Moody’s: 2017 Credit Quality ‘Generally Steady as Lenders Promote Market Confidence

The U.S. marketplace lending industry will continue to focus heavily on repairing its reputation in 2017, after a year of negative developments that called into question the previously fast-growing industry’s efforts to “disrupt” traditional lenders,” said Moody’s Investor’s Service, New York.

The report (https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1042543) said marketplace lenders’ responses to these issues could increase their ability to leverage their strengths relative to traditional lenders. “However, these challenges could also further expose shortcomings stemming from their unique and still-developing business processes that could further stunt their growth or force them to become even more like banks or other finance companies,” it said.

Although Moody’s noted a “relatively high level of uncertainty” surrounds the sector owing to the short performance history of the loans and other issues, its expectations for asset-backed securities tied to U.S. marketplace loans include the following:

–Overall, credit quality of new transactions will be little changed, because although lenders’ underwriting and practices for these loans will be generally stronger amid scrutiny on the industry, other factors, such as shifts in acquisition channels, will largely offset those changes. Marketplace lending ABS backed by student loans will include only marginally weaker collateral. “Stronger bank appetite for small business loans could result in the securitization of weaker loans in that sector,” Moody’s said.

–Moody’s outlook on asset performance of outstanding deals is stable. “Collateral losses for the marketplace consumer loan transactions that we rate will continue to accumulate, but the deals’ notes will likely perform strongly,” the report said. “Outstanding student loan deals will continue to have very low default rates.”

–Legal and regulatory landscapes will underscore lingering uncertainty, Moody’s said. “Although legal and regulatory issues will remain of high importance, new developments will likely have modest implications in 2017 for marketplace lending ABS, because any actions in the coming year are most likely to carry major impacts only for the longer-term prospects of the industry and loan credit quality, or to be incremental in nature,” the report noted.

–Originations and securitization issuance are likely to rise next year. “We anticipate higher volumes of both originations and ABS issuance, but this depends partly on financial market conditions and how well the industry meets its evolutionary challenges,” Moody’s said.