We come to you today with our quarterly consumer lending wrap. Amidst a volatile macro backdrop, catch up on the latest trends we see emerging in the consumer lending space: fintech lender and bank performance, the effect of rate hikes on the MPL securitization market, and regulatory developments.
Fintech Originations Slide, Bank and Fintech NCOs Edge Up
To kick things off, we wanted to cover new industry data released from TransUnion showing a significant increase in the number of unsecured personal loan originations (originations reported through Q2 due to reporting lag). TransUnion reported that there were 6.0Mn such originations during the second quarter, showing considerable growth from the 4.4Mn a year prior and 5.0Mn a quarter prior. Fintech lenders drove new unsecured personal loan balances, with 53.2% of new balances added attributable to fintechs, up from 51.9% in 2Q21 and up from a pre-pandemic 43.4% in 2Q19.
As we covered in last quarter’s consumer lending wrap, despite growing originations, it appears that loans were extended to lower credit quality consumers to drive growth. With inflation increasingly impacting the consumer, we have seen the result of this pursuit of growth reflected in unsecured personal loan consumer delinquency rates, which have jumped from the levels seen at the start of 2022.
Moving on to our third quarter earnings coverage, fintech lenders were hit by rising interest rates, which impacted origination volumes. Rising interest rates meant that many consumers faced higher financing costs and were less likely to get approved for loans. Those at the lower end of the credit spectrum have felt the squeeze of inflationary pressures.
SoFi +8.8%, MoneyLion +1.6%, and Affirm’s (0.2)% origination volumes avoided the brunt of the impact. SoFi was able to generate demand for its personal loans from strong credit quality consumers whose weighted average income was $160,000, with a weighted average FICO score of 746. Affirm held its approval rate steady throughout the quarter, in contrast to many lenders who have tightened credit standards.
Oportun tightened credit standards and is focusing on returning customers, reporting that just 28% of loans were made to new customers in the third quarter, down from 44% a quarter prior. OneMain CEO Douglas Shulman outlined its tightening, stating, “We were early to selectively cut our credit box in late 2021 and early 2022 and have followed on with very meaningful tightening this summer.”
Upstart’s CEO Dave Girouard divulged that the macro environment has resulted in the company extending 40% fewer approvals, and that loans were offered at 800 bps higher than they would have been a year ago.
For a majority of fintech originators, the tightening in credit led to significant declines in originations: Upstart (43.5)%, Navient (38.2)%, Oportun (27.8)%, OppFi (19.2)%, OneMain (8.9)%, LendingClub (7.8)%, Enova – Consumer (3.5)%, sequentially.
Both LendingClub and Upstart retained a greater balance of loans on their respective balance sheets. Upstart pointed to general scarcity of available capital and higher financing costs as causes for this move. LendingClub retained 33% of its loans and the core personal loans Upstart held on its balance sheet jumped by over 75%.
Consumer NCOs have ticked up, and execs do not want to be caught flat footed should the economic picture materially weaken.
OppFi +1500 bps, Elevate +400 bps, Enova – Consumer +240 bps, Oportun +120 bps, Navient +61 bps, and Ally +36 bps all saw NCO rates rise sequentially. While management has attributed some of the increase to “normalization” of credit, part of the increase may stem from inflationary pressures that have stretched out subprime consumers’ pocketbooks.
After adjusting its credit model in mid-July, OppFi reported that first payment defaults had fallen by (26)% sequentially. Oportun’s CFO Jonathan Coblentz also highlighted success in tightening standards, stating, “The credit tightening is already having the desired effect of driving down our early-stage delinquencies and first payment defaults with performance trending better than 2019.” However, as NCO rates are a lagging indicator, recent improvements may not show up in NCO data for a few quarters.
The outlier in our NCO chart, Curo, saw its NCOs drop sequentially, but this was as a result of the sale of its Legacy U.S. Direct Lending business, which shifted its loan portfolio mix to lower loss-rate products. OneMain’s early credit tightening (late 2021) has yielded some success, as NCOs improved 7 bps sequentially.
In other news, Elevate Credit announced in mid-November that it would be taken private by Park Cities Asset Management for an implied $67Mn valuation. This acquisition comes as many fintech companies have seen their valuations take a hit. Elevate Credit is no outlier to the trend, with the $67Mn valuation representing just over half of its February 2021 market cap. CEO Jason Harvison cited difficult market conditions for nonbank consumer lenders in the decision to sell. Elevate and Park Cities already have had a partnership in which Park Cities provides financing for an Elevate credit card and corporate debt.
Moving on to our bank coverage, consumer deposits began to slip from record highs (Capital One +1%, Bank of America (1)%, Citi (1)%, Citizens (1)%, JPMorgan (1)%, Wells Fargo (1)%, PNC (2)%, sequentially). This downward trend from record deposit levels is a result of continued strong consumer spending, in an economy where inflation outpaced wage growth.
Resilient consumer spending helped fuel growth in large bank’s average consumer loan books (Citi +3%, PNC +3%, Bank of America +2%, Citizens +1%, JPMorgan +1%, Wells Fargo +1%, Capital One +0%, sequentially).
Auto originations have been impacted by rising rates and continued supply chain issues. While JPMorgan grew originations +8% and Wells Fargo originations were flat sequentially, both banks had substantially lower volumes than a year prior, with management citing rates and vehicle supply as catalysts.
Citizens and Capital One have continued to let auto loans runoff and have pulled back on originations due to the current environment. Auto lender giant Ally saw its auto originations fall (8)% sequentially, as a result of continued supply constraints.
Bank’s consumer NCOs are ticking up, albeit less than fintechs. However, the average credit profile of a borrower is stronger at banks. As with fintechs, management explains this as a “normalization” of credit. However, this could represent an early indicator of consumer credit weakness.
Bank and Fintech Lender Earnings Summary
Rate Hikes Drive Up Cost of Issuing MPL Securitizations
The Fed has continued its path of rate hikes, hiking rates by 75 bps at each of its past three meetings. Markets are expecting the Fed to continue increasing benchmarks in its battle to control inflation, with CME Group data suggesting a 50 bps hike is most likely.
Rate hikes have continued to impact the securitization market, driving up the cost of debt. Despite an increased cost in funding, new issue volumes remained consistent, roughly flat from the prior quarter. However, based on the first month of the fourth quarter, new issue volumes are on track to decline sequentially. Investor sentiment has weakened, with many believing markets are likely to get worse before they get better.
Platforms are still able to market the top of the capital stack with investors but are having difficulty placing both junior tranches and first loss positions. With ABS funding costs higher than warehouse costs, where possible, loans are sitting on lines for longer. At the current level of funding costs, higher rates to borrowers will likely result in a measured reduction in loan originations. In its Q4 financials update, Upstart CFO Sanjay Datta reported that, “Loan funding in general remains challenging. Overall financing costs for our securitization investors are up about 500 basis points since last year.”
Rate hikes and economic uncertainty have fueled the continued rise of yields on issuances (issuances referenced use I-Curve as benchmark). For example, Upstart saw the yield increase from 6.057% on its August Class A issuance (WAL of 1.61) to 7.355% on its October Class A issuance (WAL of 0.84).
Source: Finsight, PeerIQ
OneMain Financial ($1,000Mn), Pagaya ($735Mn), Theorem ($422Mn), Bankers Healthcare Group ($412Mn), Conns ($408Mn), Marlette ($393Mn), Oportun ($370Mn), LendingPoint ($295Mn), Affirm ($250Mn), Goldman Sachs ($225Mn), Avant ($200Mn), and Upstart ($179Mn) were among the most active players in the space during the third quarter.
Source: Finsight, PeerIQ
Through October, cumulative new issue volume has remained above the levels seen in 2021. Despite increased costs of funding and unease in the macroeconomic environment, lenders have continued to bring new issuances to market. Going forwards, we will see if a shakier economic outlook and a continued aggressive Fed cause cumulative issuance volumes to fall behind the prior year’s pace.
Since our last quarterly report was published, we have seen many developments across the regulatory landscape.
After months of anticipation, the CFPB released its BNPL report, covering data provided from five nonbank BNPL providers (Affirm, Afterpay, Klarna, PayPal and Zip).
On the positive side, the CFPB found potential benefits in BNPL’s close-ended design and potential cost advantages compared to credit cards. However, the CFPB was particularly concerned with inconsistent consumer protections, data harvesting and monetization, and debt accumulation and overextension.
The CFPB was concerned that consumers did not have the same level of purchase protections vs. cards (disputes/chargebacks). According to the CFPB report, an increasing number of users are heavy BNPL users, with 15.5% of users using BNPL 5+ times in 4Q21 and 4.0% of users using BNPL 10+ times. In general, BNPL providers do not report “split pay” plans to credit bureaus, according to the CFPB’s report. As such, the CFPB noted that consumers may be taking on an increasing amount of debt, and debt from multiple sources, to a level that is unmanageable.
While no new regulations have been passed yet, the organization stated that it was developing “interpretive guidance” that could extend some existing consumer credit protections to BNPL products.
As we wait to see what the future of BNPL regulation may look like, the CFPB’s own future has been called into question after a three-judge panel from the 5th Circuit Court of Appeals found the CFPB’s funding mechanism unconstitutional. Most recently, the CFPB has asked the Supreme Court to overturn the appellate ruling, which could affect its ability to enforce the many consumer protections it has put in place over the past decade.
This case has broad reaching implications, as other agencies are funded using similar mechanisms, such as the Fed, the FDIC, the OCC, and the NCUA. These agencies could, in turn, be required to be funded through the congressional appropriations process. While opinions on the funding question vary, few are predicting the Supreme Court would invalidate the agency altogether or its historical actions.
Card networks have faced greater scrutiny, from the Fed, FTC, and from members of Congress, as these organizations look to reduce interchange fees weighing on merchants and consumers. The Fed tightened its rules on card-not-present debit transactions, giving debit card issuers nine months to ensure all transactions made with their cards can be processed by at least two unaffiliated networks. While the rule has applied to in-person debit transactions, the latest move notably applies the rule to online transactions.
Related to debit transactions, the FTC is looking into whether Visa and Mastercard’s security tokens restrict debit-card routing competition on online payments. While transactions must have the ability to be processed by at least two unaffiliated networks, the FTC is probing whether Visa and Mastercard have been limiting the info they send when they enable an online payment to go over a different network, and if the card networks are restricting routing choice. Given Visa and Mastercard’s dominance of the U.S. market, the card networks are facing increased scrutiny.
Members of Congress have upped the pressure on Visa and Mastercard. Sens. Durbin (D-IL) and Marshall (R-KS) unsuccessfully pushed to include the Credit Card Competition Act of 2022 (CCCA) into the National Defense Authorization Act. The CCCA was introduced in the Senate in July and the House in September and aimed to save money for merchants on swipe fees. The bill would be in a similar vein to the debit card transaction rule, expanding the number of networks offered to merchants. Banks with over $100Bn in assets would have to allow electronic credit transactions to be processed on no fewer than two unaffiliated networks. Of the two networks, one would be required to be outside the Visa-Mastercard network. Banks, credit unions, and other financial institutions voiced concerns over the proposed bill, arguing that credit card loyalty programs, and in turn consumers who benefit from such programs, would be adversely affected.