The American Banker carries an opinion column today from marketplace lenders, hoping to receive the same consideration as bank cards issued by financial institutions. The article cites well-known Fed data.
The Fed has projected an even worse second quarter as it holds short-term interest rates near zero to help ease the downward economic spiral. But investor concern about the uncertain future economy has severely tightened consumer credit funding, and the one-time payments of up to $1,200 included in the coronavirus relief aid, while necessary, likely won’t be sufficient to bolster consumers’ financial wellbeing into the summer
And then, the article cites installment loan data, which indicates plummeting demand.
New loans for credit-worthy consumers — even those who have steady jobs and a demonstrable an ability to repay — are scarce. While the demand for loans at comparison sites like CreditKarma has remained relatively steady, new loan production from the most affordable online lenders, April is down by as much as 90% in the second quarter.
In Mercator’s recent Viewpoint on installment lending, Credit Card Lenders: Hone Strategies and Do Not Let Fintechs Scare You, we noted the importance of sticking to bank-grade lending. There is a certain discipline in lending which is time tested. Our advice fell into three categories:
- Maintain lending quality and rely on FICO scores, an industry standard
- Market the flexibility in revolving lending rather than the confinement of installment lending
- Keep a watchful eye on emerging products, but do not rush into a market that will cannibalize a successful card operation
One of the marketplace lending industry issues is that they are excluded from TALF, the Term Asset-Backed Securities Loan Facility which will help the bank card industry. It is unclear if marketplace lending has enough underwriting clarity or protections found in the highly regulated credit card business. The article mentions expansion is under consideration by the Fed.
Fortunately, it appears that the Fed is considering another round of TALF expansions that could include personal loan asset-backed securities. Any support from the Fed will immediately start helping bring down interest rates for installment-loan borrowers. If Treasury even assigned less than 1% of the $454 billion coronavirus relief aid to consumer credit, that would support the Fed expanding the TALF program to include all investment grade personal loan collateral, reopening the market.
A second key action could be to set aside a portion of the Fed’s Main Street Business Lending Program, with modified terms, that would support nonbank lenders to help keep credit flowing.
But, the logical argument falls off the grid with the last consideration:
Finally, Congress could design a consumer loan forgiveness fund to provide a backstop for lenders that give the neediest borrowers full debt forgiveness.
Banks pay a price for their lending standards. Regulators look at operational risk, fair lending, interest rate risks, and other factors. With new wave installment lending, there is a promise of “better” lending. Perhaps it is not that much better afterall. Should Stress Testing be considered for the installment loan industry? Does lending look for ways to make profitable investor loans? Should the installment loan industry carry more loans on their books to share in risk?
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group.