Cleveland Fed Issues Warnings on P2P Lending-Industry Association Pushes Back


The Cleveland Federal Reserve has recently issued a report stating they find peer-to-peer lending to be predatory.  The industry trade association obviously disagrees.  The P2P marketplace started to come into its own after the Great Recession in the US, driven by marketplace needs for capital that could no longer be acquired through traditional bank lending channels.  Put another way, the market found a way to take care of demand outside the new restrictions, as it always does.  The way we read it, now that the marketplace lending sector has reached critical mass, the Fed wants to control and regulate it, bottom line.  When it was just a fledgling, growing industry, no big deal. Interestingly, the industry trade association pointed out that another report by the Chicago and Philadelphia Fed branches found the exact opposite results.  So which report is right?  You decide.
(Cindy Taylor/Publisher)

“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…

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…”

Full Story at Bloomberg