
The big, emerging issue, reported the Wall Street Journal, is concerns about the overall effectiveness of quickly evaluating borrowers through algorithms. “While online lenders have enjoyed rapid growth compared with traditional channels like bank branches during the last half decade of benign credit conditions, skeptics have questioned for years how their loans would perform in a weaker economy,” the Journal noted.
Online lenders typically offer unsecured consumer loans up to $30,000. The P2P lenders use automated processes for checking borrowers’ credit metrics and looking up their histories while in many cases avoiding more labor-intensive practices of collecting and reviewing pay stubs or tax returns, the Journal report explained. It noted that through the first quarter of 2016, LendingClub had verified actual income for 26.8% of loans, down from a peak of 49% in 2013.
A spokeswoman for LendingClub told The Wall Street Journal that “credit quality on the Lending Club platform has been consistently strong” and “charge-off rates on 75% of the platform’s loans have remained stable, and that “significant steps have been taken to manage credit quality in recent months...while continuing to make affordable credit available to consumers and small businesses.”
The company told the Wall Street Journal that verifying every applicant’s income is unnecessary. For loans made in 2012, for example, there was a higher portion of bad loans among those verified than those that weren’t verified—roughly 12% and 7%, respectively.
According to the Journal, from loans made in 2013 through the first quarter of 2015, gross charge-offs of LendingClub’s lower-graded loans a year after issuance jumped to 6.31% from 4.58%, an increase of 38% or 1.73 percentage points. Charge-off rates on top-graded loans—which go to borrowers with stronger credit histories—rose less dramatically, to 1.51% from 1.46%, according to a presentation by the firm in May, the Journal reported.
Meanwhile, as of May, about 4.2% of the principal amount lent by Prosper Marketplace Inc. in the first quarter of 2015 had been charged off, according to MyCRO, a data tracker from online lending and securitization platform Insikt, the Journal said. Loans made a year or two earlier had seen charge-offs of 3.0% and 3.8%, respectively, after a similar amount of time had passed.