The Fed released its meeting minutes this week and signaled that they were on track to raise interest rates in the June meeting. Short-term rate futures are indicating a 90% probability of a rate hike at the June meeting. The Fed’s rate hike campaign is supported by recent inflation readings and also by wage growth accelerating to 2.6% YoY in April. Rising short-term interest rates have caused the 2-10 curve to flatten to 45 bps, the lowest level since 2008, and a potential indicator of lower growth. An inverted yield curve has presaged earlier recessions but the Fed does not seem concerned about the yield curve yet.
Home prices posted impressive gains with prices rising nationally by 8.7% YoY – the fastest rate in over a decade – despite rising rates. Increasing home equity values augur well for the HELOC market and consumers may shift their financing from personal loans to lower-rate (albeit cumbersome) HELOC loans.
Liran Amrany at Forbes has new article which discusses the unique challenges online lenders would face in a recession. In the article, PeerIQ CEO Ram Ahluwalia raised concerns about the lack of available funding in a recession and said that, “non-banks with diverse and stable funding sources will be better positioned than those overly reliant on hedge funds”. The many non-bank lenders PeerIQ interacts with are aware of the issue and taking action, although readiness and diversification varies dramatically across the sector. Since the Great Recession, non-bank lending has emerged as a core pillar to expanding financial inclusion and consumer spending.
Shelley Hagan at Bloomberg notes that borrowers are prioritizing mobile phone payments over car loans, as indicated by the low default rates on phone loans. CEO Ram Ahluwalia said, “Payment priority of cell phones is higher than personal and auto loans and similar to or slightly lower than that of mortgage. Now with Lyft and Uber, you can access transportation via cell phone. The car no longer is a central asset. Technological change is driving shifts in consumer behavior.” Shifting borrower payment priority is a leading indicator and can predict default behavior in a specific asset class. The main takeaway from the shifts in consumer behavior is for investors to vigilantly monitor consumer credit. Feel free to reach out to learn more about our real-time monitoring and analytics capabilities developed with TransUnion data.
In regulatory news, the OCC has allowed banks to make high-interest rate loans to subprime borrowers as an alternative to payday lenders. Banks can now make loans ranging from $300 to $5,000 to borrowers with FICO scores of 680 or below, with few other parameters beyond “sound underwriting”. The OCC believes that this rule change would enable 25 – 50 Mn borrowers to reduce their reliance on payday loans and pawn shops as they make their way into the mainstream economy, while opening up a $90 Bn underserved market for banks and other financial institutions.
The House passed the Economic Growth, Regulatory Relief, and Consumer Protection Act which reforms the Dodd-Frank Act and provides significant oversight relief to small banks. Below are some of the main provisions of this bill:
- One of the most notable shifts lost in the headlines is that the legislation requires Fannie Mae and Freddie Mac to evaluate and consider alternative credit scores to FICO. The change introduces competition to the credit scoring market and is a big win for VantageScore.
- Regulatory Capital relief:
- The threshold for a Systematically Important Financial Institution has been raised to $250 Bn in assets from $50 Bn, which will exempt a number of regional banks. These banks will no longer be subject to onerous CCAR tests and reduce their compliance burdens. Banks with less than $10 Bn in assets are also exempt from the Volcker Rule – a win for Jeb Hensarling’s (R-TX) campaign to provide relief for community banks.
- Banks with less than $3 Bn in assets will have a lower frequency of regulatory exams, banks with less than $5 Bn in assets will have fewer reporting and compliance requirements, and all banks with less than $10 Bn in assets will have the same capital ratio.
- Lenders can now charge subprime borrowers higher rates for auto loans.
Overall, the reforms should reduce the compliance burden on smaller banks, expand credit availability, and increase competition.
TransUnion Financial Services Summit 2018
TransUnion held its landmark annual Financial Services Summit this week in Chicago. The theme this year was “Smarter Decisions: The Consumer First Era” with a focus on understanding consumer preferences, choices and behaviors.
John Silvia, chief economist at Wells Fargo, discussed how tight lending standards and economic strength have brought down the delinquency rates in all asset classes except auto loans. Delinquencies in auto loans have picked up recently to 4.3%, with subprime auto doing worse. (The drop in auto performance can be attributed to longer auto loan terms, higher LTVs, lower used car re-sale prices, and the “Lyft effect”).
Jason Laky, Consumer Lending Market lead at TransUnion, analyzed prepayment behavior on consumer loans. Accelerating prepayments over the last several years have lowered investor returns and hindered lender’s ability to recover their customer acquisition cost.
If a loan is prepaid before the 12-months mark the originator loses money as the net interest margin is not enough to compensate for the origination and servicing expenses. Only 23% of prepaid loans are refinanced, and most consumers go for a longer tenor loan with a higher balance. Some highlights:
Stay tuned for PeerIQ’s Consumer Insights report. The report, geared for investors in consumer loans and ABS, allows readers to look at and analyze origination, delinquency and other performance trends to make better risk and investments decisions. Reach out to learn more about the report or other highlights from the TransUnion summit.
PeerIQ’s Lending Earnings Insights Report
PeerIQ will soon be releasing its 2Q2018 Lending Earnings Insights Report where we analyze the quarterly earnings of banks, credit card companies and fintech and non-bank lenders. Below are some of the key themes that we explore this quarter:
For our subscribers in the US, we wish you a happy Memorial Day and a great start to your summer!
PeerIQ in the News:
- Americans Are Prioritizing Phone Payments Over Car Loans (Bloomberg, 5/23/18) PeerIQ CEO Ram Ahluwalia said, “Payment priority of cell phones is higher than personal and auto loans and similar to or slightly lower than that of mortgage. Now with Lyft and Uber, you can access transportation via cell phone. The car no longer is a central asset. Technological change is driving shifts in consumer behavior.”
- The Coming Storm: The Unique Challenges Online Lenders Would Face in A Recession (Forbes, 5/25/18) PeerIQ CEO Ram Ahluwalia said, “non-banks with diverse and stable funding sources will be better positioned than those overly reliant on hedge funds.”
- Fed Minutes Signal Rate Increase in June (WSJ, 5/23/18) Inflation rising towards the Fed’s target and an economy close to full employment are the main reasons the Fed will hike rates in June.
- Federal Reserve Board Issues Report on the Economic Well-Being of U.S. Households (FRB, 5/22/18) The Fed indicated that 74% of adults were doing OK, but many struggled with student debt and emergency payments.
- Americans’ Confidence in the Economy Slips Narrowly in May (WSJ, 5/25/18) UMich Consumer Confidence dropped slightly in May, but is still at 98, as consumers look forward to wage gains.
- Home Values Rise at Fastest Pace in 12 Years (PR NewsWire, 5/24/18) Rising interest rates have not slowed the growth in home prices, as prices rose by 8.7% YoY in May.
- OCC gives banks green light to compete with payday lenders (American Banker, 5/23/18) The OCC believes that this rule change would enable 25 – 50 Mn borrowers to reduce their reliance on payday loans and pawn shops as they make their way into the mainstream economy.
- 1,000 Cuts to Dodd-Frank (Bloomberg, 5/25/18) Dodd-Frank reform allows smaller banks to lower their compliance costs and requires Fannie and Freddie to consider alternative credit scores like Vantage Score.
- More Americans are struggling to pay their credit cards, and what’s holding them back is only getting worse (Business Insider, 5/21/18) Rising interest rates are hurting consumers and causing delinquency rates on credit cards to tick up.
- Retail Doom Leads Some Cardholders to Delinquency, Equifax Says (Bloomberg, 5/24/18) As brick-and-mortar stores close, store card issuers are struggling with rising delinquencies.
- Amazon’s Finance Ambitions Are Said to Draw Attention from Fed (Bloomberg 5/24/18) Regulatory oversight could help pave the way for technology companies to compete with financial institutions.
- Why Amazon and Google Haven’t Attacked Banks (WSJ, 5/26/18) Banks are big customers of traditional technology companies as they move their infrastructure away from legacy systems to the cloud, making for an uneasy peace between the disruptors and disrupted.
- Fintech is disrupting big banks, but here’s what it still needs to learn from them (TNW, 5/20/18) Fintech companies should partner with banks to get their expertise on dealing with regulation, risk management and customer relationship management.
- Online lending platform GreenSky edges higher on market debut (Reuters, 5/24/18) The highly anticipated IPO of online home improvement lender GreenSky raised $874 Mn and priced at the top of its price range, signaling healthy demand for fintech stocks.
- AI Powered Online Lending Marketplace Lending Express Receives $2.7 Million Seed Round (CrowdFund Insider, 5/22/18) Lending Express, an online small business loan marketplace, raised $2.7 Mn to expand operations.
- PeerStreet Funds One Billion in Loans (BusinessWire, 5/23/18) PeerStreet, an online marketplace for short-term real estate bridge loans, has funded $1 Bn in loans since inception.
- Elevate Credit Celebrates Its 2 Millionth Non-Prime Customer (Citizen Tribune. 5/23/18) Elevate, a tech-enabled non-prime consumer lender, has reached 2 Mn customers.
- Online lender Kabbage to launch payment services by year-end (Reuters, 5/21/18) Kabbage, an online small business lender, will offer payment services in the vein of PayPal and Square, as more fintech companies look to deepen their relationships with their customers by offering a broader product suite.
- SoFi will get crypto investing by 2019, says CEO Anthony Noto (CNBC, 5/22/18) SoFi will allow its members to invest in cryptocurrency as part of its wealth management offering. See our analysis of CEO Noto’s first shareholder letter here.
- Prosper Introduces Loans Up To $40,000 For Borrowers (Prosper Blog, 5/24/18) Prosper is raising its potential loan size to $40,000, in contrast to LC who is reducing the loan sizes on D and E grade loans.
- Your Next Desk Lamp: A Plant That Glows? (WSJ, 5/15/18) MIT is developing a spray that would allow ordinary plants to glow and emit light for up to 4 hours. The promise of CRISPR?