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Worried in recession is coming, U.S. online lenders reduce risk



NEW YORK (Reuters) – U.S. online lenders such as LendingClub Corp, Kabbage Inc. and Avant LLC are scrutinizing loan quality, as long-term financing and cutting costs, as executives prepare for the sector's first economic downturn.

FILE PHOTO: Renaud Laplanche, (2nd R) Founder and CEO of Lending Club, celebrates with company executives after calling the opening call at the New York Stock Exchange (NYSE) in New York, US, December 11, 2014. REUTERS / Brendan McDermid / File Photo

A recession could bring escalating credit losses, liquidity crunch and higher funding costs, testing business models in a relatively nascent industry.

Peer-to-peer and other digital lenders sprouted up largely after the Great Recession of 2008. Unlike banks, which tend to have lower-cost and more stable deposits, online lenders rely on market funding that can be harder to come by in times of stress.

Their underwriting methods also often include analysis of non-traditional data, such as education level or borrowers. While platforms see that as a strength, it has yet to be tested in times of crisis.

"This is very top of mind for us," LendingClub Chief Executive Officer Scott Sanborn said in an interview, referring to the possibility of a recession. "It's not a question of" if, "when," and it's not five years away. "

Sanborn and executives at half a dozen other online lenders who spoke to Reuters said economic indicators and forecasts have made them more cautious.

Their worries are the latest sign that fears in U.S. downturn is nigh are growing. Economists polled by Reuters in March saw a 25 percent chance of US recession over the next 12 months. More recently, some executives said, Federal Reserve decision to halt interest rate hikes reinforced those fears.

"We were seeing economists bringing up some warning signs, and we were following the Fed signals and that they were becoming more deaf," said Bhanu Arora, head of consumer landing at the Chicago-based lender Avant. "We wanted to be prepared and ready."

To position itself better for recession, Avant said up to a late late year that includes tightening credit requirements for segments identified as higher risk, Arora said.

To be sure, the executives said they are not yet seeing glaring signs of trouble in their loan books.

A downturn is also far from certain. On Friday, JPMorgan Chase & Co, the country's largest asset bank, eased fears of a recession after the posted better-than-expected quarterly profits driven by what it described as solid U.S. economic growth.

If a downturn hits, however, it would separate the stronger online lenders from the the ones.

"All these different platforms say they can underwrite in unique ways," said Robert Wildhack, an analyst at Autonomous Research. "This will be the first chance we have to see who is right and who might have been taking shortcuts."

TIGHTENING CREDIT

In February, LendingClub, one of the pioneers of peer-to-peer lending, offered growth projections for 2019 that fall short of Wall Street expectations, partly a sign of growing caution. LendingClub does not provide loans directly to consumers but is also available at connecting borrowers and investors on its online marketplace.

Sanborn said the company has more stringent about credit standards for borrowers on its platform and is attracting investors with broader risk appetites in the more cautious participants pull back.

It is also outsourcing more of its back-office operations and relocating some staff to Utah from San Francisco to reducing expenses, it said.

SoFI, and online as refinancing student loans and then securitizes them, has been focusing on making its portfolio more profitable, even if it may mean lower origination volumes, CEO Anthony Noto told reporters in late February.

EXTRA CUSHION Some companies are building more on their balance sheets and trying to secure funding farther into the future.

Small business lender BlueVine Capital Inc., for example, is seeking credit facilities with extended durations. Given a choice to pay 10 basis points less or get a line of credit that lasts in additional year, BlueVine would choose the laugh, said Eyal Lifshitz, the company’s chief executive.

"We are making sure that we are locking in capital for longer periods of time, and from providers that we trust and we know are going to be around," Lifshitz said.

BlueVine offers invoice factoring, where companies exchange future cash flows for current financing, as well as lines of credit that last up to a year. It is postponing the launch of longer-term products because of economic concerns, Lifshitz said.

Atlanta-based Kabbage, which lends to small businesses, recently completed a $ 700 million asset-backed securitization. The company said it raised the funding to meet growing borrower demand, but also partly as preparation in case of worsening economic conditions.

"We have been waiting for the next recession for the past five years," said Kathryn Petralia, co-founder and president. "More people feel confident that it's imminent."

Our Standards: The Thomson Reuters Trust Principles.

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