What is Happening with Personal Loan Losses?

Transcription

1 What is Happening with Personal Loan Losses? Ram Ahluwalia CEO, PeerIQ Nick Andreadis Head of Data Intelligence Ashish Dole Head of Research

2 P E E R I Q I N T R O PeerIQ is a NYC-based data & analytics firm that enables lenders and institutional investors to transact with confidence. Risk Management Offering 1. Risk Analytics 2. Data Benchmarking / Portfolio Mgmt Valuation Services Credit Facility Management TransUnion Derived Credit Insights 25+ lenders in a standardized format 2

3 TO D AY S C O N S U M E R C R E D I T PA R A D O X Macro conditions are strong yet credit performance is weakening How can better data help us reconcile this contradiction? 3

4 R E N O R M A L I Z AT I O N O F C R E D I T P E R F O R M A N C E % Delinquency on Unsecured Consumer Loans Long-term Avg ~3% Source: PeerIQ; TransUnion Consumer credit charge-offs are reverting to their long-term average Derogatory outcomes like delinquencies, defaults and bankruptcies are falling off the credit file due to Fair Credit Reporting Act Requirements Loan modifications (HAMP) strengthened credit performance (and credit scores) post- 2008, now may be a drag on performance as the effective subsidy is removed The credit refinancing treadmill leads to artificially higher prepayments and higher scores Models are fighting the last war: Trained off historical data sets in a benign credit environment Models miss turn-around points and tend to under/over shoot 4

5 M O D E L S F I G H T I N G T H E L A S T W A R Why FICO is flawed Traditional credit scores are backward looking and are designed to rank-order credit risk Not cash-flow oriented and does not capture underwriting quality of the loan Not time-homogenous: A credit score of 700 immediately post-crisis is much stronger than a 700 credit score pre-crisis Wrong measurement: The credit-score does not evaluate the probability of a specific loan defaulting, but rather the probability of the borrower defaulting (e.g., ignores payment priority and the relationship of lender to the borrower) Cannot be summarized via averages: FICO is defined on a logarithmic basis weighted averages distort interpretations Credit scores have blind spots (ex: ignore info from 7 years per the FCRA) Source: PeerIQ Distribution of credit scores on Avant shelf have not changes significantly over the last two years However, Avant has: Tightened credit quality Reduced size of the loan 20% from $5,348 from $6,589 Reduced Weighted Average Term 94% loans are below 36-month term vs. 47% in Avant 2016-C 5

6 P E R M I S S I B L E P U R P O S E (3) To a person which it has reason to believe (A) intends to use the information in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer; or (B) intends to use the information for employment purposes; or (C) intends to use the information in connection with the underwriting of insurance involving the consumer; or (D) intends to use the information in connection with a determination of the consumer's eligibility for a license or other benefit granted by a governmental instrumentality required by law to consider an applicant's financial responsibility or status; or (E) intends to use the information, as a potential investor or servicer, or current insurer, in connection with a valuation of, or an assessment of the credit or prepayment risks associated with, an existing credit obligation; (F) otherwise has a legitimate business need for the information (i) in connection with a business transaction that is initiated by the consumer; or (ii) to review an account to determine whether the consumer continues to meet the terms of the account. (G) executive departments and agencies in connection with the issuance of government-sponsored individuallybilled travel charge cards. Ambiguity on whether permissible purpose extends beyond whole loan investors to bond investors. Limits the ability of ABS and warehouse lenders investors to risk manage and control for the effects from derogs and loan mods Reach out to your regulator and trade associations (SFIG, SIFMA, MLA) to level-up the health and integrity of our capital markets 6

7 I N C R E A S E D S U P P LY O F C R E D I T Credit availability is at an alltime high driven by new entrants and rising credit scores Credit growth YOY (8%) has outpaced growth in GDP and personal income Source: PeerIQ; TransUnion Competition for market share can lead to looser underwriting standards Availability of unsecured personal loans can increase borrower indebtedness post-origination (especially if the loans are not used for debt consolidation) Source: PeerIQ; St. Louis Fed 7

8 P E R S O N A L L O A N S A R E N OT S U B S T I T U T I N G F O R C R E D I T C A R D O R OT H E R D E BT % of Balance Used to Refi Other Debt Source: PeerIQ; TransUnion Personal loans are used to refinance high rate debt less than 20%. Borrowers see the personal loan as another type of borrowing instrument Behavior varies by segment. Initial analytics indicates super-prime borrowers are taking down personal loans; where as subprime has more paydown 8

9 P R I O R I T Y O F PAY M E N T S I S S H I F T I N G % Delinquent by Consumer Credit Asset Class Delinquencies on Unsecured Consumer Loans are second only to those on Auto loans Payment priority has shifted 3x in the case of auto New channels and technology are leading to more rapid shifts in consumer behavior (e.g., the Lyft effect, cell phones, new digital spaces, etc.) 9

10 D R I V E R S O F C R E D I T P E R F O R M A N C E Renormalization of credit performance Derogs falling off the bureau Loan modifications Credit refinancing treadmill Increased supply of credit / underwriting Personal loans shifting from debt refi to general purpose Priority of payments is shifting Outlook 10

11 O U T L O O K Competition to own the Customer New entrants: Big Tech (e.g., Intuit, Paypal, Amazon, Google) Big Tech Secured Lending - $300 Bn in a few short years, is now half the size of the credit card industry by targeting Super Prime borrowers Community Banks / Credit Unions Consumer Relationship Money Center Banks / Wealth Management Lenders with captive customer acquisition channels and novel data are selecting quality borrowers. A few examples: Amazon Lending -$3 Bn in smallbusiness loans originated FinTech Big Tech + Big Bank: Chase/Amazon; Barclays/Uber FinTech + Small Banks: unique origination channels (POS), new products 11

12 P E E R I Q C O N S U M E R C R E D I T I N S I G H T S Segment ABS/Whole Loan Investor Macro Funds, Large PE, Economists Non Bank Originators, Regional Banks, & Credit Unions Objectives Addressed Buy/Sell a bond or resid Provide capital to/purchase loans from originator Assess the overall state of the economy Identify trades based on larger macroeconomic trends Strategic view into portfolio companies or potential targets Adjust pricing/marketing strategy based on macro factors Asses risk to existing portfolio based on consumer behavior Sample Questions Addressed How is the are loans in a particular credit tier performing? Has performance improved or deteriorated over time? What returns should I expect if I invest in a given asset class/credit tier? How has underwriting changed over time? How healthy is the US consumer? Is credit more or less available than in the past? How has consumer behavior changed over time? Are credit dollars being allocated in the same way as the past? How does US consumer credit compare to other macro data items (GDP, etc.) How has the source of credit changed over time (bank vs. non bank, etc.) Are there particular credit tiers/sub segments of the population that are over/underperforming? Is my pricing in line with the market? Are consumers seeking out more or less credit than in the past 12

13 C O N S U M E R C R E D I T I N S I G H T S E X A M P L E Source: PeerIQ; TransUnion Analyze multiple vintages and observe borrower attributes at various points over the life of the vintage. Utilization on revolving products reveals significant differences across the vantage bands, with Subprime borrowers decreasing their utilization and Prime borrowers increasing utilization 13

14 Q & A Subscribe to newsletter: info@peeriq.com Download research: Request a Demo 14