Marketplace lender Funding Circle halved its lending volume in the US at this start of the year after spotting underperforming loans in an earlier batch of loans, according to the fintech company’s chief risk officer.
Jerome Le Luel, who joined the company from Barclays last October, made the disclosure during a press conference at Funding Circle’s London headquarters on Thursday, citing it as an example of the company’s pro-active approach to managing risk and making sure investors who lend money on the platform are properly protected.
Le Luel said: “It’s our responsibility to take action fast enough.”
“We keep scrutinising quality, it’s like a factory, you’re doing quality control and if you’re not happy with what comes out of the chain you slow down, assess, fix, restart. We don’t have a huge fixed cost base, that allows this.”
Funding Circle, founded in 2010, is a marketplace, or peer-to-peer, platform that lets investors lend money directly to small businesses, cutting out banks who usually sit in between. While investors take on the risk of businesses defaulting on the loans, they stand to earn better returns.
Le Luel told journalists: “Last year, when I came in, we looked at the vintages we’d just created and although 2014 was looking fine, the first quarter 2015 vintage for some reason was going off track. Significantly off track. 50%. It was earlier on, 6 months along.”
UK-listed VPC Specialty Lending Investments, which invests in peer-to-peer loans, said in a letter to investors last month that it stopped purchasing Funding Circle US loans late in 2015 after its portfolio “continued to substantially underperform our expectations.”
Le Luel said: “We looked at that [the early 2015 loans] and without waiting for those loans to fully mature in 4 years, we drew the conclusion that there was something we didn’t like. Early January, we tightened our acceptance criteria. We basically halved the number of loans we accept — a massive reduction — until we understand what’s going on.
“We found that there were some channels that were not performing, we found that the model was not fully adapted to the US economy at that time. We decided to refine them. Suddenly, by May, we had developed tools that we could back test and get comfortable with it, and we started to reopen the taps a bit more.”
UPDATE: Since publication, Funding Circle has provided the following quote from Sam Hodges, cofounder and US Managing Director of Funding Circle US: “The Q1 2015 portfolio represents approximately 10% of total lending in 2015. The overall portfolio for 2015 has delivered 8% per annum for the whole loan marketplace.”
Le Luel put the problems down to early-stage teething problems with the US business. Funding Circle entered the US in 2013 through the acquisition of San Francisco’s Endurance Lending Network.
“Our institutional investors, we have no retail investors in the US, we were very transparent with them,” Le Luel said. “We said: ‘Hey, this is what we’ve found, we are going to protect you. Sorry, it will be less money for a few months. Once we’ve got the right tools, it will start again.'”
A spokesperson for Funding Circle told BI: “The overall portfolio has delivered more than 8% per annum in the US for our whole loan marketplace, and we continue to target net yields of over 8%.”
Le Luel said lending volumes in the UK, by far Funding Circle’s biggest market, have been unaffected and the company is still growing at around 100% year-on-year.
Funding Circle held Thursday’s press conference to showcase results of recent internal stress testing, showing the resilience of its loans in the wake of a possible recession.
The company’s modelling suggests that even under the Prudential Regulation Authority’s “apocalypse” scenario of a 60-month recession and a 30% fall in property prices, Funding Circle’s new loans should still return around 3.9% to investors.
The stress test findings contrast with comments made by Adair Turner, the former Chairman of the Financial Services Authority.
He told the BBC earlier this year that: “The losses which will emerge from peer-to-peer lending over the next five to 10 years will make the bankers look like lending geniuses.”
Le Luel began the stress testing process when he joined Funding Circle but said it was accelerated in the wake of the Brexit vote when institutional investors began asking for reassurances. Funding Circle cofounder and UK MD James Meekings said other than a slight dip on the day of the Brexit vote, activity on its platform has been largely unaffected.
Funding Circle has lent over $2.6 billion globally over its platform. The company has operations in Germany, Spain, and the Netherlands, as well as the UK and US. The company has raised over $270 million from investors including BlackRock, Singapore investment giant Temasek, Scottish investment company Baille Gifford, and a fund owned by billionaire Russian internet entrepreneur Yuri Milner.
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