One of the biggest U.S. mortgage lenders is looking to disrupt the disruptors in the market for peer-to-peer loans.
LoanDepot.com LLC, founded by mortgage-banking veteran Anthony Hsieh, started offering its customers personal loans that are funded by matching investors with consumers who borrow over the Internet. Silicon Valley firms led by Lending Club Corp. and Prosper Marketplace Inc. have been using that model to upend the kind of direct-lending that banks and finance companies have done for generations.
Traditional lenders are fighting back after more than 75 startups built websites matching investors such as hedge funds with borrowers ranging from consumers to small businesses looking for loans to pay down existing debt or finance a big purchase. Non-bank lending is growing so fast that Goldman Sachs Group Inc. said in a March report it eventually could rob banks of at least $11 billion in profits annually over the next several years.
"There are a lot of startups, and the space is feeling noisy," said Hsieh, who founded LoanDepot in 2010.
The company calls itself the second-largest independent consumer lender in the U.S. after Quicken Loans Inc. It funded $14.3 billion of mortgages through June, more than doubling its volume from a year earlier, to rank No. 11 in that market, according to newsletter Inside Mortgage Finance.
Unsecured consumer lending through operators of online loan marketplaces totaled about $7.4 billion last year and will probably rise at a compound annual rate of 47 percent through 2020 to reach $75 billion in new loans, according to a May report from Morgan Stanley. That would represent 8.4 percent of the total debt issuance of the type at that time, the bank said.
LoanDepot has locked in more than $2.6 billion in commitments from investors to buy its unsecured consumer loans, which it began making in May, according to the company. LoanDepot is also seeking to take on marketplace lenders by expanding its debt offerings to include home-equity loans, which compete with the kind of consumer loans offered on peer-to-peer websites.
LoanDepot's entry "is a big deal for all market participants," said Matt Burton, chief executive officer of Orchard Platform Advisors LLC, one of the biggest provider of marketplace lending services.
Marketplace-lending platforms have become an increasingly popular source of investments for institutions at a time of historically low interest rates. Investment firms including BlackRock Inc., Apollo Global Management LLC and Ellington Management Group are targeting direct purchases of loans with higher potential returns.
While the loans remain a relatively small piece of the broader market for consumer debt, they're on track to almost double this year, according to Autonomous Research LLP. Goldman Sachs Chief Executive Officer Lloyd Blankfein wrote in an internal memo obtained by Bloomberg in May that digital lending opportunities to consumers and small businesses was an area of opportunity Goldman intended to "capture."
The nascent business originally was known as peer-to-peer because it directly linked borrowers and funders over the Internet. It's increasingly being referred to as marketplace lending as it becomes less personal and institutional investors such as hedge funds, money managers and even banks have get in on the act by buying the debt.
Hsieh, who started LoanDepot after selling other mortgage lenders to E*Trade Financial Corp. and Barry Diller's IAC/InterActiveCorp, sees an advantage for his firm because it's accumulated about 10.5 million potential customers while growing its mortgage business. The company already spends $100 million a year on marketing, adding some 350,000 new leads on potential applicants each month, he said.
Along with the move into marketplace lending, LoanDepot is also seeking to profit from a revival in demand for home-equity loans as housing prices rebound from the worst slump since the Great Depression. That's allowing consumers to take cash out of their properties again.
The peer-to-peer business is thriving in part because home- equity lending has dried up. About half of all borrowers who take out unsecured consumer loans are homeowners, Hsieh said.
"Americans are looking for better ways to borrow," Hsieh said. "We're selling more than one flavor of ice cream."