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Online consumer lending has hit a stumbling block, better known as “breaching” and “trigger.”
(Bloomberg) – Matt Scully – A group of online consumer loans that were packaged into bonds is going bad faster than lenders and bond underwriters had expected, the latest sign that some startups that aimed to revolutionize the banking industry underestimated the risk they were taking.
Delinquencies and defaults are reaching key levels known as “triggers” for at least four different sets of bonds. Breaching those levels will force lenders or underwriters to start paying down the bonds early. Avant Inc. and its underwriters, for example, are going to have to begin to repay three of its asset-backed notes, according to a person with knowledge of the matter.
Two of Avant’s securities breached triggers this month for the first time, the person said, asking for anonymity because the data is not public. Another bond, tied to the subprime lender CircleBack Lending Inc., may also soon breach those levels, according to Morgan Stanley analysts. When the four offerings were originally sold last year, they totaled more than $500 million in size. Around $2.8 billion of bonds backed by online consumer loans were sold in 2015, according to research firm PeerIQ.
Online loans have shown other signs of weakening. LendingClub Corp. last month raised interest rates and tightened its standards for at least the second time this year after seeing higher delinquencies among its customers, especially those with the most debt.
LendingClub’s founder, Renaud Laplanche, wanted to change banking as we know it, but many online lenders are now finding themselves in uncharted territory. Steve Eisman, a money manager who famously predicted the collapse of subprime mortgage securities, said some firms have been careless and that Silicon Valley is “clueless” about the work involved in making loans to consumers. Non-bank startups arranged more than $36 billion of loans in 2015, mainly for consumers, up from $11 billion the year before, according to a report from KPMG.
“There was a rush to grow,” said Bryan Sullivan, chief financial officer of LoanDepot, a mortgage company that last year began making unsecured loans to consumers online. He was speaking generally about the industry, although LoanDepot’s own loan losses on a bond in September broke through the ceilings that had been set by underwriters at Jefferies Group.
Breaching those levels can force a company to divert cash flow from assets to paying off bonds instead of making new loans, which often means it has to find new, more expensive funding or to scale down its business. Avant, based in Chicago, cut its monthly target for lending this summer by about 50 percent, and decided to shrink its workforce in line with that, while CircleBack Lending, based in Boca Raton, Florida, stopped making new loans earlier this year.
Several lenders have changed management this year. LendingClub’s Laplanche left in May and Prosper Marketplace’s CEO Aaron Vermut is stepping aside in December.
Online loans account for a fraction of the more than $12 trillion of U.S. consumer loans outstanding. Any weakness in this area isn’t likely a systemic issue, Eisman said in his speech in September, and most types of loans to Americans are performing better now than even last year. Delinquencies have been declining since 2010, and in the second quarter were at 4.8 percent, down from 5.6 percent the same quarter a year earlier, according to a report from the Federal Reserve Bank of New York in August.
But there have been pockets of weakness for some kinds of credit. The percentage of subprime car loan borrowers that were past due reached a six-year high in Augustaccording to S&P Global Ratings’ analysis of debts bundled into bonds.
Lenders themselves are talking about the heavy competition for customers. Jay Levine, the chief executive officer of OneMain Holdings Inc., one of America’s largest subprime lenders, said last week that “the availability of unsecured credit is currently the greatest that has been in recent years,” although he said much of the most intense competition is coming from credit card lenders. OneMain, formerly part of Citigroup, is taking steps to curb potential losses by requiring the weakest borrowers to pledge collateral.
Setting bond triggers is often up to the security’s underwriters. Some lenders have been working more closely with Wall Street firms to make sure the banks know how loans will probably perform and set triggers at reasonable levels, said Ram Ahluwalia, whose data and analytics firm PeerIQ tracks their loan data.
The startups are “playing an increasingly hands-on role,” he said.
The deals that have or are expected to breach triggers include:
- MPLT 2015-AV1, a bond deal backed by Avant loans that Jefferies bought and securitized.
- AVNT 2015-A, a bond deal issued by Avant and underwritten by Jefferies.
- AMPLT 2015-A, a bond deal backed by Avant loans and underwritten by Morgan Stanley.
A fourth deal, tied to CircleBack, may also soon breach, according to Morgan Stanley analysts. The deal is called:
- MPLT 2015-CB2, backed by subprime loans made by CircleBack Lending Inc. and underwritten by Jefferies.
Here is an example: MPLT 2015-AV1, a MarketPlace Loan Trust for the online lender Avant.
The collateral backing this deal has a weighted average coupon (WAC) of 31% and a weighted average maturity of 46 months. In other words, consumer loans.
The performance thus far? As of October 2015, cumulative losses amount to 15.7%.
With the collateral details, one can only speculate that the typical borrower is a low credit score borrower or someone in urgent need of cash.