Online lenders seek to balance the needs of borrowers, investors
As businesses shutter and workers are forced out of jobs they can’t perform remotely, consumers hard hit by the rippling economic effects of coronavirus may seek out personal loans to keep them afloat — or ask for relief from their payments on existing loans.
Online lenders are answering the call with temporary measures. But at the same time, they are facing their first significant downturn given that the entire industry reached maturity after the 2008-2009 financial crisis. This is making them cautious about any long-term lowering of credit standards, and some are thinking of tightening.
These fintechs have not yet been hit with a wave of new applicants since the coronavirus outbreak. While SoFi reports it has had a 20% week-over-week increase in personal loan applications in March, Prosper, a peer-to-peer marketplace, notes that the increases it has seen are in line with seasonal patterns and can also be attributed to reduced choices in the market. Avant, a service for middle-income borrowers, says it has not seen a marked increase but expects that could change.
Online lenders are loosening rules for existing borrowers in search of temporary relief. A number of fintechs are adopting measures that are similar to what major banks are offering to their borrowers, including deferred payments, fee waivers and forbearance.
Payment deferrals of one to two months are common. For example, Upstart allows affected customers to defer up to two months of payments, with no interest or penalties accrued. SoFi will allow eligible customers to defer one month’s payment and consider those experiencing hardship for an additional 30 days, all fees waived.
SoFi also offers an unemployment protection program in which members who lose a job through no fault of their own can apply for forbearance in three-month increments and up to 12 months in aggregate. Unpaid interest will continue to accrue and be capitalized onto the principal balance (although members can elect to make interest-only payments).
Others are introducing programs that can adjust to fluctuations in customer demand. In February, LendingClub moved to a new loan servicing platform that Financial Health Officer Anuj Nayar (his job is to help members achieve financial well-being) said gives the company more flexibility in how it rolls out new services for borrowers facing turbulence. For instance, associates may adjust payment dates to keep members out of delinquency.
“And I think this is the definition of unexpected turbulence,” Nayar said.
James Paris, CEO of Avant, counts well over a thousand customers who have been hurt by the crisis and says his company is fine-tuning a forbearance program. It allows borrowers to delay one payment to the end of the loan schedule and waives some fees.
Still, “it’s hard to know if the initial programs are the right length of time, and if they give people the breathing room they need to get back on their feet, which is our goal,” Paris said. “There is always the potential these programs could be extended.”
These relief options echo those typically granted to personal loan customers of Avant, LendingClub, Prosper and SoFi in the wake of natural disasters declared by the Federal Emergency Management Agency. But in those cases, companies can zero in on geographic areas where customers are in need.
“The difference here is that it’s not restricted to a particular location,” Paris said. “And we expect the forbearance period will be longer than what we’ve done in the past for floods and hurricanes.”
Wary of a recession
But to protect themselves and their investors, some alternative lenders are tightening their underwriting requirements, leaving fewer options and more restrictions for applicants in search of a personal loan.
This is not the case with SoFi, which has not reported any significant changes in lending criteria since it already focuses on prime or super-prime borrowers. But LendingClub, which normally sees 50,000 loan applications a day, is taking several steps to balance out the needs of its borrowers with its investors. That includes reducing approval rates for certain higher-risk borrowers, increasing income and employment verification requirements, and pulling back on marketing through certain channels, such as Credit Karma.
“We are not seeing loan deterioration, but depending on how long this lasts, we’re anticipating that might happen,” Nayar said.
David Kimball, Prosper's CEO, said it was concerned about a recession back in 2018, and took several measures over the past few years — including tightening credit, focusing on high-quality borrowers and diversifying funding sources — to ensure its portfolio could withstand the impact. The company has continued to make adjustments to credit and verification.
LendingClub also said it has been planning for a market downturn for a long time. Its last recession-planning session came in the nick of time.
“Luckily, we did an executive-level exercise in October about what would be the effects on the business due to a pandemic,” Nayar said. “We took a lot of lessons into our crisis playbook.”
“You never think when you’re doing these things that they will come in useful,” he added. “And when they do, it’s so much better to have everyone in agreement so all you’re doing is executing than trying to work out on the fly.”