Bloomberg by Matt Scully (August 19, 2016)
Lenders raising private funds to buy loans from their own platform is an inherent conflict because lenders cannot fulfill a fiduciary duty to both shareholder and loan buyer, Blue Elephant CIO Brian Weinstein says in investor letter.
- Originate to distribute creates value for shareholders, but not necessarily loan buyers; difficult to imagine an investment arm of a lender refusing to buy its own loans because of deteriorating underwriting standards, he wrote in Thursday afternoon letter
- “Trust issues caused by these fiduciary conflicts will slow the growth of the industry,” he said
- Safe to say online lending myth has been “debunked”
- A “myth developed that online lending could grow infinitely” and steal business from big banks while providing investors a “Holy Grail” of high returns and minimum risk
- Growth came to screeching halt this year amid deteriorating performance and governance issues; the “real devil” is in the performance details
- Competition for borrowers pushed lenders to lower rates and originate more than they could handle; defaults rose accordingly, during otherwise strong credit cycle
- Calls for new analytical tools to compare loans across originators to allow investors to do independent assessments; not enough to trust the originator, which clearly has bias
To contact the reporter on this story: Matt Scully in New York at mscully17@bloomberg.net
To contact the editor responsible for this story: Nabila Ahmed at nahmed54@bloomberg.net