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Intro to Stress-Testing; Varo Money Bank Charter; Funding Circle IPO

By Vy Phan

September 9, 2018

Greetings, Early this week, Funding Circle announced plans to raise £300Mn on the London Stock Exchange through an IPO, valuing the company at up to £1.65 billion. To date, Funding Circle has originated over £5 billion in loans across Europe and the United States. Funding Circle has grown revenue by a 54% CAGR to £63 Mn in the first half of 2018. Funding Circle charges 100bps for servicing and estimates it receives revenue equal to almost 5% of loan value originated. In regulatory news, the OCC granted Varo Money preliminary and conditional approval for a national bank charter. Varo Money applied for a national bank charter in July of 2017 with both the OCC and the FDIC. The OCC’s approval is conditional on Varo raising $104 million in initial capital within 12 months and obtaining deposit insurance from the FDIC. Although Varo is a fintech company with no physical footprint, this approval and application is not part of the OCC’s special purpose fintech charter for nondepository fintech companies. The approval is notable: i) the scope of the OCC charter is broader than the SPNB/FinTech charter, ii) regulators are willing to provide contingent application approval to startups (Varo Money was founded three years ago, and iii) it’s the first approval for all-mobile online bank (which means regulators may be rethinking how FinTech satisfy CRA regulations from the era of brick-and-mortar banking). Stay tuned for a webinar next week focusing on characteristics of consumers who prepay and opportunities to mitigate personal loan prepayment risk. Hosted by PeerIQ’s CEO, Ram Ahluwalia, and TransUnion’s SVP of Financial Services, Jason Laky, the webinar will help both lenders and investors make smarter lending decisions.

 

  Prepayment Webinar Teaser – Aggregate Excess Payment As shown in the slide below, a simple metric such as the aggregate excess payment (“AEP”), is a strong indicator of a borrower’s propensity to prepay. Also, the profile of borrower’s who refinance are quite different than those holding to maturity. The effect is more pronounced at higher quality borrowers (super prime borrowers who refinance within the first 6 months have an AEP 2x those who never prepay). The AEP is a credit bureau derived attribute – reach out to PeerIQ to learn more how to implement this metric in your investment decisioning.

 

Source: TransUnion, PeerIQ

Online Lending Policy Institute Summit in DC We also look forward to the Online Lending Policy Institute’s annual summit in DC. The OLPI’s Summit is focused on creating a dialogue between the industry and regulators. Last year, former Acting OCC Head Keith Norieka affirmed that the FinTech charter could be granted to commercial firms. This year we expect a showdown between the NY Department of Financial services and the Fed. The NY DFS has consistently challenged the authority of the OCC to grant special purpose national bank charters. Headlining the event are Craig Phillips, Counselor to the Secretary, U.S. Department of the Treasury, Congressman Trey Hollingsworth (R-IN) and Congressman Gregory W. Meeks (D-NY). State Banking Commissioners from New York, Wyoming and Illinois and Paul Watkins, the new head of Innovation at the CFPB will also join. PeerIQ readers will receive 33% discount by using the coupon code ‘PeerIQ33’ when buying tickets. This week, we dive into a new application on the PeerIQ Analytics Platform - Stress Testing. (PeerIQ customers should reach out to your client delivery coverage to activate this feature.) PeerIQ’s Stress Testing Tool – Manage Your Portfolio Thru a Downturn Introducing PeerIQ’s new Stress Testing tool. Stress testing allows originators, banks, and asset managers to create custom stress scenarios and evaluate portfolio performance in these scenarios. Stress Testing is essential to understand the downside risk of your portfolio, shock portfolios, and ensure reserving of adequate capital consistent with OCC charter risk supervisory guidelines. Step 1: Choose a Baseline Stress Test You can choose to base your stress test on the historical performance on a specific pool as a baseline, or specify your assumptions. A Stress Test comprises multiple Stress Scenarios, and each scenario requires the following inputs:
  1. CPR curve
  2. CDR curve
  3. Severity curve
  4. Forward Interest Rate projection
  5. Origination projection
  6. Funding Rate projection
  7. Advance Rate projection
The baseline pool can be stratified using combinations of the following risk-factor so you can design the appropriate curves:
  1. Loan Term
  2. Loan Coupon
  3. Loan Status
  4. Origination Vintage
  5. Original Principal
  6. Current Principal
  7. Borrower Credit Score
  8. Borrower DTI
  9. Borrower State of Residence
After selecting the baseline pool and the associated cohorts to model your stress scenarios on, the charts below update to show the historical CPR, CDR and Severity curves for each selected cohort. (We highlight below in ‘Red boxes’ brief annotations to walk-thru the application).  

Source: PeerIQ

Step 2: Defining Stress Scenarios The curves defined above can be shocked to generate various the stress scenarios under a stress test. Below we have defined PeerIQ Bull, PeerIQ Base and PeerIQ Bear scenarios which are derived from shocks of baseline curves shown above.  

Source: PeerIQ

Step 3: Running a Stress Test Once all the scenarios in a stress test have been defined, you can choose the pool to run the stress test on, with an as-of-date to run the test and a time horizon for projections. The following outputs are provided for each scenario:
  1. Market Value
  2. Yield
  3. Price
  4. Cumulative Loss (%)
  5. Cumulative Prepayments (%)
  6. New Originations
  7. Net Interest Income (NII)
  8. Net Interest Margin (NIM)
The charts show projections of cumulative loss, prepay, market value and yield for each scenario. In the example below, the sample pool has a yield of 6.29% in the Bull case and 1.06% in the Bear case, with expected cumulative losses of 11.44% and 14.15% respectively.

Source: PeerIQ

 Step 4: Cashflow Projections The Cashflows tab shows cashflows broken down by principal, interest, prepays, servicing fees, charge-offs and recoveries. The chart below shows projected cashflows in the Base case. Cashflows are displayed visually and in a table format.  

Source: PeerIQ

Robust stress-tests are critical to satisfy OCC charter risk supervisory guidelines. They also help investors analyze how their portfolio will behave under various economic scenarios. Reach out to learn more about Stress Testing! Conferences: Industry Update: Lighter Fare: