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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