Analysis: Fintech lenders tighten lending standards, bolstering debt financing

OneMain Holdings

19/07/2023 11:00

By Hannah Lang and Matt Tracy
       July 19 (Reuters) - U.S. financial technology companies
are tightening their lending standards, a move that has
bolstered their access to debt financing from Wall Street
investors, according to industry executives.
    During the COVID-19 pandemic, many fintechs began lending to
borrowers with imperfect credit, but Wall Street investors were
comfortable buying their asset-backed securities as government
stimulus ensured consumers had the money to meet repayments. 
     Asset-backed securities (ABS) are a type of bond backed by
a pool of assets, such as auto or credit card loans, which pay a
fixed yield. They are a key source of financing for some fintech
lenders, which have fewer funding options than banks.
    As the end of pandemic stimulus and rising inflation led
delinquency rates to normalize, investors shunned the fintech
ABS market late last year.
    Fintechs like Upstart  UPST.O , Affirm  AFRM.O  and OneMain
Financial  OMF.N  say they are boosting credit quality, in
another example of how lenders have been pulling back amid
uncertainty over the economic outlook. That in turn has improved
the quality of their ABS offerings, executives say.
    "As delinquencies have risen over the past year and a half,
we've adjusted accordingly in how we calibrate our models and
assess default risk," said Sanjay Datta, the chief financial
officer at Upstart, which specializes in loans for subprime
borrowers. 
    "The outcome of that is that the collateral that's forming
the basis of these ABS deals looks very different and is much
more conservative now," Datta added.
    Buy-now-pay-later giant Affirm mostly lends to near-prime
and prime borrowers, but has tightened its credit standards
further this year, said CEO Max Levchin. The average credit
score of non-interest bearing loans in its ABS offering in 2023
was 731, compared to 706 in its previous offering last year,
according to Morningstar. 
    Roughly 65% of OneMain's new loans in the first quarter went
to borrowers with the best credit quality, compared to 30% to
40% in 2021, CEO Doug Schulman said on an April 25 earnings
call. OneMain did not respond to a request for comment.
    These efforts appear to wooing back some ABS investors. 
    After hitting a two-year low in the first quarter of 2023,
issuance of ABS that bundled unsecured consumer loans mostly
from fintechs or marketplace lenders rose 17% in the second
quarter to reach $3.4 billion, according to data provider
Finsight.
    To be sure, that is a slow pace compared to the $9.6 billion
issued in the first half of 2022, and fintech issuers are
offering higher yields to compensate for loan loss risk. The
average yield for the highest quality AAA-rated tranches of
unsecured consumer loan ABS issued so far this year is 6.24%,
compared with 3.78% this time last year, according to Finsight. 
    Still, analysts say it is a sign the fintech ABS market is
recovering. 
    "The year started better than many would have expected,"
said Robert Wildhack, an analyst at Autonomous Research.
    In addition to pandemic stimulus phasing out, inflation has
hit subprime consumers who spend most of their income on rent,
groceries and gasoline, according to Moody's.
    For fintech loans to borrowers with weighted average credit
scores between 710 and 760, annualized net losses rose by 1.98%
from May to June, to 8.11%, according to Kroll Bond Rating
Agency, which noted this primarily reflects charge-offs on 2022
loans. Delinquencies of at least 30 days on loans in this tier
rose 0.58%, to 3.74%. 
    For fintech loans to borrowers with weighted average credit
scores between 660 and 710, annualized net losses rose by 1.88%
month-over-month to 16.61%. Thirty plus-day delinquencies rose
0.51%, to 6.36%.

 (Reporting by Hannah Lang and Matt Tracy in Washington; Editing
by Josie Kao)
 ((Hannah.Lang@thomsonreuters.com;))