Fintech Online Lenders Respond to Rising Defaults by Tightening Underwriting Standards

Jun 1, 2018News

Several years of positive growth have been good for investors in fintech lending companies like Social Finance (SoFi), LendingClub, Prosper, and Avant. But after a wave of defaults across these platforms, investors have gotten spooked, and the firms are now tightening their underwriting standards governing who can get loans, according to a report in Bloomberg.

These fintech startups are responding to higher than usual default rates and an increasing number of write-offs by raising interest rates, rejecting consumers with lower credit scores, and shifting toward shorter-term loans, according to the Kroll Bond Rating Agency.

For borrowers who were gravitating toward these platforms instead of traditional banks, that could be bad news.

In November, LendingClub, the biggest of the four companies, stopped offering F and G grade Notes on its investor platform, saying in an update that the company “noticed an increase in prepayment and delinquency rate” in this loan segment. “We feel it is in the best interest of our investors to remove F and G grade Notes while we test new capabilities and refinements to the underwriting and pricing criteria and determine how to best offer a better experience for both borrowers and investors in the F and G segment.”

SoFi, the second largest company, increased the weighted average of its FICO credit scores from 732 to 744. Similarly, the weighted FICO credit score average on Prosper jumped from 704 to 717.

“Defaults in the general unsecured consumer credit market (which includes marketplace loans) have been on the rise,” Prosper said in an emailed statement to Bloomberg. “Prosper has been watching this trend and tightening credit since 2017, and we expect credit tightening to continue in 2018.”

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