Concerns over some online loans disputed
They’ve been advertised as a way to build credit or refinance credit-card debt.
However, a new study shows that loans from online companies such as Lending Tree, called peer-to-peer lenders because they link borrowers with lenders, have a high and growing default rate. And that rate rivals the rate of subprime mortgage defaults a decade ago.
A Cleveland Federal Reserve Bank study says “defaults on (peer-topeer) loans have been increasing at an alarming rate. ... Such a signal calls for a close examination of P2P lending practices.”
The industry takes issue with the study and its conclusions.
Acknowledging there have been questions about the data used in the study, the Cleveland Fed issued a statement saying that the authors are revising the study and the new version will be posted as soon as it is completed.
There are about two dozen consumer peer-to-peer lending companies, also called marketplace lenders. Lending Club and Lending
Tree are among them. Other similar lenders provide student loans or lend to businesses. Such services hit the marketplace in 2006.
The companies serve as kind of an online matchmaker between consumers and small businesses that want a loan and investors willing to make the loan. The investors can be individuals, but more recently, banks and hedge funds have started to use the platforms to make loans.
The Cleveland Fed study said these loans have three key benefits: They allow consumers to refinance expensive credit-card debt, they help consumers build their credit history and improve their credit score, and they provide loans to those underserved by traditional banks.
In some cases, the interest rates on these loans can approach 30 percent, the report found, higher than the interest rate on most credit cards. Also, the report found consumers who took on a peer-to-peer loan actually ended up with more debt and that their credit scores fell compared with consumers who didn’t take on a peerto-peer loan.
“When we look at the data, we couldn’t find (that borrowers benefited). If anything, we found the opposite,” said Yulia Demyanyk, senior economist at the bank and one of the authors of the study.
“Overall, P2P loans resemble predatory loans in terms of the segment of the consumer market they serve and their impact on consumers’ finances,” the report said. “Given that P2P lenders are not regulated or supervised for anti-predatory laws, lawmakers and regulators may need to revisit their position on online lending marketplaces.”
An association representing these lenders took exception to the study.
“This report isn’t a study of marketplace lending. It relies on a mishmash of loan data from banks, credit unions and high-interestrate finance companies that belong in a totally different category,” said Nathaniel Hoopes, executive director of the Marketplace Lending Association.
“When Chicago and Philadelphia Federal Reserve Bank researchers released an exclusive in-depth study of marketplace lending just a few months ago, they reached the opposite conclusions — finding that the loans reached underserved communities and had a positive impact for borrowers.
“Beyond the problem with the scope of the report, the researchers push the absurd idea that this industry is unregulated. The same consumer-protection laws apply to marketplace loans that apply to all consumer loans. To suggest anything else is just pushing misinformation.”
The study by the Philadelphia and Chicago Federal Reserve, based in part on data supplied by Lending Club, found that about 40 percent of Lending Club’s consumer loans are being made in areas where there has been a decline in bank offices and that consumers do receive loans at interest rates that are lower that they might otherwise pay on a credit card or a traditional bank loan.
Demyanyk said at this point, the potential trouble from these loans doesn’t pose the threat to the economy the way subprime loans did a decade ago.
Her study pegged the value of peer-to-peer lending at more than $100 billion. The industry says the total is about half that.
“The trends are certainly worrisome,” she said, acknowledging that peer-topeer lending represents only a “very small fraction” of consumer credit.