Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Storm Clouds Are Gathering Around Peer-to-Peer Lending Sector

Companies / Debt & Loans Aug 22, 2015 - 04:24 PM GMT

By: ...

Companies

MoneyMorning.com Shah Gilani writes: Peer-to-peer lending, or P2P as it’s known, is a juggernaut financial-services Disruptor.

But thanks to its supercharged growth, P2P lending has attracted the attention of regulators and other financial-market overseers. They’re scrutinizing this new form of lending from multiple angles – fearing it may be too disruptive for its own good.


The U.S. Treasury Department, the Consumer Financial Protection Bureau, financial services regulators, bank and finance company lobbyists and, most recently, the U.S. Court of Appeals for the Second Circuit are weighing in on P2P lending.

There’s a lot at stake here…

  • For borrowers in love with lending platforms that give them access to money that would otherwise be hard – even impossible – to get.
  • For private lenders who loan money to borrowers at above-average rates.
  • And for the owners of sites that match lenders and borrowers for a fee, including investors in publicly traded ventures like LendingClub Corp. (NYSE: LC).

There’s even more at stake for the stock market and the economic health of the country.

The issues aren’t complicated, but tackling them will be.

As we’ve said before, P2P lending is one of the biggest new developments in the world of finance.

But you don’t want to take a wrong step.

Here’s what you need to know to avoid getting caught on the wrong side of the tracks if this Disruptor train gets derailed…

When Banks Aren’t Banks

While Disruptors can upend the status quo in any industry, not every disruptive business model plays out as their creators plan.

That’s especially true when the industry being disrupted – in this case, financial services – is one the most powerful sectors in the world.

Banks and formerly successful consumer-finance companies weren’t initially concerned about P2P lending when the new lending barbarians, led by Prosper Marketplace Inc., opened up in 2006.

Of course, 2006 led into 2007, which was the beginning of the end for a lot of banks and consumer finance companies.

While traditional lenders struggled to stay open during the credit crisis and through the Great Recession, P2P lenders honed their business models and extended their reach globally.

Today, P2P lenders are a growing threat to banks and consumer finance companies trying to reestablish themselves. The traditional lenders have unleashed their lobbyists to undermine P2P lenders before they get much bigger than they already are.

According to research from Morgan Stanley (NYSE: MS), marketplace lenders – that’s what P2P lenders are calling themselves now – are expected to account for more than 8% of consumer-unsecured loans and 16% of small-business lending by 2020.

Here’s the knock on marketplace lenders by their more traditional competitors.

Marketplace lenders are non-banks that don’t directly issue loans, that don’t keep any credit risk on their books after they match up borrowers and lenders, that use small Federal Deposit Insurance Corp. (FDIC)-insured specialty banks to facilitate their banking services but don’t pay into the FDIC safety-net fund, that don’t have lots of assets or capital, that add leverage to the economy, and that generally act as banks but don’t have the regulatory burdens of banks.

Constituents and lobbyists are bombarding legislators, asking them to look into these issues. And, in turn, those legislators are prodding regulators and the Treasury Department to step up their game.

On July 16, the Treasury Department issued 14 questions for public comment. The preliminary information-gathering inquiry on marketplace lenders and lending practices asked market participants for comments on:

  • The different models used by marketplace lenders and how these models may raise different regulatory concerns.
  • The role electronic data plays in marketplace lending and the risks associated with its use.
  • Whether marketplace lenders are tailoring their business models to meet the needs of diverse consumers.
  • Whether marketplace lending expands access to credit to underserved markets.
  • The marketing techniques utilized by marketplace lenders.
  • The process marketplace lenders use to analyze the creditworthiness of borrowers.
  • The relationship between marketplace lenders and traditional depository institutions.
  • The processes marketplace lenders use to manage certain client operations, including loan servicing, fraud prevention and collections.
  • The role the government could play in effecting positive change in the marketplace lending industry.
  • Whether marketplace lenders should be subject to risk retention rules.
  • The harms that marketplace lending may pose to consumers.
  • Factors that investors should consider when making investment decisions.
  • The secondary market for loan assets originated in the peer-to-peer marketplace.
  • And whether there are other key issues that policymakers should monitor.

The Consumer Financial Protection Bureau (CFPB) is looking into the marketplace for consumer loans and what protections borrowers have.

Even the U.S. Securities and Exchange Commission is looking into P2P lending. Both in the funding process and when loans are purchased from sites and packaged, securities are created. That’s the SEC’s beat.

The real threat P2P lending poses is to the economy, which is only now coming into focus thanks to lobbying efforts to bring it to everyone’s attention.

The truth is, this financial services Disruptor could upend the economy and should be closely scrutinized.

The Economy Problem

There are three fundamental and alarming problems with the P2P lending model.

First, lending sites aren’t banks. Instead of relying on a stable deposit base against which loans can be made, marketplace lenders originally relied on peer-to-peer (meaning person-to-person) matching, where a private lender agreed to fund a borrower’s loan request and each paid a transaction fee to the platform provider.

There’s very little P2P anymore. Institutional investors such as hedge funds, private equity shops, insurance companies and even bank subsidiaries are raising short-term funds in the capital markets to buy up huge quantities of platform-generated loans. Regulators worry about their ability to roll over their short-term borrowings to continue to fund consumer loans if capital markets experience anything akin to 2008, when they ceased up entirely.

Second, most consumer loans are unsecured loans made to individuals who are consolidating higher-interest loans. Any prolonged economic slump would devastate the ability of borrowers to keep up with debt-service payments. And because there’s no recourse on unsecured loans, it’s easy for borrowers to simply default.

The effect of cascading defaults on marketplace loans would cause lenders to cut off funding, further choking consumers who, under present growth rates for marketplace lenders, are increasingly likely to turn to these non-bank or even “shadow bank” lenders.

Third, without access to bank loans, because they’re being shunned for marketplace loans that have different credit-profiling techniques, consumer spending could come to a standstill and squeeze the entire economy.

These are legitimate concerns that are only now being addressed.

Whether or not the Treasury, SEC, CFPB or other regulators apply heat to marketplace lenders and their Disruptor model, P2P lenders may be disrupted sooner rather than later by the U.S. Supreme Court.

The U.S. Court of Appeals for the Second Circuit recently overturned a lower court’s ruling that allowed “appointees” of banks to charge high rates in any state regardless of where the appointee itself was located. The Court of Appeals overturned that ruling in Madden v. Midland Funding LLC, saying essentially that any issuer of a loan that isn’t a national bank has to abide by each state’s usury laws.

Marketplace lenders use small banks to facilitate the actual loan-making process, and those small specialty banks have been bypassing state usury laws.

Midland Funding is trying to take the decision of the Appeals Court to the Supreme Court to get it reversed. If there is no reversal of the Appeals Court’s ruling, the marketplace lending business model itself will be seriously disrupted.

Investors in LendingClub Corp. who aren’t aware of the Appeals Court’s ruling may be wondering why the shares they hold have dropped 30% since the beginning of June. Now they know.

The slippery slope that the great P2P Disruptor model is facing should give investors pause. Until there’s more clarity on the profitability of marketplace lending going forward, venturing into a marketplace lender like LendingClub should be done gingerly – at best.

For investors ponying up funds as private lenders on platform sites, a good look at the direction of the economy is mandatory. Making loans in good times doesn’t count for anything if hard times befall borrowers who can easily default.

For my money, the great Disruptor of financial services is being given a run for its money, and I’m anxious to see how this Disruptor might get disrupted itself.

[Editor’s Note: We encourage you all to “like” and “follow” Shah on Facebook and Twitter. Once you’re there, we’ll work together to uncover Wall Street’s latest debaucheries – and then bank some sky-high profits.]

Source http://www.wallstreetinsightsandindictments.com/2015/08/storm-clouds-are-gathering-around-peer-to-peer-lending/

Money Morning/The Money Map Report

©2015 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in