Worried a recession is coming, U.S. online lenders reduce risk
Anna Irrera NEW YORK (Reuters) - U.S. online lenders such as LendingClub Corp, Kabbage Inc and Avant LLC are scrutinizing loan quality, securing long-term financing and cutting costs, as executives prepare for what they fear could be the sector’s first economic downturn. A recession could bring escalating credit losses, liquidity crunch and higher funding costs, testing business models in a relatively nascent industry. Peer-to-peer and other digital lenders sprouted up largely after the Great Recession of 2008. Unlike banks, which tend to have lower-cost and more stable deposits, online lenders rely on market funding that can be harder to come by in times of stress. Their underwriting methods also often include analysis of non-traditional data, such as education level of borrowers. While platforms see that as a strength, it has yet to be tested in times of crisis. “This is very top of mind for us,” LendingClub Chief Executive Officer Scott Sanborn said in an interview, referring to the possibility of a recession. “It’s not a question of ‘if,’ it’s ‘when,’ and it’s not five years away.” Sanborn and executives at some half a dozen other online lenders who spoke to Reuters said worsening economic indicators and forecasts have made them more cautious. Their worries are the latest sign that fears a U.S. downturn is nigh are growing. Economists polled by Reuters in March saw a 25 percent chance of U.S. recession over the next 12 months. More recently, some executives said, a Federal Reserve decision to halt interest rate hikes reinforced those fears. A downturn is also far from certain. On Friday, JPMorgan Chase & Co, the country’s largest bank by assets, eased fears of a recession after it posted better-than-expected quarterly profits driven by what it described as solid U.S. economic growth. TIGHTENING CREDIT In February, LendingClub, one of the pioneers of peer-to-peer lending, offered growth projections for 2019 that fell short of Wall Street expectations, partly a sign of growing caution. LendingClub does not provide loans directly to consumers but earns fees by connecting borrowers and investors on its online marketplace. Sanborn said the company has gotten more stringent about credit standards for borrowers on its platform and is attracting investors with broader risk appetites in case the more cautious participants pull back. It is also outsourcing more of its back-office operations and relocating some staff to Utah from San Francisco to reduce expenses, he said. SoFI, an online lender that refinances student loans and then securitizes them, has been focusing on making its portfolio more profitable, even if that may mean lower origination volumes, CEO Anthony Noto told reporters in late-February. “We have been waiting for the next recession to happen for the past five years,” said Kathryn Petralia, co-founder and president of the Atlanta based Kabbage. “More people feel confident that it’s imminent.”
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