This week marks the 10-year anniversary of the Lehman Bankruptcy. With the wounds from the prior financial crisis largely healed, FinTechs and non-banks have stepped up to lend in the void left by banks that retrenched post-crisis.
Of the top mortgage lenders, only 52% of loans were originated by banks during the first half of 2018. In the unsecured lending space, Fintech lenders eclipsed bank lenders as early as 2016. Lalita Clozel at the WSJ reports, citing PeerIQ / TransUnion data, that Fintech lenders have $10 Bn more personal loans outstanding than banks as of June 2018.
Despite support from federal regulators and FinTechs, the OCC’s charter continues to provoke harsh opposition from state-level regulators. As we mentioned in our previous newsletter, we expect heated discussion on the topic between the NY Department of Financial services and the Fed at the upcoming Online Lending Policy Institute annual summit in DC (feel free to reach out to PeerIQ and for a discount code on tickets).
On Friday, Equifax closed at a share price of $136.68, and the company had almost completely recovered from the massive security breach one year ago. Trading at $142.72 before the breach, Equifax dropped approximately 37% after announcing the breach that compromised the personal data of 146 million U.S. consumers and spurred outrage against the company. As a result of said breach, Equifax increased security spending by $200 million, and new regulation will require credit bureaus to provide free credit freezes for consumers. As of the Friday close, Equifax is only down 4% as compared to the pre-breach stock price. Over the same period in question, TransUnion rallied ~55%.
As we mentioned in our newsletter last week, please join us on Friday, September 21st at 2 pm EST, for a webinar focused on Managing and Forecasting Prepayments. In this webinar, PeerIQ and TransUnion team up to present a master class on the 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.
As discussed in a recent piece in American Banker, Navient and Nelnet are increasing their role in the private student loan market. Both companies are big players in the market for servicing federally funded student loans. Together, they service $405 Bn with approximately 38% of the market share as of March 31, 2018. Nelnet, which currently focuses on servicing student loans, recently applied to for an industrial bank charter.
Source: National Student Loan Data System (NSLDS) as of March 31, 2018
In April 2014, Navient was spun out of Sallie Mae, splitting the business in two. Sallie Mae continued its consumer banking business as well as origination of private student loans. Navient continued with loan management, servicing, and asset recovery. After the split, Navient kept 99% of the legacy company’s FFELP loans and 83% of the legacy company’s private loans. In October of last year, Navient acquired Earnest, a student, and personal loan lender, for $155 Mn in cash. The acquisition allowed Navient to begin originating student loans under the Earnest brand (as they were previously not allowed to make loans under any brand due to a non-compete with Sallie Mae). Starting in 2019, Navient will be allowed to compete directly with Sallie Mae under the Navient brand.
Earlier this week, OnDeck became the first non-bank fintech small business lender to lend $10 Bn. Over the last two years, OnDeck has increasingly tapped warehouse finance. Most recently, the company added a new $175 million credit facility Mutual and Ares Management. The 3-year facility has an 87.5% advance rate with and a funding cost of 1 Month LIBOR + 3.00%. According to the most recent 10-Q, OnDeck’s weighted average cost of capital on facilities and securitizations was 5.6%. As of Friday’s close, ONDK is up 32% YTD and 66% YoY.
Given the recent 10-year anniversary of Lehman Brothers, we think it’s a fitting time to introduce PeerIQ’s stress testing and benchmarking products. Last week we introduced PeerIQ’s new Stress Testing application, this week we’ll dive into our new Benchmarking application.
PeerIQ’s Benchmarking Tool
Introducing PeerIQ’s new Benchmarking tool. Benchmarking is essential for originators and asset managers who want to compare the performance of their portfolios with the performance of the broader market, or with other stylized portfolios. Benchmarking informs asset managers if their performance is in line with market performance and allows originators to compare their pricing and performance to other similar portfolios.
Benchmarking can be performed over a time-frame of 1, 3, 6 or 12 months.
In the example below, we compare the cumulative return over 6 months of a sample pool of LendingClub loans to the TransUnion Consumer Unsecured benchmark. The LendingClub pool outperforms the broader market TransUnion benchmark by 2.5%. The Overview tab shown below explains the difference of 2.5% in cumulative return broken out by the Top Drivers of Delta. In this example, the FICO 650-700, DTI 16-19, 36-month term cohort of loans contributes to 1.87% of the difference in cumulative return. The top 5 cohorts which contribute to difference in performance are listed in the descending order of their contribution.
The Composition chart shows the percentage of the pool and the benchmark allocated to the selected cohort. The Performance chart displays the Cumulative Return for the pool and the benchmark (grey) and for the selected cohort (blue).
The Composition tab shown below displays the differences in allocation between the pool and the benchmark broken down by the factors listed above. Ideally, the benchmark chosen for comparison should be as close as possible to the pool in terms of allocation to isolate the impact of performance differences. This tab allows users to see how close their pool and benchmark are to each other, and adjust the benchmark if necessary.
Adapted Brinson-Fachler Model
PeerIQ has adapted the Brinson-Fachler model to whole-loan portfolios for the purposes of attribution analysis using a benchmark. This model breaks out the differences in performance between the portfolio and the benchmark into Allocation, Selection and Interaction effects. In the broadest sense, the allocation effect measures the composition differences between the portfolio and the benchmark, while the selection effect measures performance differences within similar cohorts. Interaction measures the impact of these factors on each other.
The allocation effect is calculated as:
(portfolio sector weight – benchmark sector weight) * (benchmark sector return – benchmark return)
The selection effect is calculated as:
(benchmark sector weight) * (portfolio sector return – benchmark sector return)
The interaction effect is calculated as:
(portfolio sector weight – benchmark sector weight) * (portfolio sector return – benchmark sector return)
The return measure can also be replaced by other metrics like prepayments, charge-offs, and losses.
PeerIQ’s Benchmarking Methodology
PeerIQ’s benchmarking tool allows users to benchmark the following portfolio characteristics:
- Cumulative Return
- Cumulative Prepayments
- Cumulative Charge-Offs
- Cumulative Losses
These characteristics can be benchmarked over a combination of up to 3 of the following factors:
- Loan Term
- Loan Coupon
- Origination Vintage
- Original Principal
- Current Principal
- Borrower Credit Score
- Borrower DTI
- Borrower State of Residence
Reach out to learn more about Benchmarking!
- PeerIQ’s CEO, Ram Ahluwalia, will speak on the Tomorrowland is Here Today: What Will the Structured Finance Market Look Like in 2025 panel at 11 am on Monday, September 24th 2018 at ABS East in Miami
- PeerIQ’s CCO, Kevin Walsh, will speak on The Innovation Institute: Technological Solutions for Improving Market Transparency panel at 4 pm on Monday, September 24th 2018 at ABS East in Miami
- PeerIQ’s CEO, Ram Ahluwalia, will speak on The CEO’s Roundtable: Expanding Your Business Model panel at 10 am on Friday, November 2nd 2018 at the Investor’s Conference on Online Lending in New York
- ‘Fintech Charter’ Has No Early Takers as Lawsuit Looms (WSJ, 9/12/18) – State regulators are threatening to sue over a new national license for cutting-edge financial firms
- State Bank Regulators Look to Pick Another Fight with the OCC (Crowdfund Insider, 9/13/18) – The article posits the real reason for the CSSB animosity is the risk of their diminishing relevance
- Ygrene Closes $25 Million Credit Facility Arrangement with ING (BusinessInsider, 9/10/18) – Ygrene is a national leader in PACE lending
- Goldman Bear-Market Risk Indicator at Highest Since 1969 (Bloomberg, 9/10/18) – Indicator provides “reasonable signal for future bear-market risk”
- The Fintech Banks Are Coming: Why You Should Care (Forbes, 9/13/18) SoFi, Stash, PayPal, and Amazon are all eyeing the banking market
- OnDeck Surpasses $10 Billion in Lending (9/12/18, LendAcademy) – The small business lender crossed the milestone after being in business for 11 years
- S. Bank Launches Simple Loan to Meet Customers’ Short-Term Cash Needs (MarketWatch, 9/10/18) – US Bank is entering the online Payday loan market
- Federal Reserve Considers a New Tool to Avert Crises (WSJ, 9/9/18) – Fed could require banks stock up on capital while the economy is strong – forcing banks to hold additional capital might take some pressure off the Fed to raise interest rates very aggressively to cool the economy
- Fintech Upgrade doubling S.F. workforce after raising $62 million (BizJournals, 9/4/18) – Upgrade founded by Renaud Laplanche and recently closed a round led by CreditEase
Former Lehman Brothers Staff Host 10-year Anniversary Party To Celebrate the Bank’s Collapse (FT, 9/13/18) – this article dives into the people behind the party