Cross River IQ

Q1 2023 Review | Consumer Lending

Cole Gottlieb, Research Analyst

June 1, 2023

14 min read

Every quarter, we conduct extensive research to provide insights into the consumer lending landscape. In the first quarter, we found that credit tightening put a damper on unsecured consumer origination volumes, but has yielded some favorable results, with NCOs and delinquencies beginning to turn a corner. Domestic MPL new issue volume declined (38)% YoY and (20)% QoQ to $2,937Mn as economic uncertainty led to less favorable ABS market conditions. However, issuance volume may be turning the corner.

Catch up on the latest trends emerging in the consumer lending space in the latest version of our Consumer Lending Review.


Unsecured Credit Tightening Impacts Origination Volume, Delinquencies

Before diving into our first quarter coverage, we wanted to cover new industry data released from TransUnion showing a decline in origination volume (originations reported through Q4 due to reporting lag). Originations fell to 5.2Mn in Q4 2022, from 5.6Mn in Q3 and a record 6.0Mn in Q2 as delinquencies and the cost of capital rose. Fintech lenders accounted for a majority of the pullback, following significant market share growth during the pandemic. Bank lenders also tightened underwriting standards in Q4, contributing to a portion of the decline in originations. Fintech lenders and finance companies pulled back significantly on originations to subprime consumers to cull a rise in delinquency rates from historically low levels seen during the pandemic.

Graph - Unsecured Personal Loan Origination

Source: TransUnion

With lenders pulling back on originations (in particular, subprime originations) delinquencies declined sequentially. First quarter below prime unsecured personal loan balances made up 32.8% of total balances, down from 34.6% a quarter prior. Specifically, subprime loans as a percentage of total balances declined to 12.6% in Q1, from 13.4% in Q4. As seen below, subprime consumers account for a much larger proportion of delinquencies than other consumers.

Graph - Unsecured Personal Loan Consumer Delinquency Rates

Source: TransUnion

In the first quarter, 30+ DPD improved by (42) bps, 60+ DPD improved by (23) bps lower, and 90+ DPD came in slightly higher +5 bp. Some of the improvement can be attributed to seasonal decline, but delinquencies did come in above pre-pandemic rates (vs. 1Q19 30+ DPD was 33 bps higher, 60+ DPD was 15 bps higher, 90+ DPD was 2 bps higher).

At the same time, average unsecured personal loan balances per consumer rose to $11,281, a 1.5% increase from the prior quarter.

Graph - Unsecured Personal Loan Account Delinquency Rates

Source: TransUnion

In other news, the NY Fed recently released its Q1 report on Household Debt and Credit. The report showed credit card debt of $986Bn was flat from the fourth quarter and up 17% YoY (the largest YoY increase in the data’s 20-year history). Historically, balances fall in the first quarter, as consumers pay down balances accrued during the holiday period and benefit from tax refunds. A flat quarter for credit card debt would imply that consumer balance sheets are being further stretched. Data from the University of Michigan shows consumer sentiment remains depressed due to inflation and economic concerns.

Graph - Indebted Again

Source: American Banker

Elevated credit card balances have begun to translate into higher delinquency rates. NY Fed data showed upward trends in 30-day delinquency rates for both credit card and auto loans. While delinquency rates for credit card and auto loans are at rates substantially similar to pre-pandemic rates, the upward trend, particularly in a period of low unemployment, may be concerning. With the Fed voicing its commitment to keep rates “higher for longer” and a potential end to the student loan forbearance program coming in the back half of the year, there are many catalysts that could trigger an increase in delinquencies. The Secretary of the Education Department has said borrowers should prepare to make payments no later than 60 days after June 30th. With a debt ceiling deal potentially reached, student loan payments and interest would resume 60 days after June 30 if the legislation is passed by Congress. Per New York Fed data, borrowers in their 20s and 30s have already shown upticks in delinquency rates. With the end of the student loan forbearance, this demographic will likely see their balance sheets further stretched. This may lead to reductions in consumer spending and increases in consumer delinquency rates.

Graph - Transition into Delinquency

Source: New York Fed Report

Fintech’s Credit Tightening Impacted First Quarter Origination Volume, Improved NCOs

Turning to fintech lenders, our earnings coverage found that most lenders’ origination volumes fell due to the continued tightening of credit. Many fintech lenders began restricting credit in the summer of 2022.

Part of the credit tightening includes a focus on returning borrowers, who may carry lower risk due to their track record. For example, Oportun CEO Raul Vazquez stated, “The things that we’re really focused on in originations today are really number one, focusing on repeat borrowers, those who’ve had success with our loans in the past, and then number two, across both repeat and new borrowers, really focusing on those who have higher free cash flow.” Oportun noted that it has continued to tighten credit since its last earnings call in March. Additionally, OppFi CFO Pam Johnson reported, “New customer originations for the quarter decreased by 17.9% year-over-year, while existing customer originations increased by 15.9%.”

Lenders have focused on higher FICO customers to proactively defend against higher NCO rates. OneMain CEO Doug Shulman explained that “Our top two risk grades, those with the best credit quality and lowest risk customers [generally above 660], made up approximately 65% of new customer originations in the first quarter as compared to mid 2021 levels of 30% to 40%.” The focus on higher credit quality consumers had led to a reduction in approval rates. Upstart CFO Sanjay Datta explained that their conversion rates had slid because, “[Our Upstart Macro Index] basically reflects the fact that, apples-to-apples, the same consumer is defaulting at a rate that is maybe sort of 2 to 3 times higher than they were in mid-2021…We’re including much higher default premiums in the loans. And then compounding that, of course, there’s the higher base interest rates, which are requiring investors to demand higher sort of returns.” Essentially, conversions have declined as the price for loans has increased (in some cases by over 1,500 bps) and many borrowers have been pushed above the 36% APR threshold.

While most of the fintech lenders we track reported sequential declines in originations, SoFi bucked the trend, posting 19.8% QoQ growth. One reason SoFi may have been able to post record personal loan originations? Its borrowers’ credit profile. CFO Chris Lapointe reported that, “Our personal loan borrower’s weighted average income is $164,000 with a weighted average FICO score of 747.”

Pagaya did not see its network volume drop sequentially, but the fintech acts as a facilitator for loans, providing AI-driven analysis to lenders instead of directly originating loans. MoneyLion, the other outlier in the data set, grew originations by 2.0% sequentially, but has been placing a greater focus on third party products instead of its internal products.

After multiple quarters of substantially adding to its balance sheet, Upstart reported a slight decline, down (3)% sequentially, in retained loans. Upstart had reported sequential increases for all of 2022. The company said that while the balance sheet would fluctuate in the future, it does not plan to go above where it was in Q4, about $1.01Bn. As a recall, 41% of Upstart’s loans held on its balance sheet were auto loans, despite just 5% of transactions dollars and 2% of the number of loans coming from auto loans. As these auto loans are held in the “Testing and Evaluation” section, we would guess that these loans are being monitored as Upstart ramps up its auto lending business.

LendingClub retained 44% of its originations during the quarter, higher than its 30-40% guidance. This represents a meaningful step up from the 28% retained a quarter prior and 27% retained a year prior.

Graph - Selected Companies Originations

Source: PeerIQ

Credit tightening put a damper on origination volumes, but has yielded results, with NCOs and delinquencies beginning to turn a corner. OppFi, Curo, Enova, and Oportun all have begun to see credit improvement due to their more selective lending strategies.

While OneMain has yet to see an improvement in NCOs, NCOs remain a lagging credit indicator. Examining OneMain’s delinquencies paints a more up-to-date picture. Despite a 92 bps sequential increase in NCOs, 30+ day delinquencies improved sequentially by 51 bps, 30-89 day delinquencies improved 49 bps sequentially and 90+ days improved 2 bps sequentially. The improvement in delinquencies, paired with a rising percentage of the portfolio coming from after its August 2022 credit tightening, would indicate that NCOs are likely to come down over time.

Graph - Net Charge-Off

Source: PeerIQ

Looking at banks’ consumer NCOs, we saw more muted changes to NCOs. Capital One and PNC saw slight improvements while Citizens, Wells Fargo, Bank of America, JPMorgan and Synchrony saw marginal increases in NCOs. Banks did not expand credit as much as fintechs during the pandemic boom, and as such, did not have the need to sharply pivot and tighten credit last year.

Graph - Net Charge-Off for Banks

Source: PeerIQ

Following the March collapses of Silicon Valley Bank and Signature Bank, all eyes were on bank deposits. Earnings showed that there was a “flight to safety” after the collapses, with the largest banks taking on additional deposits. Additionally, continued rate hikes have driven depositors to search for yield on their cash.

Among the largest banks, Citi +2%, JPMorgan +1%, Bank of America (0)%, Wells Fargo (1)% reported higher period-end consumer deposit growth than average consumer deposit growth (average Citi – flat, JPMorgan (3)%, Bank of America (2)%, Wells Fargo (3)%). The uptick in growth was likely due to a mid- to end-of-March “flight to safety” among depositors.

Period-end deposits at banks were mixed, as consumers re-positioned certain deposits into higher-yielding alternatives. Finwise +17%, LendingClub +13%, Capital One +5%, Discover +4%, Synchrony +4%, PNC +3%, and Ally +1% reported sequential increases in period-end deposits while Citizens (5)% and Goldman (3)% reported declines.

LendingClub continues to grow its deposit base, just two years after gaining a bank charter (through the acquisition of Radius Bank). Finwise attributed its deposit growth to an increase in brokered CDs, which were primarily utilized for short term funding needs of the bank.

As with other deposit-taking institutions, the cost of funding has risen, with Capital One reporting an average rate of 2.4% on its interest-bearing deposits, up from 1.82% a quarter prior and just with Finwise reporting a cost of deposits of 3.18%, up from 1.98% a quarter prior. PNC management said that they continue to see a shift from noninterest-bearing to interest-bearing deposits.

Discover (3.36%), Ally – Retail (3.16%) Synchrony (3.13%) all offered elevated average deposit rates on their interest-bearing accounts, which make up a vast majority of their deposit bases.

In contrast, Citizens offered a lower average rate paid on deposits (1.28%), suggesting that consumers are searching for yield on their deposits. Citizens’ management did report that much of the decline in deposits occurred in the first two months of the quarter, with deposits “broadly stable” in March. This trend was also seen in the largest banks (prior to SVB/Signature collapses), with depositors pulling money from low-yielding accounts at the likes of JPMorgan, Citi, Bank of America, and Wells Fargo.

Even within Citizens’ results, it showed that consumers realigned their deposits in the search for yield. Citizens’ term deposits grew 22% QoQ while its lower-yielding checking with interest deposits fell (13)% QoQ and demand deposits fell (10)% QoQ.

Bank and Fintech Lender Earnings Summary

Graph - Bank Sum

Source: PeerIQ

Graph - Fintech Sum

Source: PeerIQ


MPL New Issue Volume Slumped to Start the Year, but has Bounced Back

To combat stubborn inflation, the Fed hiked rates 25 bps at each of its three meetings of 2023, bringing the Fed Funds Rate to a 5.00-5.25% range. Looking ahead to the June meeting, CME Group data shows that markets expect a pause in rate hikes. While Powell has hinted at a June pause, Fed Bank of St. Louis President Bullard has come out in support of two more rate hikes in 2023 and Fed Bank of Minneapolis President Kashkari has called June a “close call” on a hike or pause. Kashkari says that regardless of the June decision, the Fed should signal that its tightening cycle is not over.

With unemployment levels low and inflation still well above the Fed’s 2% target, it remains likely that the Fed will hold rates at elevated levels (and maybe hike!), even as markets price in 50 bps of rate cuts by year end.

The Fed’s aggressive path of rate hikes caused lenders (especially fintech lenders) to tighten credit underwriting, due to fears that hikes will weaken the labor market and consumer balance sheets. To combat credit weakening and higher funding costs, many fintech lenders (as discussed above) significantly tightened credit mid-2022 and increased target returns, driving down origination volumes. Combined with less attractive funding in the ABS market, securitization volumes have been lower as well.

New issue volume declined (38)% YoY and (20)% QoQ to $2,937Mn during the first quarter as economic uncertainty led to less favorable ABS market conditions. However, issuance volume may be turning the corner. In the second quarter, through May 22, there has been $3,199Mn in new issue volume, already eclipsing the first quarter’s volume.

Specifically, we have seen increased demand for this type of paper, with Marlette’s April MFT 2023-2 Class A issuance yielding 6.116% (WAL of 0.87), 0.033 percentage points lower than its February MFT 2023-1 Class A issuance that yielded 6.149% (WAL of 0.87). At the same time, the April MFT 2023-2 Class A issuance priced with a spread 130 bps above benchmark, wider than the February MFT 2023-1 Class A issuance (110 bps spread).

Further evidence of increased demand in the market can be seen in Affirm’s April closing of a $400Mn expansion of its 2023-A ABS offering. Due to strong investor demand, Affirm upsized the offering from an original size of $250Mn. The deal was more than 3x oversubscribed at pricing, with $1.3Bn in total orders.

Graph - New Issue Volume

Source: Finsight, PeerIQ

Pagaya ($800Mn), Affirm ($500Mn), Marlette ($423Mn), SoFi ($340Mn), Bankers Healthcare Group ($265Mn), Achieve fka Freedom ($245Mn), Upstart ($193Mn), and LendingPoint ($171Mn) were among the most active players in the space during the first quarter.

Graph - Cumulative New Issue Volume

After a slow first quarter, ABS issuers returned to the market in April, closing the gap on cumulative new issue volume from the year prior with $2,137Mn of new issue volume during the month. Through May 22nd, 2023 we have seen cumulative new issue volume of $8,273Mn that has outpaced 2022 volumes (of $7,269Mn as of May 22, 2022 and $8,090Mn as of the end of May). Despite high interest rates and negative sentiment from management teams, the ABS market has seen a reacceleration of growth as of late.




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