Delinquency/Loss Trends; Yield Curve One Hike from Inversion; Varo withdraws FDIC app

by | Sep 30, 2018 | Blog | 0 comments

Greetings,

The Fed raised rates for the 3rd time on Wednesday and expect inflation to rise to their 2% target.

The range of Fed Funds Rate is now between 2% – 2.25%. A super-majority of committee members indicated that they would like to hike rates by another 25 bps in December. US GDP growth of 4.2% in the 2nd quarter was the fastest since 2014 Q2, and US consumer confidence reached an 18-year high in September.

The Fed’s “dot-plot”, which indicates committee members’ views on the level of interest rates showed a potential rate hike in December, and 2-3 hikes in 2019.

Source: Federal Reserve, Bloomberg, PeerIQ

Rising front-end rates have brought the yield spread between 10-year and 2-year rates close to zero, increasing the likelihood of an inverted yield curve at the next rate hike. The yield spread between 10-year and 2-year treasury bonds is only ~12 bps, and an inverted curve has presaged past recessions.

Source:  PeerIQ, Bloomberg

In regulatory news, Treasury Secretary Steven Mnuchin has indicated his support for his former OneWest colleague and the Comptroller of the Currency, Joseph Otting’s proposal to overhaul the Community Reinvestment Act (CRA). Mnuchin and Otting butted heads with CRA activists when they were selling OneWest, and would like to simplify and modernize CRA rules.

In an op-ed, Otting laid out his vision for redesigning the CRA which is designed to encourage banks to meet the needs of borrowers in all segments of their communities, including low and moderate-income neighborhoods. CRA rules were rolled out in 1977 – a period where “redlining” the practice of refusing credit to specific neighborhoods. Online lending and deposit-taking cuts across state lines and the rules need an update.

Otting suggest policymakers:

  • Revisit how we define the communities that banks serve – Otting seeks to revise how assessment areas are defined under the CRA and expand what qualifies for CRA consideration. By defining “community” as underserved populations, rather than a geographic area in proximity to a bank’s branches, a bank can expand financial inclusion while not being narrowly limited to their geography.
  • Establish metric-based thresholds for CRA performance ratings – Metric-based thresholds can reduce the cost and regulatory burden on banks, and create transparency in the CRA evaluation process.
  • Make CRA performance evaluations timelier and more useful – Regular and periodic evaluations of banks’ CRA activities will help ensure that the new laws are working as intended, and provide banks with the feedback needed to fine tune their activities to reach the broader goal.

We believe that this is an important step towards increasing financial inclusion, and you can read our prior analysis here.

Varo Money, which was granted preliminary approval for National Bank Charter last month, has withdrawn its FDIC application. The FDIC is out-of-sync with other federal regulators – including the US Treasury, Federal Reserve, OCC, and SEC – all of whom are supportive of FinTech innovation. Varo Money joins NelNet, Square, and SoFi as others have withdrawn their charter.


LendingClub settles with SEC

The SEC’s order enables LendingClub to put the investigation into the events of May 2016 largely behind the company. In addition to a fine, former CEO Renaud Laplanche agreed to a securities industry bar and investment company prohibition. LendingClub Advisors and Laplanche agreed to the entry of the SEC’s order without admitting or denying the SEC’s findings.  The SEC Enforcement Division determined not to recommend charges against parent LendingClub Corporation, which promptly self-reported its executives’ misconduct following a review initiated by its board of directors, thoroughly remediated, and provided extraordinary cooperation with the agency’s investigation.


PeerIQ’s Marketplace Lending Loan Performance Monitor

This week we preview our MPL Loan Performance Monitor (with data as of July 2018). Our MPL Loan Performance Monitor tracks the delinquency rates, cumulative losses, cumulative prepays and transition matrices using public marketplace lending data that comprises unsecured consumer loans originated by Marketplace Lenders. Overall, we notice that delinquencies and cumulative losses on newer vintages are higher while cumulative prepayments have picked up on newer vintages at the corresponding loan age.

You can download our latest MPL Loan Performance Monitor here.

Delinquencies by Vintage

Source: PeerIQ

Cumulative Losses by Vintage

Source: PeerIQ

The table below shows the transition matrix for all outstanding loans in the PeerIQ Public Marketplace. 97.3% of current loans stayed current, while 54.9% of loans that missed 1 payment also missed their 2nd payment. The cure rate once a loan has missed 4+ payments is negligible with 79.6% of those loans charging off as issuers recognize their charge-offs.

Source: PeerIQ

PeerIQ customers can track roll-rates and the data above in real-time by going to the Roll-Rates application on the platform. Subscribers to the TransUnion dataset can perform analysis such as the charts above on the consumer credit dataset.

Reach out to PeerIQ to learn more!

 

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