In browsing through the Wall Street Journal I ran into three stories side by side:
- China Calls Lending Platform Ezubo a $7.6 Billion Ponzi Scheme
-
J.P. Morgan Acquires Nearly $1 Billion Worth of Lending Club Loans
- Remember ‘Liar Loans’? Wall Street Pushes a Twist on the Crisis-Era Mortgage
Each is a different side of specialty loans.
The Ezubo fraud story caught my attention first. That is a lot of money for a Ponzi scheme. There is no proof that it is actually a fraud at this point. But employees of legitimate companies do not generally bury the firm’s accounting books in a field.
I found the LendingClub loan story to be interesting because the loans were sold at premium to the outstanding balance. The buyer thought it would get its money back and then generate more revenue through those borrowers.
The liar loans are a vestige of the housing boom when lenders were underwriting loans on value and not the borrowers’ ability to repay the loan. There is some need for these products for borrowers whose income is hard to document. But largely they are known as liar loans for poor documentation and cheating on behalf of the borrower. I though they had gotten buried in hole, never to be seen again.
It’s the liar loans and the Ezubo loan that are most alike. The loans (or “loans” in the case of Ezubo) are driven by lender demand. It’s Wall Street banks that are looking for pools of liar loans. In Ezubo’s case its the small investors looking generate returns for peer-to-peer loans. In neither case is an increase in loans being driven by legitimate consumer demand. Its lenders searching for yields.
The LendingClub loans are driven by consumer demand. These loans are also better documented and have credit worthy borrowers. The story states that the average FICO score was about 700.
Good documentation and controls generated the best returns. I think that makes any compliance professional happy.