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Institutional lenders "cherry picking"
There have been several press articles and several discussions on the P2P Independent Forum (links here and here) concerning institutional lending on peer-to-peer platforms "cherry picking" loans. The Peer-to-Peer Finance Association is believed to be looking at amending its operating principles to ensure that institutional lenders are treated the same as retail lenders. Several insiders have stated that they believe that this is not happening, but it is our belief that this is indeed happening, either directly or indirectly.
Some peer-to-peer companies have stated privately to P2P money that the costs of acquiring or maintaining a smaller number of institutional lenders is less than a larger number of retail lenders. Others have privately stated that they have offered institutional lenders lower fees in order for them to join a particular platform. These companies may not be members of the P2PFA but these practices are belived to be taking place.
Even on Funding Circle an institutional lender can reject a loan and this would then be passed on to retail lenders to fund. The due diligence an institutional lender would do for say a £250,000 loan would be significantly more than a retail lender for a £100 loan. If an institutional lender rejected a loan it is likely that their perceived risk of a loan was too great for the lending rate, and then the retail lenders would take on this loan. Therefore the institutional lender is, by the very nature of the lending mechanism, cherry picking loans.
There is a historical similarity with Zopa listings, which Zopa used to offer as well as their market model. A listing would allow a borrower to appeal directly to lenders. The credit checks for listings were less rigorous than markets, and quite a few listers - as they were known - were actually rejected borrowers from their market model. The bad debts for listings were considerably greater than on the Zopa markets and Zopa removed the listings offering in June 2011.
A few companies, such as RateSetter, have come out and publically stated that they will not treat institutional lenders any different to retail lenders, but there are others that remain silent. We would encourage all platforms to treat institutional lenders the same as retail lenders without positively discrimination, and we would welcome any change to the operating principles on the Peer-to-Peer Finance Association.