Back Cross River Intelligence Archives

Q4 2023 Review | Consumer Lending

By Cole Gottlieb

March 20, 2024

Hi all, Cole here,

We come to you today with our quarterly consumer lending review. Catch up on the latest trends emerging in the consumer lending space: personal loan vs. auto/bankcard loan trends, takeaways from individual fintech company and bank earnings, and a decline in MPL new issue volume.

New here? Subscribe here to receive our newsletter each Sunday. For even more updates, follow/connect with me on LinkedIn and join my Discord server for an archive of my individual company earnings notes.

Missed last quarter’s report? Recap key trends with my Q3 Consumer Lending Review.

Personal Loan Credit Tightening, Auto and Bankcard DQs Continue to Rise

Before diving into our fourth quarter coverage, we wanted to cover new industry data released from TransUnion, showing that third-quarter unsecured personal loan (“UPL”) originations fell (10.3)% YoY and (2.0)% QoQ (originations reported through Q3 due to reporting lag). Originations fell to 5.0Mn in 3Q23 from 5.6Mn a year prior, and 5.1Mn a quarter prior. The decline in originations was driven by most risk tiers, with prime plus (7.8)%, prime (13.5)%, near prime (11.5)%, and subprime (13.0)% from a year earlier. Superprime originations, the only risk tier to report YoY origination growth, were up 15.5% YoY.

Fintech originations fell (31.6)% and finance company originations fell (5.4)% from the year prior, continuing their declines, while banks +11.3% and credit unions +0.6% continued to grow their originations from the year prior. As a reminder, fintechs significantly tightened credit underwriting standards in the back half of 2022, so these YoY metrics likely did not fully reflect that tightening.

Banks continued to grow their share of total UPL origination volumes, to 17.4% in 3Q23, up from 14.0% a year prior. At the same time, fintechs are losing their share of volumes, down to 23.3% in 3Q23, from 30.7% a year prior. And it’s not just better credit customers that banks are lending to. 44% of banks’ originations were made to below prime borrowers in 3Q23, up from 40% a year prior and 38% two years prior. This compares to 45% of fintechs’ originations made to below prime borrowers in 3Q23, down from 52% a year prior and 60% two years prior.

Source: TransUnion

In the fourth quarter, below prime unsecured personal loan balances accounted for 32.5% of total unsecured balances, up slightly from 32.2% both a year and quarter prior.

With consumer lenders maintaining tight credit boxes, we saw delinquencies improve on a YoY basis, with 30+ DPDs (40) bps lower, 60+ DPDs (34) bps lower, and 90+ DPDs (25) bps lower.

Delinquencies came in slightly above pre-pandemic (4Q19) levels for both 30+ DPDs up +33 bps and 60+ DPDs up +8 bps, but remained below pre-pandemic levels for serious delinquencies (90+ DPDs were (11) bps lower).

On a sequential basis, 30+ DPDs rose +8 bps and 60+ DPDs rose +10 bps, while 90+ DPDs fell (6) bps, with some of the increase likely attributable to seasonality.

Source: TransUnion

With delinquencies declining from the year prior, and largely in line with pre-pandemic trends, it appears that credit-tightening efforts made by unsecured consumer lenders have proven successful in quelling a rise in delinquencies. Of course, this has come at the cost of origination growth, with overall origination volumes down YoY.

Turning to other consumer credit products, Fed data showed that 30+ DPDs for credit card and auto loans continued their upward trends, above pre-pandemic levels. Notably, auto 90+ DPDs rose above pre-pandemic levels for the first time.

Source: Q4 Fed Report

In particular, subprime auto delinquencies have risen to historic levels. Fitch data showed that subprime 60+ DPDs rose to 6.28% by January 2024, the highest since Fitch began recording data in 1993 and well above Great Recession levels. The rise to 6.28% also represented the first meaningful 60+ DPD move above pre-pandemic levels, which saw 60+ DPDs peak at 5.93% in August 2019.

Source: Fitch Ratings Subprime U.S. Auto Loan 60+ Delinquency Index

Despite the rise in consumer delinquency rates, consumer spending remains strong, with spend volumes up +7.3% at JPMorgan, +5.1% at Amex, +4.1% at Capital One (credit cards), +3.0% at Discover and +2.6% at Bank of America from a year prior. While U.S. retail sales did rise +0.4% MoM in December, they fell (0.8)% MoM in January, more than the (0.3)% expected.

With “excess pandemic savings” tapped out, consumers turned to credit to finance their spending habits. TransUnion data showed that bankcard balances rose +12.8% YoY and +5.5% QoQ to $1,047.9Bn, with the growth driven primarily by subprime. Younger generations are taking on a greater share of bankcard balances with Millennials (29.4% share of bankcard balances) overtaking Baby Boomers (26.7% share of bankcard balances) for the first time. The average debt per borrower of $6,360 represented a +9.6% increase YoY and +4.5% increase QoQ.

Increased credit card debt has driven delinquency rates, with Fed data showing that 90+ DPDs for credit card debt rose to 6.36%, from 4.01% a year prior, 5.78% a quarter prior, and a pre-pandemic 5.32% (4Q19).

To go along with the Fed’s data, TransUnion data showed that serious bankcard delinquencies (90+ DPD) have continued to rise, to their highest level since the Great Recession. Across the board, bankcard delinquencies have risen, driven higher by 2022-2023 vintages. 90+ DPDs of 2.59% are up +33 bps YoY, +25 bps QoQ, and +40 bps from pre-pandemic levels (4Q19). 60+ DPDs of 3.52% are up +42 bps YoY, +29 bps QoQ and +58 bps from pre-pandemic levels

(4Q19). And 30+ DPDs of 4.94% are up +51 bps YoY, +32 bps QoQ, and +72 bps from pre-pandemic levels (4Q19).

Bankcard charge-off balances have risen to $13.1Bn, up from $11.5Bn a quarter prior. And the number of accounts entering charge-off grew to 4.6Mn for the quarter, up from 4.1Mn in the prior quarter.

Credit card issuers are taking note of the rising balances and delinquency rates, with the % of bankcard originations to the below prime segment declining to 40.3% by the third quarter of 2023, from 43.7% in 3Q22 and 44.7% in 3Q21.

Source: TransUnion

On top of rising levels of credit card debt, millions of consumers now face the return of student loan payments. Despite payments resuming in October, these figures do not yet reflect the impact of student loan payments on household budgets. Speaking about the resumption of payments during LendingTree’s Q4 earnings call, COO Scott Peyree noted, “There was no significant change in defaults or delinquency rates based off of that, that they're [LendingTree’s clients] seeing.”

With the one-year “on-ramp” period for student loan payments (through September 30, 2024), the government will automatically put loans into forbearance for payments missed. While interest will continue to accrue, under the “on-ramp” period, borrowers’ accounts “will no longer be considered delinquent and will be made current, recent missed payments will not lead to negative credit reporting, [and] loans will not default and therefore will not be sent to collection agencies.” As a result, we may not see the full impact of student loan payments on consumer delinquency figures until at least late 2024.

In addition, certain federal student loan borrowers may be eligible for relief if President Biden’s second student loan cancellation attempt passes. The second attempt would offer a narrower set of borrowers debt cancellation. Those that are classified as facing hardship, that have seen their loans grow larger due to compounding interest, that hold older loans, or attended low-value programs may be eligible.

Back to top

Fintech and Bank Lender Earnings Reveal Rising Charge-Offs, Further Credit Tightening

In the fourth quarter, we saw many fintechs grow originations YoY, while a significant contingent of personal loan lenders continued to report declining originations due to continued credit tightening efforts.

SoFi (+45.1% YoY) and Pagaya (+33.3% YoY) continued to grow volumes, with Pagaya attributing growth to a ramp-up of new partnerships in auto, PoS and single-family rental. SoFi’s growth was driven by a +193% YoY increase in home loan originations, +95% YoY increase in student loan originations and +31% YoY increase in personal loan originations.

Despite the YoY increase, SoFi reported a (16.3)% sequential decline in originations, due to credit tightening efforts. SoFi CEO Anthony Noto explained, “We have continued to reduce our credit box. In late December, we reduced underwriting by eliminating what we call tier six and seven, which is the higher end of our FICO band. As those that know the company, we underwrite 685 going higher and our average is much higher than 680 in the mid-7s as we talked about earlier. But as we progress through the year, we have reduced our credit box and we continue to do so.”

Personal loan lenders (that cap APRs at 36% or less) OneMain ((13.2)%YoY), Upstart ((18.7)% YoY), Oportun ((28.4)% YoY), and LendingClub ((35.4)% YoY) all reported declines in origination volumes due to credit tightening measures. In addition, they remained well below pre-pandemic (4Q19) origination levels, with OneMain (18.2)% lower, Oportun (29.4)% lower, and LendingClub (47.1)% lower.

Upstart plans to tighten credit further, with Upstart CFO Sanjay Datta saying, “Within unsecured lending, our view is that the near-term risk in credit has shifted to the primer customer segments. And as a result, we are becoming increasingly conservative in our underwriting of these higher FICO borrowers.”

OneMain has maintained a tighter credit posture, with CEO Douglas Shulman stating, “Even though demand for our loan products remains very strong, we deliberately reduced the pace of originations as we have taken a conservative view on credit and continued to tighten our underwriting and increase pricing in certain segments.” Furthermore, CFO Micah Conrad explained, “Part of our tightening has come through pricing actions that we've been taking throughout the year. The average APR on our loan originations is currently around 27% compared to 26% a year ago. That higher pricing has naturally led to reductions in loan volume. However, the net earnings result is expected to be positive.”

While LendingClub reported a significant decline in originations on a YoY basis, on a QoQ basis, it notched its first sequential increase in originations since the Fed began raising interest rates. CEO Scott Sanborn attributed the increase to “Marketplace demand for our new structured certificates program” and CFO Drew LaBenne explained that the program accounted for ~$1Bn of the total originations in Q4. As a reminder, LendingClub launched its structured certificates program in 2Q23 under which, “LendingClub retains the senior note and sells the residual certificate on a pool of loans to a marketplace buyer at a predetermined price.”

With rising rates and credit tightening reducing consumer access to loans, lenders like Oportun and Upstart plan to lean into secured loans. Oportun plans to expand its secured personal loan product to 40 states by the end of 2025. And Upstart CEO Dave Girouard stated, “In the coming months, we expect to release an optional feature that allows borrowers to provide collateral to support their personal loan application.”

Despite an overall decline in unsecured consumer originations from the peak 21/22 era, it has not been due to a lack of consumer demand. Consumers are still seeking credit, and some have turned to credit cards, cash advance products, and higher-APR (higher than 36% APR-capped loans) credit products to fulfill those needs.

As such, we saw higher-APR lenders like Enova (offers unsecured installment and lines of credit with APRs 34-200+% depending on state and product type) lean in on marketing, capitalizing on the demand. Enova’s Consumer division grew originations by +48.1% YoY, with CEO David Fisher explaining that “Strong demand and solid credit performance enabled us to be more aggressive with our marketing, particularly in our SMB business which had record originations in Q4.” He explained that the lender may be more insulated from a downturn, “As we discussed previously, in some ways, our consumer customers are always in a recession. They are experienced in living paycheck to paycheck and sophisticated at managing variabilities in their finances. As a result, recessions tend to have less of an impact on our non-prime customers than on prime borrowers."

OppFi, another higher-APR lender (average yield of 127%), grew originations +2.9% YoY, as the fintech tightened credit, focusing on existing customers.

Fintechs that offer shorter-term cash advance products have continued to see robust demand. MoneyLion (+29.8% YoY) and Dave (+28.8% YoY) both reported double-digit increases in originations from the prior year. Facing high inflation, consumers are turning to these products to remedy cash flow problems. Dave CEO Jason Wilk noted, “Our ExtraCash short-term liquidity offering continues to resonate with consumers and our largely millennial and Gen Z target demographic, who use our ExtraCash product for essential staples, such as gas and groceries.”

BNPL player Affirm grew originations +32.4% YoY, driven by strong travel and ticketing volume (up +56% YoY).

Student lender Navient grew originations +32.0% YoY but volume was well below the quarter prior (41.6)% and prepandemic levels (86.4)%. Navient recently announced strategic actions to simplify the company, including outsourcing its student loan servicing and creating a variable expense model, initiating exploration of strategic options for its business processing division, including a potential divestment, and intending to streamline its shared service infrastructure and corporate footprint.

Source: Company Earnings

Turning to credit, despite significant tightening efforts, we have seen many fintechs report sequential increases in net charge-off ratios.

Subprime lenders OppFi (+400 bps QoQ) and Enova - Consumer (+180 bps) reported larger increases in NCO ratios. To put into context, OppFi’s average yield was 129% and Enova’s loans offered through subsidiary NetCredit have APRs 34-155% and lines of credit through subsidiary CashNetUSA have APRs over 200%, depending on state. At the same time, we saw OppFi’s NCO ratios fall ((1,200) bps) YoY on credit tightening efforts we touched on in the section above.

While LendingClub focuses on a more prime borrower, the fintech still saw NCO ratios increase by +150 bps QoQ and +360 bps YoY. CEO Scott Sanborn explained that, “Our current originations are focused on prime consumers, with loans coming onto our balance sheet having a weighted average FICO of around 750.”

OneMain’s NCO ratio rose +102 bps QoQ, but management expects NCOs to peak in 1H24 and then decline as the back book (loans made pre-August 2022 credit tightening) runs off. For reference, OneMain’s personal loan yield was 22.1% in the quarter.

Oportun’s NCO ratio rose +50 bps QoQ, but it expects NCOs and delinquencies to decline as its back book (pre-July 2022 credit tightening) declines in size. Oportun’s front book (post-July 2022 credit tightening) has outperformed its back book, with CEO Raul Vazquez reporting, “Loss rates are approximately 400 basis points lower for our front book of loans in comparison to our back book loans.” Oportun has significantly tightened credit, with CFO Jonathan Coblentz explaining, “The percentage of underwritten loans with Vantage scores of 660 or greater increased to 51% during Q4 23, up from 33% for Q2 22 prior to the start of our tightening actions.”

Compared to pre-pandemic (4Q19) levels, Oportun’s NCO ratio rose +330bps, OneMain’s NCO ratio rose +195bps, Ally’s NCO ratio rose +86bps, Enova - Consumer’s NCO ratio rose +10bps, and Navient’s NCO ratio fell (22) bps.

Source: Company Earnings

Looking at banks’ consumer divisions, we largely saw increases in net charge-off ratios with Synchrony +210 bps, Bank of America +52 bps, Capital One +52 bps, JPMorgan +40 bps, Citizens Financial +17 bps, and PNC Financial (1) bps on a YoY basis. While NCO ratios have risen on a YoY basis, when comparing to pre-pandemic (4Q19) figures PNC’s NCO ratio was (32) bps lower, JPMorgan’s was (11) bps lower, and Citizens Financial’s was (5) bps. At the same time, NCO ratios rose at Synchrony +43 bps, Capital One +32 bps, and Bank of America +12 bps from 4Q19 levels.

Source: Company Earnings

Bank net-charge offs (in $ values) have also seen significant YoY increases, with the consumer divisions of J.P. Morgan +93.8%, Synchrony +80.7%, Bank of America +73.1%, Citizens Financial +41.7%, and Capital One +23.3%. PNC Financial was the only bank in this set not to post a double-digit increase, posting a (2.6)% decline YoY.

Looking at pre-pandemic figures, net charge-offs have eclipsed 4Q19 figures at Capital One +41.6%, Synchrony +26.4%, JPMorgan +20.7%, Bank of America +10.7%, Citizens Financial +7.4%. PNC Financial's net charge-offs were (25.3)% lower than 4Q19 levels.

One reason why PNC may have posted lower net charge-offs? Home equity + residential real estate loans as a % of its consumer loan book has grown from 59.2% in 4Q19 to 72.3% in 4Q23. Broader credit data has shown that home loans have not seen the same increases in delinquencies as credit card and auto loans.

Source: Company Earnings

Despite rising NCO rations, banks have largely continued to grow their consumer loan books on a YoY basis, with JPMorgan +27% (ex-First Republic Bank “FRB” +6%), Citi - Branded Cards +12%, Citi - Retail Services +8%, Bank of America +4%, PNC +2%, and Wells Fargo (1)%.

While higher interest rates have weighed on home lending, JPMorgan +8% (ex-FRB +1%) and Citi +4% grew their originations from the year before. At the same time, Bank of America (25)% and Wells Fargo (69)% reported declines in home loan originations, in line with strategic decisions.

Auto originations rose +32% at JPMorgan from the year prior, while Bank of America (10)% and Wells Fargo (34)% originations declined. Wells Fargo cited its credit-tightening actions to explain the decline in auto originations. As we covered above, auto loan delinquencies are rising, with Fed data showing delinquencies above pre-pandemic levels.

It’s been just about one year since the regional banking crisis, which prompted a “flight to safety” in deposits. Since then, major banks have seen consumer deposits leave for higher-yielding alternatives. Wells Fargo (10)%, Bank of America (8)%, Citi (5)%, JPMorgan (4)% (ex-FRB down (8)%), and PNC (1)% all reported sequential declines in consumer deposits. Citizens reported flat deposits QoQ. In contrast, SoFi +19%, LendingClub +5%, Synchrony +4%, and Capital One +1% reported sequential increases in consumer deposits. Yield-seeking behavior appears to have driven the deposit moves, with SoFi’s average yield on interest-bearing deposits at 4.28%, Synchrony’s average yield at 4.42%, LendingClub’s average yield at 4.45%, and Capital One - Consumer’s average yield at 3.06%.

By successfully growing deposits, SoFi has recognized significant cost savings, with CFO Christopher Lapointe noting, “The 218 basis points of cost savings between our deposits and our warehouse facilities has resulted in a meaningful benefit to our net interest margin.”

Cost of deposits has continued to rise, despite the Fed pausing its rate hikes, with LendingClub +29 bps, Synchrony +24 bps, Wells Fargo +22 bps, Capital One - Consumer +21 bps, and Citizens +16 bps on a QoQ basis.

Further evidence of yield-seeking behavior lies within Citizens’ deposit flows. Total deposits were down (0.5)% QoQ (relatively flat), but term deposits were up 12.4% QoQ (continuing the trend of double-digit QoQ growth) while checking with interest deposits fell (4.4)% and demand deposits fell (3.8)% QoQ (continuing their downward trend).

Bank and Fintech Lender Earnings Summary

Sources: Company Earnings, Yahoo Finance

Sources: Company Earnings, Yahoo Finance

Back to top

Smaller Deals Lead to Decline in MPL New Issue Volume

February CPI data showed a +3.2% YoY and +0.4% MoM increase in inflation, above economists’ expectations. Additionally, February PPI data came in above expectations, rising +0.6% MoM. On the other hand, February retail sales came in below expectations, but still rose +0.6% MoM. Stubbornly elevated inflation and a strong job market have pushed out the timeline that markets expect for the Fed to cut rates. However, Fed Chair Powell has said that inflation is “not far” from where it needs to be for the Fed to begin cutting rates. While in December, markets gave it a ~50% chance of a rate cut at the March 19-20 meeting (per CME Group data), the odds today stand at just 1%. Also in December, CME Group data showed markets expected 4-5 rate cuts in 2024. Today, markets expect just 3 rate cuts in 2024, now in line with the Fed’s December dot plot.

Source: Bloomberg

In the fourth quarter, we saw a decline in demand in the consumer unsecured MPL market, with new issue volume (17.5)% lower on a YoY basis and (42.9)% lower on a QoQ basis. The YoY decline was driven by smaller securitizations as 11 deals (flat YoY and QoQ) accounted for the $3,022Mn of new issue volume for the quarter (an average of $275Mn vs. $333Mn a year prior and $481Mn a quarter prior). With many lenders (especially fintech lenders) maintaining tight credit underwriting standards, these efforts have put a damper on origination volumes and, paired with higher funding costs, have led to lower securitization volumes.

Source: Finsight

Affirm - $757Mn, Pagaya - $542Mn, Best Egg (Marlette) - $402Mn, Mariner Finance $300Mn, Bankers Healthcare Group - $269Mn, Upstart - $195Mn, Achieve - $158Mn, Cross River - $147Mn, Americor Holdings - $128Mn, and Momnt - $124Mn were among the most active players in the space in the fourth quarter.

Source: Finsight

2023 cumulative new issue volumes ended the year at $14,621Mn, (19.6)% below 2022 volumes. Through February 2024 cumulative new issue volume of $2,658Mn has outpaced 2023 levels by (6.3)%, but still lags 2022 volumes by (24.9)%. Through February, we saw 9 consumer unsecured ABS issuances, already more than the 8 issuances in 1Q23.

Found value in our Q4 report? Subscribe here to receive our newsletter each Sunday. For even more updates, follow/connect with me on LinkedIn and join my Discord server for an archive of my individual company earnings notes.

Back to top