In “Presenting The $77 Billion P2P Bubble [2]” we took a close look at the P2P lending market which is expanding exponentially amid Wall Street’s efforts to securitize the loans on the way to creating a market for P2P-backed ABS.
As a reminder, P2P lending allows borrowers laboring under high-interest credit card debt to essentially refi via loans from individual lenders, thus transforming credit card debt into unsecured personal loans. As we noted, this only works if borrowers do not subsequently max out the credit cards they just paid off:
Consider also that P2P loans create the conditions whereby borrowers can refi high-interest debt via personal loans, transferring credit risk from large financial institutions to private lenders in the process. It’s not entirely clear what the implications of that shift might ultimately be, especially if the market continues to grow rapidly, but one thing is clear: using a relatively low-interest P2P loan to pay off a high-interest credit card is no different in principle than using a new credit card that comes with a teaser rate to pay off an old credit card. The borrower will very often max out the old card again and thus end up with twice the original amount of debt.
We were also quick to remark that as long as investors are buying the P2P-backed ABS, demand for the loans will only grow, causing lenders to lower underwriting standards in a repeat of the dynamic that led to the housing crisis:
It's not difficult to imagine a scenario where this spins out of control as borrowers refi multiple credit cards with multiple P2P loans, only to run up still more credit card debt. Voracious demand for P2P-backed ABS will provide an incentive for P2P companies to ignore signs of trouble as they profit from providing the loans that feed lucrative securitizations.
If you needed proof of the above, we bring you the following mailer from the industry’s number-one player, LendingClub, which is now advertising the P2P-credit card refi opportunity to “pre-approved” borrowers who can get up to $35,000 with "no collateral required":
[3]
Whether or not this kind of aggressive advertising is the result of a push to stimulate more demand for P2P loans which will in turn feed Wall Street's securitization machine we can't say for sure but it certainly looks as though LendingClub is hunting for more business and it's probably fair to say that that means the race to the bottom is on in terms of recruiting underqualified borrowers.
