what is happening with personal loan losses? - peeriq.com · • availability of unsecured personal...
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What is Happening with Personal Loan Losses?
Ram Ahluwalia
CEO, PeerIQ
Nick Andreadis
Head of Data Intelligence
Ashish Dole
Head of Research
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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
▪ Benchmarking / Portfolio Mgmt
▪ Valuation Services
▪ Credit Facility Management
2. Data
• TransUnion Derived Credit Insights
• 25+ lenders in a standardized
format
TO D AY ’ S C O N S U M E R C R E D I T PA R A D O X
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Macro conditions
are strong…
…yet credit
performance is
weakening
How can better data help us reconcile this
contradiction?
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
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• 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
Source: PeerIQ; TransUnion
% Delinquency on Unsecured Consumer Loans
Long-term Avg ~3%
M O D E L S F I G H T I N G T H E L A S T WA RWhy FICO is flawed
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• 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)
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
Source: PeerIQ
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(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 individually-
billed travel charge cards.
P E R M I S S I B L E P U R P O S E
• 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
I N C R E A S E D S U P P LY O F C R E D I T
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• Credit availability is at an all-
time high – driven by new
entrants and rising credit
scores
• Credit growth YOY (8%) has
outpaced growth in GDP
and personal income
• 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; TransUnion
Source: PeerIQ; St. Louis Fed
P E R S O N A L LO 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
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• 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
Source: PeerIQ; TransUnion
% of Balance Used to Refi Other Debt
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
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• 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.)
% Delinquent by Consumer Credit Asset Class
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
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• 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
O U T LO O K
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Consumer Relationship
“Big Tech”
Money Center Banks
/ Wealth Management
“FinTech”
Community Banks /
Credit Unions
• Competition to own the Customer
• New entrants: “Big Tech” (e.g.,
Intuit, Paypal, Amazon, Google)
• Secured Lending - $300 Bn – in a
few short years, is now half the
size of the credit card industry by
targeting Super Prime borrowers
• Lenders with captive customer
acquisition channels and novel data
are selecting quality borrowers. A
few examples:
• Amazon Lending -$3 Bn in small-
business loans originated
• Big Tech + Big Bank:
Chase/Amazon; Barclays/Uber
• FinTech + Small Banks: unique
origination channels (POS), new
products
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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
ABS/Whole Loan
Investor
Segment Objectives Addressed
• Buy/Sell a bond or resid
• Provide capital
to/purchase loans from
originator
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?
Macro Funds,
Large PE,
Economists
• Assess the overall state of
the economy
• Identify trades based on
larger macroeconomic
trends
• Strategic view into
portfolio companies or
potential targets
• 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.)
Non Bank
Originators,
Regional Banks, &
Credit Unions
• Adjust pricing/marketing
strategy based on macro
factors
• Asses risk to existing
portfolio based on
consumer behavior
• 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
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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
• 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
Source: PeerIQ; TransUnion
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