Market loans: market momentum in 2020 – finance and banking
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Expectations are high for market lending in 2020 but, more than any other lending industry, there are legal issues on the horizon that are likely to have an impact in the future.
A booming market
Lending agreements in the market have been steadily increasing since FinSight started tracking data in 2013. There has been a jump from 2018 to 2019 with the number of transactions tracked increasing from 37 in 2018 to 47 in 2019, and the value of those transactions increasing from $ 12.3 billion to $ 15.2 billion. Recently, the Kroll Bond rating agency predicts a rise in securitized market loan volume to $ 17.5 billion in 2020, although lending guidelines are expected to tighten.
SoFi had the largest offering of consumer credit notes in 2019, expanding from student loans and refinances to consumer loans to better serve a high-quality customer base. Their most recent consumer loan offerings in 2019 had high FICO scores in the 750s, weighted average gross income of over $ 150,000, and weighted average monthly free cash flow of over $ 5,000.
TransUnion reported that, generally speaking, debt consolidation and the use of home improvement funds are driving the growth of unsecured personal loans. However, unsecured personal loan lenders not have pushed further into subprime territory and, indeed, their share of the non-prime market remained stable from 2018 to 2019. Consistently, the low delinquency rates of recent years have also demonstrated the merits of this approach. TransUnion expects lenders to focus more on core customers going forward in 2020 and expects a slower rate of growth in originations due to this risk aversion.
Growth continues despite uncertainty related to the
Madden vs. Midland, which, as we discussed, disrupted market lending in the second circuit. In the past, we have noted that regulatory or legislative action is needed to bring clarity to all market participants. And just in the past few months, the OCC and FDIC have come up with new regulations to potentially offset Madden’s overthrow of the long-standing “valid once done” rule.
the The OCC offers codify the “valid when issued” principle by amending the wording of the National Bank Act and the Homeowners’ Loans Act. The new wording would allow the interest eligible at the time the loan is made not to be affected by subsequent events, such as the sale, assignment or other transfer of the loan. The FDIC offers a similar amendment to the Federal Deposit Insurance Act.
The proposed rules will not reverse Madden and are not as strong a solution as legislative action could be. But it is progress. Regulations are always subject to public comment and the real test will be, once they are codified, how the courts interpret them.
Real lender issues
One area that the proposed regulation does not address is the concept of ‘real lender’, the other main issue questioned by Madden which was at the center of the forensic analyzes of usury and loan assignment issues.
The “real lender” issue plays a controversial role in payday loans in California, where a new law, AB 539, seeks to limit interest rates on installment loans to between $ 2,500 and $ 10,000. It was reported at the end of 2019 that several non-bank lenders in California had told their investors in earnings calls that they could avoid the impact of AB 539 by using a “rent-a-bank” structure, which would allow non-banks to partner with out-of-state banks to get the benefit of a higher interest rate elsewhere. California lawmakers have sent letters to lenders warning them that if they tried to avoid this new law, they would face enforcement action.
Reasonable minds disagree
We talked about the disparity between Kroll and Fitch’s views on risk in the MPL market, with Kroll being more dynamic and Fitch more cautious. At least one lender has pointed out that Kroll’s loss expectations for their securitizations have been
regularly and significantly outside. Upstart reports that their securitizations have exceeded Kroll’s expectations by 40% to 71% on various transactions. While this may be an anomaly or unique to this lender’s portfolio (Kroll has been close to target on many other deals), it is a good reminder that this is still a relatively nascent and difficult industry. predictable.
Because lending in the marketplace is so algorithmic, AI, and data driven, and relies on non-traditional ways to determine creditworthiness, it’s a space that can change as quickly as the technology that drives it. underlies. Yet the speed of change contrasts with the slow pace of resolution of the main legal issues facing the market. The market is poised for further growth once there is more legal certainty.
And, at that point, a new challenge may emerge: We still haven’t seen market lending perform in times of recession or real economic pressure. Experience through bad times is what is needed to attract more investment.
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