There is likely no one alive who has witnessed this level of economic disruption in this country in such a short time span. With potentially millions of people losing their jobs in the past two weeks this could have a dramatic impact on the consumer lenders.
We reached out on Monday of this week to several leading online consumer lenders, across a range of the credit spectrum, to get a sense as to how they were responding to the rapidly changing economic conditions. We asked four questions:
- What are you doing to help your existing borrowers?
- How are you changing their underwriting?
- How are you responding to increased loan demand?
- What is your message to investors?
We heard back from several of the leading companies although some wanted to talk on background only, preferring not to go on the record at this time. Suffice it to say that every single lender has reacted quickly to this looming crisis.
Below are their responses.
LendingClub
LendingClub released this 8-K earlier this week that has a detailed explanation as to how they are responding. Here is a short summary:
For borrowers who might feel the impact of coronavirus:
We are committed to our borrowers’ financial success and know that this is a trying time for many. All LendingClub members have a 15-day grace period to make payments with no penalty. We are working closely with our borrowers, have several payment plans available for those members who need help, and we are working on adding new options specifically tailored to this situation as well (more to come on that in a few weeks). For now, you can read about what we’re doing here.
On underwriting changes:
LendingClub is enhancing the resiliency of the portfolio by proactively managing underwriting quality and credit risk. We are reducing approval rates for certain higher-risk borrower populations, increasing income and employment verification requirements and adjusting our marketing mix, focusing on channels where we have the most flexibility to control volume and credit quality. These efforts, which include evaluating and repricing credit risk, are currently underway.
Implications for LendingClub’s investors:
Last week, we published a blog post that focuses on our investors and the proactive, immediate and temporary changes we are making today. A principal benefit of our marketplace model is the ability to quickly adapt and flex to changing market conditions; our changes last week are a clear example of this. This week, we published another post discussing additional actions we’re taking.
Marcus
Marcus is unique in this list in that they are the only major bank. Here is how they are helping their customers:
- A core part of the Marcus by Goldman Sachs brand is to be on the side of our customers – in this difficult time, we want customers to know that we are here to support them
- That’s why we’ve launched our no-fee Customer Assistance Program to help customers impacted by COVID-19
- Customers can withdraw money early from their Marcus certificates of deposit with no penalty, postpone one payment on their Marcus personal loans, or skip their Apple Card March payment without accruing any interest during the deferral period
- In addition to our Customer Assistance Program, we continue to focus on providing our customers with a seamless, 24/7 user experience on marcus.com and the Marcus app
- To support the wellbeing of our employees as we continue to support customers, we are operating our contact center virtually during this time – customers can continue to call in if they require assistance
- There is a dedicated page on our website that provides detailed coronavirus information.
Here is what the head of Goldman Sachs’ US Consumer business, Omer Ismael, had to say about their efforts to help customers:
We are always dedicated to being on the side of our customers and are here to help during this difficult time. We have launched our Customer Assistance Program and continue to focus on providing great service and a seamless user experience to meet customers’ needs.
Prosper
What steps are you taking to help your existing borrowers?
In response to the potential impacts of COVID-19, Prosper is offering a number of options to impacted borrowers including up to three months payment relief with fee waivers and suppression of delinquency reporting to bureaus. Customized relief options for our borrowers also include due date adjustments, multi-month extensions, payment drops and loan settlements. We have proactively communicated to our borrowers and encouraged them to reach out to us if they are impacted and need assistance.
How have you changed your underwriting due to the quickly changing economic conditions?
Beginning in 2017, Prosper undertook a number of credit actions focused on driving consistent and stable credit performance. This credit tightening and a focus on high quality borrowers has led to significant characteristic enhancements over time (for e.g. our average FICO score on new originations across the platform is currently above 720). Additionally, borrower rates on the platform have increased since the first quarter of 2018 to ensure consistent and attractive risk-adjusted returns for investors through the cycle.
In light of the evolving credit environment due to COVID-19, we have further tightened our credit and verification strategies this quarter while implementing several pricing increases across the platform. We will continue to take actions as we see the situation evolve.
What is your message to investors?
Prosper started preparing for a recession in 2018 and, over the past several years, we have taken a highly disciplined approach to risk management. In addition to numerous credit and pricing changes to ensure attractive risk-adjusted returns for investors, we have significantly diversified our funding sources (our largest investor in 2019 comprised 9% of total originations across the platform), established $500 million of committed warehouse facilities and generated positive cashflow from operations. We are closely monitoring the impact this unprecedented event is having on our borrowers and investors and will continue to stay focused on our mission of advancing financial well-being.
Marlette Funding (BestEgg)
What steps are you taking to help your existing borrowers?
We have proactively reached out to customers to make them aware of flexible repayment programs that we have available and are actively enrolling customers into those programs.
How have you changed your underwriting due to the quickly changing economic conditions?
Our underwriting practices are controlled to a large extent by the expected loss rates of consumers. We have calibrated our loss rate assumption with the current economic outlook which in return decreases approval rates, lowers loan amounts and increases data verification requirements.
Beyond underwriting how are you responding to increased loan demand from consumers?
We have not seem an increased demand for loans like the mortgage industry. That said, we have been very active in producing content and resources that we think will help people navigate this crisis.
What is your message to investors?
We are taking a very proactive and conservative approach to managing risk.
Avant
Avant is helping existing borrowers in a number of ways. They have sent notifications to borrowers with the message that they are there for them. They are rolling out a program like they do for natural disasters but not limiting it to any geographic region. Given how they are structured with several customer care facilities around the globe they have been able to maintain a high level of service for borrowers throughout this busy time.
They are tightening their underwriting across the board right now. They are taking a look at their marketing channels and the different segments of their borrower base. They are continuing to issue loans and credit cards but are seeing slightly reduced demand.
On the investor side they were very pleased to have completed an ABS transaction a few weeks ago. They always maintain significant balance sheet capacity to enable loan originations and they don’t rely on loan sales so they are in good shape as far as capital goes.
Opploans
What steps are you taking to help your existing borrowers?
- Customers calling in expressing concern or inability to pay due to COVID-19 for any reason, OppLoans will offer relief through our Disaster Borrower’s Assistance Program. This is a program we created a few years ago for customers who experienced unexpected disasters, like hurricanes or flooding, for example.
- The Disaster Borrower’s Assistance Program allows customers to skip their upcoming payment without incurring any penalties or accruing additional interest and keeps them in an active status so there is no negative credit reporting impact.
- No documentation or proof of loss of income is required at this time.
How have you changed your underwriting due to the quickly changing economic conditions?
Our underwriting model is always based on quality and consistency of the data to show the customer’s ability to repay the loan. We will continue to leverage this model and alternative data in order to create the most accurate credit profile of our customers. We do expect that more demand will increase as near-prime lenders tighten their credit models during this time.
Beyond underwriting how are you responding to increased loan demand from consumers?
Right now, the short-term demand is a bit lower – which is typical for this time of year. But because of the current “stay at home” state mandates, people are limiting their spending to essentials (grocery, pharmacy) and they are not traveling so the chances that cars are breaking down or in need of repairs are less at the moment. Nonessential medical visits are being cancelled and postponed. All of these factors have lessened the demand right now, but we expect to see considerable demand increases in the coming weeks and months. Again, we will continue to service our customers as we always do, knowing the increased access for credit will be so important in the coming months.
What is your message to investors?
Small dollar loans and access to credit are essential to millions of Americans. More than half the country lives paycheck to paycheck (78%) and 60 million lacked credit access before the COVID-19 crisis. These numbers will likely increase quickly. In order to create more access, it will be critical for banks to get into the space and fintechs are well positioned to partner with them. Banks have the ability to build mainstream credibility and market reach to help more consumers gain access to better priced, highly regulated lending products, particularly in the current crisis we are experiencing today.
Aura
What steps are you taking to help your existing borrowers?
We proactively reached out to all 200,000+ borrowers to let them know that if they have lost work / job due to Covid-19 and they call us to make arrangements, we can defer / skip their next payment. You can see our policy on: myaura.com/corona
How have you changed your underwriting due to the quickly changing economic conditions?
We changed underwriting 1 month before the crisis, but are putting in a new change as we speak that will lower approval rates by >20% temporarily (prioritizing renewal customers with higher approval rates). We are, however, monitoring the vast unemployment insurance benefits particularly available to our customers (average incomes of $34,000/year) and may increase approval rates back up after we fully understand those changes (as well as $1200 and $2400 upfront checks in the $2T stimulus).
Beyond underwriting how are you responding to increased loan demand from consumers?
We have seen retail applications fall by 50% since the crisis started, but online apps up by 350%. We think that retail apps are down because many residents are being asked to stay home, aside from grocery store visits. But, online apps are way up.
What is your message to investors?
Aura stands by its customers and wants to help them during this crisis. We lead by our heart and this is the time to show it. Therefore, while we will need to be cautious and realistic on the underwriting side, we are one of the only lenders who provides capital to low income communities and it’s crucial that we do that, especially when times are the toughest. This is what we believe in and what matters to us.
Conclusion
It is really gratifying to me to see how the fintech community is responding so quickly to this crisis. Every company has changed components of their business this month demonstrating the speed and nimbleness that is one of the strengths of fintech.
One of the most interesting things to me in the responses here is that for most lenders, not all, loan applications are not increasing much at all, in fact for many lenders they are decreasing. I expected during this time of economic hardship for millions of people that they would be flocking to the online lenders to get a loan to tide them over.
It is likely that the economic impact of this health crisis will deepen in coming weeks. Thankfully, the consumer lenders here seem ready, willing and able to help.
