You might not know Steve Eisman, but you have likely seen or heard of the movie The Big Short. Eisman is the inspiration behind the character of Mark Baum, played by Steve Carrel.
Eisman keeps a low profile for the most part, but most recently, he spoke at a large conference hall of the beachfront Fontainebleau Hotel in Miami. There, Eismam pointed out an industry that he is concerned about at the moment: online lending. (Source: “Eisman Assails ‘Clueless’ Silicon Valley Over Online Lending,” Bloomberg, September 20, 2016.)
“Silicon Valley, I think, is clueless,” he said.
According to Bloomberg, more than 160 startup online lending firms have emerged since 2009. Eisman’s concern is that these companies don’t have much experience when it comes to making loans to consumers. Some of them, he said, treat the loan-making business the same as retail sales.
“When you go to Amazon and buy a book, you buy it and the transaction is over,” said Eisman. “But when you take out a loan, that is just the beginning of the transaction—it’s like a relationship.”
Peer-to-peer lending (P2P) companies have gotten a lot of attention in recent years. LendingClub Corp (NYSE:LC) went public in December of 2014, although the stock’s performance has been quite disappointing.
Delinquencies can be a big problem for the loans generated from online lending platforms.
“We have seen loans underperform from their expected loss estimate at the time of underwriting,” said Stephanie Yeh, a director at Credit Suisse Group AG. “There still isn’t a lot of data.” (Source: Ibid.)
Still, P2P lending proponents say that the technology brings cheaper transaction costs, faster approval times, and more availability of credit to borrowers who may otherwise not qualify for loans.
“Traditional Wall Street occasionally forgets that online lending has a long track record and that these platforms have been built by people with deep financial markets experience,” said Nat Hoopes, executive director of the Marketplace Lending Association. “Borrowers and investors are turning to these online products because they are delivering enormous value compared to the traditional alternatives.” (Source: Ibid.)