Jun 19, 2018 Walt Wojciechowski
Over the past 10 years or so, the rapid rise in online lending has opened doors for millions of small businesses, providing them with the funds they need to compete and pay for their key operational functions. Indeed, from 2015 to 2017, online lenders furnished thousands of companies in the United States with close to $10 billion in funding, according to the Electronic Transaction Association.
Unfortunately, the swift speed at which online lenders approve loan requests, in part, has led to an uptick in borrowers defaulting, forcing lenders to ratchet up their qualification standards.
"Online lenders are responding to defaults by changing some of their loan approval rules."
LendingClub, Avant, Social Finance and Prosper are just a few of the online lenders that have stiffened the credit approval requirements their customers must meet to gain approval for various loan products, Bloomberg reported. These stricter underwriting rules have also included shorter maturity periods and timelines in which borrowers have to pay off their loans in full.
Henry Song, a Columbus, Ohio-based portfolio manager who owns securities in several online-lending platforms, told Bloomberg that bond investors - which largely provide the money FinTech firms use to lend - are the ones calling for the credit crackdown.
"They all had a pretty tough time and took losses a lot more than expected," Song explained. "Some dropped certain grades and the mentality of grabbing market share to be profitable has shifted."
Loan dollar amounts up 50 percent since 2015
There's no denying the upward mobility online lenders have given to consumers as well as companies, many of them start-ups short of the money they need for various payment purposes. Based on an analysis performed by NDP Analytics, the five largest online small business lenders increased their loan amounts by 50 percent over the course of three years. Specifically, they furnished small businesses with a combined $3.9 billion in 2017 compared to $2.6 billion in 2015.
But with earnings down and defaults up, online lenders are covering their bases through programs and strategies that help improve the likelihood they get paid back, such as by raising interest rates and flat out rejecting loan requests from borrowers that don't quite measure up to the creditworthiness test.
Rosemary Kelley, Kroll senior managing director, noted to Bloomberg that the tougher rules are applied virtually across the board.
"We have seen many of the platforms tightening their underwriting or essentially eliminating certain segments," Kelley said. "They are changing certain criteria in order to move up-tier somewhat in terms of the credit that they're taking."
Borrowers of major online lenders must meet higher credit standard
For example, as recently as 2016, the weighted average FICO credit score borrowers needed to obtain a loan from online lender SoFi was 732. This year, the average is 744, Bloomberg reported. The same is true for the online lender Prosper, whose weighted average credit score currently sits at 717 from a previous 704 just two years ago.
As noted by The Wall Street Journal, earnings have failed to impress for online lenders and the investors that provide the backing. The uptick in defaults is part of the reason why. Annual returns are down for funds such as Lending Club Corporation, and Colchis Capital Management.
Online lenders are hoping that the dialing up of loan underwriting standards will fix what currently ails the segment and avoid what the student loan sector has experienced in recent years. Citing data from the Department of Education, the Washington Post reported 11.5 percent of borrowers defaulted on their student loans in 2016 among those that took them out in October 2013. In 2015, the student loan default rate was 11.3 percent.
FinTech firms and other loan entities serve a tremendous purpose by providing the financial backing for the backbone of the U.S. economy - small businesses. However, they quite literally can't afford to make hasty approval decisions. Microbilt offers the powerful credit decisioning tools that gives online lenders the background knowledge available to learn more about borrowers' financial track record so they can better determine the best loan candidates. We also have alternative credit reporting resources to learn more about borrowers who don't have traditional credit.