With continued growth of the marketplace lending ABS sector and repeat issuance from a range of firms, the market appears to have shaken off its label as an esoteric asset class. At the same time, a potential resolution to the ongoing Madden case suggests that the sector could finally be overcoming its reputational issues.

Last quarter was strong for the marketplace lending ABS sector, which saw volumes of US$2.6bn, representing 7.6% growth in issuance over 3Q16, according to PeerIQ figures. Issuance volumes now total US$23.8bn across 96 deals and, in line with other asset classes, there has been 15 months of spread tightening - along with and "acceleration of the deal calendar."

Vincent Basulto, partner at Richards Kibbe & Orbe, says that, in general, the market has shaken off its label of being an esoteric asset class. While still relatively new, it has built up a bigger data set and has therefore managed to attain the status of a more mainstream asset class.

Equally, while concerns about increased delinquencies persist, it is acknowledged that delinquencies are generally on older loans and, therefore, older ABS. Basulto says that the securitisations are structured in a robust enough fashion that investors are sufficiently protected and platforms have also amended their lending strategy to reduce the likelihood of future defaults.

However, a recent report from the Federal Reserve of Cleveland accused the marketplace lending industry of a number of damning indictments, such as predatorial lending practices and negatively impacting the financial wellbeing of borrowers. After an outcry from industry figures, such as the Marketplace Lending Association, the report was retracted.

Basulto explains: "The report has been taken down because it was recognised that it used a range of data from storefront firms, payday lenders and so on. It was a mixed data set, not exclusively about marketplace or online lenders. The Cleveland Fed has acknowledged this and consequently the report isn't generally applicable to marketplace lending."

The Marketplace Lending Association issued a strongly worded statement criticising the report, stating "the Cleveland Fed researchers relied on a data set almost entirely of traditional non-online loans to grab 90,000 random borrowers for their analysis, labeled them peer-to-peer with no evidence that they were peer-to-peer and then brutalised the new peer-to-peer lending industry with their analysis of those traditional loans."

TransUnion also reportedly said it has no understanding of how the Federal Reserve Bank of Cleveland could have used its data to reach the conclusions it did.

Adding further to the furore, the Cleveland Fed was accused of using the retracted study to block the 'Protecting Consumers Access to Credit Act' bill by US Representative for North Carolina Patrick McHenry. The bill is intended to overturn a decision in the Madden versus Midland case against the "valid when made clause", which allows sales of legally made loans in one state to parties in other states, even if the loan exceeds the interest rate cap in the state of the borrower.

Basulto comments that while the data from the Cleveland Fed's report overall might be invalid, the study may serve as a worthwhile reminder to the lending industry to reevaluate their lending practices.

This year has also been marked by increased ABS activity from Lending Club, with the lender issuing its first self-sponsored securitisation in June (see SCI's primary issuance database) under the Consumer Loan Underlying Bond Credit Trust programme. It then went on to issue a further two ABS, with the most recent closing at the end of November - the US$330m Consumer Loan Underlying Bond Credit trust 2017-P2.

Additionally, the platform issued a US$25m tradeable pass-through certificate - dubbed the CLUB certificate - which the lender describes as a "first-of-its-kind" transaction within the marketplace lending arena. Basulto comments that it indicates a desire to engage a wider range of investors, although notes that it isn't so much an innovation as applying old technology to a new lending model. He adds that Lending Club has essentially structured a group of loans as a single security with a CUSIP.

Basulto says: "The pass-through structure brings investors added value because they can be more selective about the loans they have exposure to. It is thought to have been tailored to investor demand from a pension or insurance firm and it highlights the willingness of lending firms to broaden their investor base and to accommodate a variety of investor demands."

PeerIQ also comments that the pass-through certificate is an important milestone for Lending Club, as it helps it expand its investor base because the product enjoys greater marketability through being in a security format and opens up liquidity possibilities in OTC markets. Furthermore, it may enable lower financing costs, as the CUSIPs enjoy lower-cost repo financing as an alternative to higher-cost credit facilities.

PeerIQ adds that the product helps Lending Club address investor demand for secondary market liquidity and "obviates the need to build a distinct secondary market". The firm concurs with Basulto that the product helps from the valuation angle too, as the "price discovery generated from markets in CUSIPs" will help valuation firms "calibrate pricing to observed trades in the market." Basulto says that he suspects other firms will look to launch similar products, but it is too soon to say whether it will become ubiquitous.

While the industry continues to move forwards and platforms continue to issue ABS, it's notable that several firms have yet to post a regular profit. Even Lending Club, the largest platform in the US, has failed to escape from loss-making territory.

Basulto remains sanguine on this topic, however. He says that it's not too much of a "red flag", but indicates that the lender may look to start turning a profit, should the venture capital funding it is reliant on dry up.

Looking ahead, Basulto suggests that smaller firms may need to scale up in order to make their business model viable. He concludes that the industry is set to continue in much the way it did in 2017 and predicts steady issuance, although he is keeping an eye on the impact of the new OCC head and the interim head of the CFPB.

RB