Happy Sunday,

Fed officials’ expectations for future interest rates diverge. Mortgage purchase apps hit lowest level since ‘95. Cars are increasingly unaffordable. CFPB sues division of CURO on loan “churning.” Ramp raises $300Mn. Coinbase acquires minority stake in Circle. Current partners with Cross River on credit building card. Consumer credit growth slows. Affirm reports earnings.

With Q2 earnings nearly behind us, keep an eye out for PeerIQ’s Consumer Lending Review, which we’ll publish later this week.

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Fed Officials’ Forecasts Increasingly Diverge

Fed officials increasingly have diverging opinions about where interest rates are heading. The so-called “dot plot,” which shows officials’ expectations about future interest rates, demonstrates the disagreement. Variance in opinion, after falling during the economic expansion and registering virtually zero during the pandemic, rose above its average level during the first half of 2023.

Image: Bloomberg

Meanwhile, mortgage applications for home purchases have hit their lowest level since 1995. Purchase applications declined for the sixth week in a row, as rates hit 7.31%. That marks the highest rate since 2000.

Finally, there are signs automobile purchases are increasingly unaffordable for most consumers. Just a single new car model sells for less than $20,000. And the average used vehicle price is now $27,000, which is a 30% increase from pre-pandemic levels. Rising rates haven’t helped matters, with the average interest rate on new auto loans hitting 9.5% and used vehicles coming in at an average of 13.7%. The confluence of factors helps explain seasonal auto delinquencies hitting their highest level since 2006.

CFPB Sues Small-Dollar Lender Over “Churning” Loans

The CFPB has filed suit against Heights Finance, a division of publicly traded CURO Group, alleging the small-dollar, high-interest lender “illegally churned” loans in order to “harvest” fees. The complaint alleges the company of violating the CPFA’s prohibition on unfair, deceptive, and abusive practices. Specifically, the CFPB argues that Heights Finance coerced distressed borrowers into repeatedly refinancing their loans, including through repeated texts, phone calls, and home visits.

According to the complaint, the company structured its incentive compensation program to reward employees for achieving refinance targets and punished those who did not. The company also allegedly used credit scoring models that positively weighed prior refinancing, thereby targeting and encouraging borrowers to refinance, even when they couldn’t afford the payments. And finally, the company misleadingly marketed refinances as a “fresh start” and “best option” for getting up to date on payments, according to the Bureau.

Ramp Raises $300Mn in Downround

Corporate card and expense management startup Ramp announced it has raised a fresh $300Mn in equity at a substantially reduced valuation of $5.8Bn. Last March, the company said it had raised $200Mn at a valuation of $8.1Bn. Still, a 28% drop in valuation is substantially less than other public- and private-market fintechs, including names like Affirm and Klarna, have seen in the past year or so. The latest $300Mn round was co-led by existing investor Thrive Capital and new investor Sands Capital. Other investors participating in the latest financing include Founders Fund, General Catalyst, and former Amex CEO Ken Chenault. The company plans to use the funds to increase hiring (an outlier these days!) and to accelerate product development.

Coinbase Acquires Minority Stake in Circle

Coinbase has acquired a minority stake in Circle Internet Financial as the companies move to dissolve the consortium that had been responsible for issuing the USDC stablecoin. Once the transition is complete, Circle will handle the governance and issuance of USDC in-house. USDC is the second most popular stablecoin after Tether (USDT), which has been the subject of frequent speculation about its financial backing. Support for USDC is set to grow, with six additional blockchain protocols planning to add native support for the token.

Current and Cross River Team on Secured Charge Card

Current has partnered with Cross River Bank to power the company’s credit-building secured charge card product. Current’s new offering, which will be available to its 4Mn members, will enable users to safely build their credit history through a unified spending balance. Head of Cards and BaaS at Cross River, Anthony Peculic, said of the news, “We are excited to partner with Current to create a custom solution and bring this credit building product to market. We have been, and continue to be, committed to expanding access to financial services and empowering underserved communities. Together, we can make a meaningful impact by providing individuals with the tools they need to establish or rebuild their credit profiles.”

Consumer Credit Growth Slows on High Rates, Tightened Underwriting

Are the “glory days” of consumer lending behind us? While hopes remain high for a “soft landing,” with rising rates and tightening credit policies, growth in consumer credit is noticeably slowing. In July, year-over-year growth in consumer loans was 5.9%, a decline from the 7.3% increase in June and 10.8% increase at the start of the year. Total consumer loan balances at U.S. banks fell in July, the first such drop since 2020. Borrowers held a total of $1.84T in loans in July, down slightly from $1.89T in June.

As bank deposits decline, some banks are selling assets, including consumer loans, as a means of generating liquidity. Industry analysts expect to see further deterioration in credit quality, especially at the margins, where household budgets continue to be stressed by rising prices. Still, overall, banks see consumers as resilient, thanks to a continued strong job market. Even if the pace is slowing, credit card lenders plan to remain in growth mode.

Image: American Banker

Affirm Beats Earnings Estimates

We wrap up our earnings season coverage with Affirm, whose stock rose 28.8% after beating revenue and earnings estimates.

Affirm reported gross merchandise value (“GMV”) of $5,515Mn for the quarter, representing a 25% increase from year prior and 19% increase from a quarter prior. 70% of interest-bearing GMV was offered at the new 36% rate cap (up from 30%) by the end of July, up from 55% at the end of March.

Affirm’s loans HFI increased to $4,089Mn, up 66% from a year prior and 10% from a quarter prior. CFO Michael Linford explained some of this increase, “Though we continued to add capacity across the ABS and forward flow channels, we sold fewer loans as a percentage of GMV than in prior quarters.”

Affirm saw a sequential decline in delinquencies (seasonal), with its FY 2023 vintage performing close to FY 2022 and FY 2019 levels.

Source: Affirm Earnings Supplement

The installment lender continues to roll out its Affirm Card (formerly Debit+) reporting over 300,000 active users as of mid-August. Affirm Card GMV was “over $70Mn” in July, with the company reporting 9x higher in-store spend with card vs. Affirm overall and 3x higher transactions per active user.

CEO Max Levchin explained that the strategy for the card is to increase transactions, “Affirm on average is used basically 4 times a year, and that’s great, but that’s not nearly enough. You’re trying to be a payment network, you have to be there for doughnuts and coffee and for bicycles and couches. And we’ve more or less conquered the bicycle and couch space, and we’re trying to take our unfair share of doughnuts and coffee.”

In the News:

Does the commercial lending slump hint at a looming recession? (American Banker, 8/20/2023) Economists and analysts warn tightening commercial lending could signal a recession.

Banks Don’t Love Rich Mortgage Borrowers as Much as They Used To (WSJ, 8/21/2023) With interest-rate hikes and bank failures, jumbo mortgages have lost some appeal.

Europe’s Stripe rival Adyen saw $20 billion wiped off its value in a single day. Here’s what’s going on (CNBC, 8/21/2023) After reporting its slowest revenue growth on record, Adyen shares plunged nearly 40%.

BMO, Wells Fargo and USAA are latest banks to report layoffs (American Banker, 8/21/2023) More banks report layoffs amid industry-wide belt tightening.

S&P Joins Moody’s in Cutting US Banks Amid ‘Tough’ Climate (Bloomberg, 8/22/2023) S&P cut ratings for a number of banks, including Comerica, Valley National Bancorp, UMB, and Associated Banc-Corp.

Becoming a Bank Proves Challenging for Fintechs Seeking Survival (Bloomberg, 8/22/2023) A number of fintechs, including Figure, Oportun, Brex, and Monzo have withdrawn U.S. bank charter applications.

Klarna claims European momentum (Finextra, 8/23/2023) Stockholm-based Klarna is benefiting as rivals exit the European market.

Lighter Fare:

The only Blue Moon of 2023 is one week away (Space.com, 8/23/2023) The August Blue Moon will be the biggest, brightest moon of the year.