Cleveland Fed Slams ‘Predatory’ Marketplace Lending in ReportBy
Authors says peer-to-peer lending is in need of regulation
Study says delinquency rates are increasing at alarming rate
The Cleveland Federal Reserve Bank slammed the peer-to-peer lending business, calling it predatory and asking for more regulation.
“Signs of problems in the P2P market are appearing,” a team led by Senior Research Economist Yuliya Demyanyk said in a report late last week. “Defaults on P2P loans have been increasing 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.”
Peer-to-peer, or marketplace lending platforms, emerged following the financial crisis when more traditional avenues of lending dried up. They match borrowers with investors and shorten loan approvals. Growth for the sector has been staggering. While champions of the innovation argue that there are a number of benefits for consumers, such as offering credit to those that wouldn’t otherwise get it or helping others refinance expensive credit-card debt, the Fed researchers disagree.
“We find that, on average, borrowers do not use P2P loans to refinance pre-existing loans, credit scores actually go down for years after P2P borrowing, and P2P loans do not go to the markets underserved by the traditional banking system,” the team found. They used data from the TransUnion credit bureau, looking at about 90,000 people who received P2P loans from 2007 and 2012 and about 10 million who did not receive one.
The researchers found that only the highest-grade borrowers received better interest rates when refinancing credit card debt, while those in one of the riskier groups weren’t likely to get better rates, and might even pay more.
As for the claim that marketplace loans can help borrowers increase their credit score, the authors found otherwise. Credit scores of P2P borrowers actually decline substantially, and delinquency rates rise after taking on such a loan compared to those that didn’t.
“P2P loans resemble predatory loans in terms of the segment of the consumer market they serve and their impact on consumers’ finances,” the team concluded. “Given that P2P lenders are not regulated or supervised for antipredatory laws, lawmakers and regulators may need to revisit their position on online-lending marketplaces.”
Nathaniel Hoopes, executive director at the Marketplace Lending Association, disagreed with the findings. He pointed to an earlier study from two Federal Reserve banks that analyzed loans at LendingClub Corp., one of the industry’s largest players.
“Despite the misleading title, this not a study of marketplace lending, which only makes up a small percentage of the data,” Hoopes said in an email. “When the Chicago and Philadelphia Federal Reserve released an exclusive in-depth study of marketplace lending, they reached the opposite conclusion.”