Alternative Finances

Banks Move To Protect Themselves From Online Lending Troubles

As the dust continues to settle from the great Lending Club explosion, the big banks of Wall Street are reportedly inking up their Plan Bs when it comes to exposure to those loans should the market deteriorate more.

The list, according to Bloomberg, includes Credit Suisse Group AG and Deutsche Bank AG. Neither have officially acted to reduce exposure as of yet, but insiders report that they’re concerned about financing they provide to institutional investors that buy loans from companies like Lending Club and Prosper Marketplace Inc.

So far, banks have funded a few billion in online loans through such credit lines, and now, lenders are hoping to avoid the same kind of troubles that rocketed through the industry when mortgage lending had its historic course correction a little under a decade ago.

Which means planning for how and when to cut back on marketplace loans — though, as of yet, no plans have been made public. Lawyers and banks’ risk committees are now looking at how they might reduce, renegotiate or even cancel funding agreements with investors, Bloomberg’s sources said.

Lending Club has noted that it is talking to new banks about their offering funding and doesn’t know of any banks that are declining to provide financing for its loans.

Rob Allard, who previously worked on complex debt instruments at Goldman Sachs Group Inc. and Deutsche Bank, notes that such scalebacks may likely be in the offing, as investors these days will cut off credit to customers even if loan performance hasn’t significantly deteriorated rather than risk the massive reputational damage that they faced during the financial crisis.

“This is noise banks want to avoid,” said Allard, who heads FireBreak Capital, a hedge fund that focuses on lending.

The especially undesirable noise comes from the short-term funding they provide to investors to help them buy online loans, as those loans are generally repackaged quickly into bonds and sold to other fund managers. The term for this is “warehouse lines of credit,” and they are widely credited with billions of dollars of losses for banks during the subprime crisis.

If these loans can not be packaged into bonds, banks may end up having to seize them.

“Borrowers typically don’t have the ability to repay in cash,” Richard Kelly, a managing director at New Oak Capital Markets, an advisory firm in New York, said. “That is a problem for banks.”

Worries aside, not all lenders are fleeing the field. Prime Meridian Capital Management is a loan investor that, with help from a bank, is increasing investments in loans made mainly by Prosper and Lending Club, noted Don Davis, a portfolio manager at the asset manager.

“As far as the quality of loans we hold in our portfolio, I see absolutely no problem with those loans, past, present or future,” Davis said.

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