The CFPB ruling and Marcus platform dominated headlines this past week.
The CFPB was ruled unconstitutional by the United States Court of Appeals for the District of Columbia Circuit in a landmark decision on October 11th, but rejected the idea of shutting down the agency. The appellate court focused on its unusual independence in the Executive Branch, and the use of retroactive enforcement action against PHH Corp, a New Jersey mortgage-service company (PHH Corp. v. Consumer Financial Protection Bureau, 15-1177, U.S. Court of Appeals).
The court’s decision in favor of PHH Corp. was considered a setback to the CFPB, who just last month was recognized for its role in determining Wells Fargo’s $185 million fine for opening deposit and credit card accounts without clients’ knowledge.
Across the pond, marketplace lenders and platforms gathered in London at the LendIt Europe conference. Former FSA head, Lord Adair Turner softened his critical position on marketplace lenders and suggested there was “merit” to alternative lending which could “[make] credit crunches less likely” and lending is “likely to become a stable, significant and use part of our total credit system.”
The second highlight was “The State of the Industry in the USA” panel. Convictions were riding high with polar opposite views on the Marcus platform. PeerIQ CEO Ram Ahluwalia found himself in the minority position making the case that a “well capitalized bank with a deep understanding of consumer credit risk” should not be underestimated.
Coincidentally, Marcus launched two days later and we recommend a Fast Company in-depth report for those following the story.
It’s debate season. We encourage readers to grab a bowl of popcorn and watch the short debate on Marcus here (8 minutes).
This week we touch briefly on two topics – LendingClub’s recently released 8-K, and CommonBond’s CBSLT 2016-B.
LendingClub Interest Rate Revision
LendingClub released an 8-K providing a recap of credit and pricing changes, an update on credit performance and macro trends, a description of pricing changes, and revised loss-adjusted forecasts.
LendingClub monitors macroeconomic, credit, and other market factors and attempts to achieve appropriate levels of loss-adjusted returns for investors and interest savings to borrowers by responsively revising underwriting and borrower rates.
Indeed, LendingClub has revised borrowing rates ten times since October 2014 (Exhibit 1) due to various reasons. For instance, while the December 2015 interest rate revision was in response to the Fed rate hike, other instances were due to increases in loss estimates, and increased investor demand for loss-adjusted returns. As seen in Exhibit 1, these revisions can lead to both increases and decreases in borrowers’ interest rates for given originator sub-grades.
Exhibit 1 Historical LendingClub Interest Rate Revisions
Source: Company Data, PeerIQ
Lower Grade Loans Experience the Most Dramatic Interest Rate Increase
In our Q3 Securitization Tracker, we noted the increased delinquency rates for 2015 and 2016 vintages and anticipation of additional interest rate revisions. On October 14, 2016, LendingClub interest rates increased by a weighted average of 23 bps based (Exhibit 2). Rate increases are concentrated in ‘F’ and ‘G’ grade loans. A-grade loans will experience an interest rate reduction.
Increased interest rates enable LendingClub to continue to provide borrowers with competitive interest rates and investors with solid risk-adjusted returns, particularly for Grades E through G, which represent approximately 14% of total LendingClub outstanding principal balance.
The rate increases ranged from 27 to 71 basis points (bps), representing a 265 bps cumulative increase from December 2015 to October 2016.
Exhibit 2 LendingClub Interest Rate Increases since December 2015
Source: Company Data, PeerIQ
The Portfolio Level Projected Loss-adjusted Return is Stable
LendingClub projected annualized loss rates by grade have increased since Nov 15 (Exhibit 3).
Specifically, F-grade loans experienced about 515 bps of increase in annualized loss rate; F-grade 450 bps and E-grade 370 bps of increases. Further, investors holding E, F, and G-grade loans will experience about 120 to 475 bps of underperformance.
Investors holding A through D-grade loans, representing approximately 86% of LendingClub outstanding loan balance, will enjoy marginally improved loss-adjusted returns (Exhibit 3). The net impact is a 6.3% projected loss-adjusted returns to investors which is the same expectation as of April 2016.
Exhibit 3 LendingClub Loss-adjusted Return Revisions
Source: Company Data, PeerIQ
According to the 8-K released on October 14th, 2016, LendingClub “will no longer approve loans for certain sub-segments of borrowers who meet a combination of several risk factors such as high revolving debt, multiple recently opened installment loans, and higher risk scores on our proprietary scorecard.”
We do note that the rate revisions due to credit performance suggest significant valuation impacts to Near Prime loan and ABS bond investors.
CommonBond Student Loan Trust (CBSLT) 2016-B
CommonBond is a student loan refinance online platform, targeting high credit quality undergraduate and graduate student loan borrowers. Since its inception in 2012, CommonBond has originated over $700 MM in loans through its lending partner The Bank of Lake Mills (BLM), a Wisconsin state-chartered and FDIC insured bank. BLM also back-stopped the reps and warranties CommonBond provided in the transaction.
Since the first deal under CBSLT shelf, CommonBond has established itself as a repeat issuer with a strong deal team, jointly led by Barclays and Goldman Sachs, and co-managed by Deutsche Bank. We expect that CommonBond will continue to issue two to four deals per year, and employ securitization as a financing solution.
The senior bonds A-1 and A-2 of CBSLT 2016-B are A2 and AA rated by Moody’s and DBRS, respectively (Exhibit 4). The credit support associated with both tranches is also relatively consistent with CBSLT 2016-A deal. The DBRS BBB-rated B tranche of this deal has 5.38% initial credit support, which is slightly lower than that of CBSLT 2016-A B. Moody’s did not rate the deal’s B tranche.
Exhibit 4 Summary of CBSLT Deals in 2016
Exhibit 5 shows that CBSLT 2016-B has stronger credit subordination than CBSLT 2016-A. The senior bond target overcollateralization (OC) levels are 5.15% higher than those of CBSLT 2016-A. Besides the initial and target OC protections, CBSLT 2016-B traps excess spread for the senior bond holders if the rolling six-month average deferment and forbearance rate exceeds 7.5% or cumulative default rate trigger is breached. The CBSLT 2016-B’s cumulative default rate trigger was lowered to 2.75% from 4.0% in CBSLT 2016-B.
We note that historically, CommonBond’s borrowers have never defaulted on their loans although 1.4% of loans in the pool are in deferment.
Exhibit 5 Comparing Key Structural Features
Source: DBRS, PeerIQ
Stronger structural protection along with favorable credit market condition factored into CBSLT 2016-B tighter pricing this week. CBSLT 2016-B is priced 75 to 115 basis points tighter than CBSLT 2016-A, issued in April (Exhibit 6). In fact, these pricing levels are also tighter than initial pricing guidance. Specifically, the A-1 tranche is priced at 155 basis points, 5 basis points tighter than the guidance level; and the B-tranche was priced at 280 basis points, 20 basis points tighter.
Further, as compared to traditional private student loans ABS, we see around 50 basis points of spread pick-up for CBSLT 2016-B. We expect that the relative value arbitrage between MPL and traditional student ABS papers will diminish over time as rating agencies grow more comfortable with the category and as investors reach for yield.
Exhibit 6 Comparing Deal Pricing
- Money2020 on October 23-24 in Las Vegas. Send us a note if you’d like to connect.
- The State of the Industry in the USA (LendIt, 10/11/16) PeerIQ’s CEO Ram Ahluwalia provided an update on the US market and the hybrid platform model as well as securitizations in the industry. Here are excerpts of his panel remarks:
- How has the industry changed last year to this year: 2:55
- How to improve investor confidence? What are you seeing across platforms? 7:30
- Update on US securitization market? 17:50
- How are platforms solving their funding challenges? 25:30
- Goldman Sach’s Marcus Platform – Can they win? 28:55
- One of Peter Thiel’s Investors Comments on Marcus (Business Insider, 10/12/16) FinTech leaders present polar opposite views on likelihood of Marcus success.
- The Goldman Sachs Consumer Lending Platform Called Marcus Has Launched (LendAcademy, 10/13/16) Goldman Sachs went live Thursday with its online loan service, “Marcus”.
- PeerIQ’s Marketplace Lending Securitization Tracker Q3 2016 (Lending Times, 10/10/16) Highlights from our recent release of the Q3 2016 Securitization Tracker.
- US P2P Securitisation Hits Record High (Peer2Peer Finance News, 10/6/16) Marketplace lending loan securitization in the US hit a record issuance amount in the third quarter.
- Weekly Briefing No. 50 (The Financial Revolutionist, 10/15/16) Reference to Ram’s comments at his LendIt Europe panel.
- Will You Trust Marcus (and Goldman Sachs) With Your Debt? (Fast Company, 10/13/16) In-depth behind the scenes view on the launch of the Marcus platform.
- One of Peter Thiel’s Investors Comments on Marcus (Business Insider, 10/12/16) Summary of views from FinTech leaders on prospects GS Marcus platform.
- Episode 48: How Fintech is Transforming Consumer Finance (Goldman Sachs, 10/16) Harit Talwar, head of Digital Finance, discusses the evolving role of technology in finance and the launch of the firm’s new online personal loan platform, Marcus.
- Online Loan Pioneer Stops Lending Money as Industry Losses Mount (Bloomberg, 10/14/16) CircleBack Lending Inc. is servicing loans and no longer originating.
- Funds Are Taking the Peer Out of Peer-to-Peer Lending (Bloomberg, 10/10/16) Analysts predict global online lending will grow, and funding is increasingly institutional.
- Peer-to-peer Lender Zopa is Now Profitable — a Year Ahead of Schedule (Business Insider, 10/11/16) Despite slowdown in lending volumes earlier this year, Zopa becomes profitable in September.
- CFPB Survives Legal Attack as Court Trims Director’s Power (Bloomberg, 10/14/16) The CFPB’s structure has been declared unconstitutional.
- SoFi Nears Long-Awaited MBS Deal (AB Alert, 10/14/16) SoFi expands its reach into home loans, preparing for its first securitization of home loans, totaling $250-$300 million and expected to price in mid-November.
- Bob Dylan Wins Nobel Prize, Redefining Boundaries of Literature (NYT, 10/13/16) Bob Dylan is the first musician to win a Nobel Prize, perhaps the “most radical choice in a history stretching back to 1901”.