US GDP growth clocked in at an annual growth rate of 2.9% and the probability of a December rate hike is increased to over 70%. A PIMCO analysis this week illustrates that rising inflation expectations and negative real rates continue to pressure bank profitability, consistent with PeerIQ’s bank ROE analysis.

LendingClub appears to be pivoting to growth. LendingClub CEO, Scott Sanborn, unveiled an auto re-finance product at Money 2020. In a shift from prior business practice, the loans will initially be funded by LendingClub’s balance sheet and servicing will be outsourced–a nice combination should LendingClub choose to tap the auto ABS markets.

In an expected move, noted in our 3Q2016 Securitization TrackerProsper increased rates on riskier loans (concentrated in D, E, and HR grades) and lowered rates on high-quality loans following a similar action from LendingClub on October 14th when LendingClub raised rates by a weighted average of 23 bps basis.

On the securitization front, the latest deal from Earnest Student Loan Program (EARN 2016-D), led by Barclays and Goldman Sachs, priced successfully. October marked the first month of over $1 billion in new issuance – an industry milestone that PeerIQ anticipated at a LendIt Europe “State of the Industry USA” panel.

2017 Forecast

In this monthly newsletter, we release our 2017 forecast for marketplace lending origination and new issuance. Year-end forecasts help banks and asset managers plan resource and capital allocations.

We expect the U.S. MPL market to grow in 2017. Specifically, we expect 47% YoY growth ($11.3 Bn) in new ABS issuance under our base case.

Our forecast methodology is as follows:

  1. We start with consumer demand. We observe re-leveraging of consumer credit post-2011 and conclude that consumer demand for loans will continue to expand in 2017.
  2. We predict continued demand for short duration MPL ABS bonds given i) elevated interest rate risk and potential steeper yield curve for fixed-income investors, and ii) the favorable relative value of MPL ABS to other credit spread products.
  3. We build a bottoms-up framework that examines the pace and size of deal activity across repeat issuers to forecast 2017 ABS volumes under a base, bear, and bull case.
  4. Finally, we observe that ~55% of loans were funded via the ABS market in 1H 2016. We use an assumption of 50% funding via ABS to back out total MPL originations.

Consumer Credit Continues to Expand in 2017

The Great Recession of 2008 was marked by significant consumer credit contraction, with a quarterly reduction of 4% in 2009 as observed in the Federal Reserve Consumer Credit Outstanding Index. Aggregate consumer deleveraging stopped in the summer of 2011 (Exhibit 1).  As the U.S. economy stabilized, consumer confidence and spending also improved.

Exhibit 1
Quarterly Changes of Consumer Credit Outstanding (Non-mortgage)

Source: St. Louis Federal Reserve, PeerIQ

In our base case, we do not foresee a severe negative shock to the U.S. economy, and consumer debt growth stays on the same trajectory as next year. As the U.S. household market moves out of the balance sheet deleveraging phase, we expect an expansion in the total addressable consumer credit market.

Moreover, we are now seven years behind the Great Recession. Consistent with Fair Credit Reporting Act waiting period requirements, “Derogs” associated with bankruptcy, foreclosure, and short sales will fall off borrower credit bureau reports in 2017. As a result, we expect an expansion of credit eligible borrowers.

Fixed-income Investors Continue to Favor MPL ABS in 2017

We turn now from consumer demand to capital supply.  As the economy recovers from the Great Recession and inflation risks increase, the probability of an interest rate hike in December stands at ~71% according to CME Fed Fund futures.

Asset managers are seeking short duration assets that have lower interest rate sensitivity in a rising rate environment. Within the ABS sector, we observe that marketplace ABS papers present strong relative-value. For instance, MPL student refi ABS papers retains ~50 bps of spread pick-up as compared to traditional private student loans ABS.

Fixed-income investors, especially traditional securitized product investors, will continue to actively bid MPL ABS bonds in 2017 amidst rising inflation expectations and a global reach for yield. A healthy yield appetite from bond investors will support stable demand for new issuance.

Repeat Issuers Continue to Power the New Issuance Market in 2017

We believe that the emergence of repeat issuers and broader rating agency coverage allow the MPL ABS category to be incorporated into mainstream ABS sector. Indeed, as warehouse financing roll risk increases non-bank lenders are increasingly funding via securitization to raise permanent, low-cost, non-recourse capital.

We expect repeat issuers continue to participate in the ABS issuance market next year as they aim to minimize deal cost and optimize capital market distribution:

  • Despite a drought in the securitization market in Q1, SoFi issued seven deals totaling $3.3 billion for the first three quarter of this year, issuing at a speed of approximately 5-6 weeks per deal with $440-$480 million deal size.  SoFi’s shelves contribute about 53% of total MPL ABS issuance this year. At the current pace of issuance, we believe that SoFi will contribute between $4.5 and $5.0 billion new ABS paper in 2017 (and may be under-estimating due to SoFi’s new mortgage product).
  • Since its first securitization in November 2015, Avant has brought about $1.2 billion of ABS papers into the market, of which  about $1.0 billion was issued in 2016 with an average size of $280 million. We expect Avant to print a deal a quarter for 2017.
  • In 3Q2016, we saw the establishment of a new shelf (Marlette Funding Trust) from Marlette, setting the stage for repeat securitization deal issuance.
  • LendingClub introduced its own branded shelf which we analyzed here. We discuss this further below.

MPL ABS Issuance to Grow Approximately 47% YoY for 2017

Looking ahead to 2017, we believe that the MPL ABS new issuance market will continue to be dominated by repeat issuers, such as SoFi, Marlette, Avant, Earnest, CommonBond, and others.

Base Case

In our base case, the MPL ABS new issuance market will grow about 47% YoY for 2017 and new originations grow 52%. We assume that repeat issuers will issue about the same amount of deals in 2017 as in 2016 and that LendingClub and Prosper will issue at least one ABS deal.Given the repeat issuers makes up about 80% of the MPL ABS issuance, we put our base case new issuance outlook at $11.2 billion, or a $26.7 billion total ABS issuance, backed by $30 billion of loans, by YE 2017.  We ignore growth in the real estate MPL market for this analysis (although we do observe ABS activity with LendingHome and expect others to follow).

Bear Case

Under a mildly bearish scenario where the securitization market dries up for one quarter, we expect established repeat issuers to reduce deal flow by one for the year, and assume Prosper and LendingClub do not tap the ABS capital market in a meaningful fashion.  The MPL ABS market will issue $6.3 billion of bonds, a 17% decline in issuance as compared to 2016. By the 2017 year-end, we expect to see about $21.8 billion total MPL ABS issuance in this scenario.

Bull Case

We expect 114% growth in new ABS issuance and 76% in loan origination growth in the bull case. The bull case scenario sees an uptick in issuance from Prosper and LendingClub as they become repeat issuers under a friendly securitization market environment. In 3Q2016, we note Prosper was in advanced talks with a group of structured credit funds to sell roughly $5.0 billion worth of loans over the next two years.  A meaningful portion of the $5.0 billion origination from Prosper would find its way into the ABS market under this scenario.We assume one deal per quarter using the average deal size from prior deals as guidance to arrive at bullish estimates of $16.3 billion for 2017 new issuance. By YE 2017, Life-to-date MPL ABS market since 2013 would be ~$31.8 billion, and the MPL loan origination since 2007 would be ~$75.6 billion under a bullish scenario.

Exhibit 2

Expected New Issuance Volume for 2017 ($Mn)

Source: PeerIQ

Overall, we expect the U.S. MPL ABS market to grow in 2017. However, we also want to highlight factors that potentially lead to lower MPL issuance and loan origination, such as risk retention, regulatory uncertainty, and increased bank competition in prime consumer credit segments.

Hiring Update: 

PeerIQ is pleased to announce five outstanding additions to the team:

  • Len Langsdorf leads the technology team at PeerIQ, marshaling the delivery of our innovative products.  Prior to joining PeerIQ, Len headed S&P Capital IQ’s Innovation Lab, where he acted as an internal entrepreneur for the business, helping to mold and foster concepts into industry-changing products. Before the Innovation Lab, Len held senior roles leading the development of global data solutions and fixed income valuation services at S&P.  He has spent over 20 years in the financial services industry and devotes his free time to education and encouragement of children to have careers in STEM through First Robotics competitions.
  • As Head of Client Delivery, Richard Robinson works hand-in-hand with PeerIQ clients, managing data onboardings, API integrations, and other platform feature development.  He also directs platform trainings, product materials, and broader client support systems.  Prior to PeerIQ, Richard served as the Global Head of Integrated Solutions for S&P Global Market Intelligence, where he traveled the world engineering complex client solutions, executing strategic initiatives, and supporting key engagements across the entire suite of S&P solutions.
  • Corey Burr leads UI/UX design at PeerIQ, focusing on usability, clean and intuitive design patterns, and design-driven product development. Prior to PeerIQ, Corey lead UI/UX design initiatives at S&P Capital IQ and S&P Ratings Innovation Labs.
  • Yishu Song is an Associate on the Quantitative Strategies team, working on model optimization and quantitative research efforts.  He also works on testing and incorporating advanced techniques for PeerIQ’s latest modeling efforts, drawing on his extensive machine learning and statistical background. Yishu holds a PhD in stochastic probability theory and stochastic processes under Llie Grigorescu from the University of Miami.
  • Roy Weiss develops data product offerings and supports data scaling initiatives. Prior to joining PeerIQ, Roy started his career within BlackRock’s Aladdin Business, supporting client relationships and onboardings, with a focus on analytics and risk management. Roy graduated magna cum laude from the University of Pennsylvania, earning a dual-degree in Economics and Applied Computer Science.


  • Bloomberg’s “Growing a FinTech Enterprise: Legal & Business Frameworks” Conference, Wednesday, November 16, in Washington, DC. Ram will join SoFi General Counsel, Rob Lavet, and Thomas Baxter from Sullivan & Cromwell to discuss how FinTech firms can position for growth and navigate regulatory challenges.
  • IMN’s Investors’ Conference on Marketplace Lending, December 1st in New York.  Ram will be speaking on the panel, entitled, “Assessing the Relative Value of Securitization as a Funding Tool,” and COO, Kevin Reed, will be speaking on a panel entitled, “Third Party Loan Valuation.”

Industry Update:

  • LendingClub to Offer Auto Loans (WSJ, 10/25/16) Lending Club has announced their newest lending vertical, Auto Refinance, which will initially only be available to California residents and be funded by Lending Club’s balance sheet.
  • Windows Closing for ABS Issuers (AB Alert, 10/28/16) The influx of ABS offerings is expected to decline prior to the upcoming election and face an additional squeeze ahead of the November 23rd phase in date for stricter disclosure under the SEC’s Regulation AB.