DriverUp, a U.S. online marketplace that allows hedge funds to invest directly in car loans, launched on Monday with a $50 million investment from venture capital firms.
Executives at DriverUp told Reuters that the company is expecting to sell at least $50 million of auto loans to funds, wealthy individuals and other investors through its website this year.
DriverUp's parent, Dallas, Texas-based Sierra Auto Finance, will make all the loans on the platform at first, but Chief Executive Sam Ellis said that over time other lenders may sell their loans via the site. Before starting Sierra in 2012, Ellis founded Exeter Finance Corp, a subprime lender acquired by Blackstone Group LP in 2011.
Banks and investors have poured money in auto loans in recent years after losses on mortgages and credit cards during the financial crisis made many lenders skittish about expanding in those areas. Consumers took out $105 billion in auto loans in the third quarter, the most in any quarter since 2005, according to the Federal Reserve Bank of New York's quarterly report on household debt and credit.
Websites that allow investors to fund consumer loans, including sites like LendingClub Corp, extended $9 billion of loans in 2014, nearly triple the volume of loans made in 2013, according to estimates from credit-rating firm DBRS.
Unlike many other sites, the loans that DriverUp is making and selling will be backed by borrowers' collateral.
The auto finance market's fast growth has been accompanied by increased scrutiny from regulators and law enforcement officials, especially around whether investors in bonds backed by auto loans received adequate disclosure of their underlying quality.
Ellis said that although regulators pose the greatest risk to DriverUp's business model, loans on the platform will offer much more information to investors than bonds backed by the loans, including a verified credit analysis for each individual borrower.
