Online Lenders May Raise Rates

The move by the Fed to raise interest rates earlier this month may have a ripple effect across the online lending space, The Wall Street Journal reported Tuesday (Dec. 22).

The space has “felt the effects of investor uncertainty” amid the rising rate environment, said the publication.

One tell: caution in the marketplace as deals are getting pushed out and when they are getting done, the securities backing the loans are seeing waning pricing.

It’s been widely anticipated that borrowers will start to see higher costs, with the sector marked by statements such as Lending Club’s this week that it would boost rates charged to new borrowers by the same 25 basis points that the Fed used as its hike to the target short-term rate.

[bctt tweet=”It’s been widely anticipated that borrowers will start to see higher costs.”]

Could it be that the expectations for low yields may give way for yearning for higher yields and that costs will no longer stay low for the lenders themselves? If both scenarios dovetail, the ability to offer loan metrics that are relatively more attractive than those offered by larger, more traditional lenders may be squeezed. In an illustrative example, WSJ noted that Citigroup, which has sold more than $1 billion in securitized loans gathered from online lender Prosper, has over the past four months “had to offer progressively higher yields on each deal to entice investors.”

The yields on loans packaged and sold to investors with an average weighted yield of two percentage points higher than LIBOR — and subsequent packages — have come in at a 2.5 percent and 3 percent premium, respectively. Higher yields will mean higher borrowing costs and thus smaller margins for the lending companies themselves.

One new issue coming to market that represents what WSJ said is “the next deal to watch” is Deutsche Bank, which is looking to complete a sale of $1 billion in personal loans that were bought by Santander Consumer USA Holdings, in turn bought from Lending Club. The sale started in November.