Consumer credit ABS survived COVID-19


Amid the economic recovery from the COVID-19 pandemic and the resumption of the US economy, consumer-related debt has unexpectedly changed with better-than-expected credit scores. But market watchers say the conditions that made it possible to improve consumer lending, especially consumer installment loans, are unlikely to return again in the next economic downturn.

As consumers benefited from major programs such as student loans and mortgage waiver programs, they used windfall income to pay off debt and accumulate savings.

“Unprecedented levels of federal aid, such as increased unemployment benefits, direct stimulus payments and radical abstinence programs, have bolstered credit performance in consumer finance markets during the pandemic,” Elana Lipchak, ABS strategist at Bank of America’s global research group, said in a report. … email response.

Asset-backed trusts continue to see benefits from how consumers allocate their incentive and aid payments. Consumer loans ABS, like other consumer-oriented debt instruments, has performed better than expected even in recent months, according to data from Bank of America Securities.

According to BofA, some of these results come from the market lending segment, which accounts for just over one third, 33%, of ABS’s total consumer loans from the beginning of the year to the present.

According to the latest available data, the ABS market loan net loss rate was 4.4% in May 2021, slightly higher than in October 2020, when it bottomed out at 4.3%.

In the year leading up to the pandemic, the range of net losses ranged from 6.0% to 8.5% and was still below the 12% achieved in 2016 and 2017. loan in the market. To start, ABS is proposing new deals. The difficult economic environment in 2020 reduced the demand for loans. In addition, the marketplace lender has diversified its funding sources by acquiring banks or issuing pass-through securities. In the latter case, sponsors of structured finance market-based loans have issued about $ 7.6 billion worth of pass-through certificates.

With all the support, the spike in unemployment has not led to an increase in non-payments, unlike in previous recessions. Indeed, according to the Bureau of Labor Statistics, the unemployment rate stood at 14.7% in April 2020, a shocking rise from 3.5% in February 2020.
The economic performance has improved significantly compared to last year. The unemployment rate rose to 5.9%, while observers had expected a decline to 5.6%. The shift coincided with the economy adding 850,000 jobs to job listings in June, surpassing a projected increase of 720,000 jobs.

According to Lipchak, the state of the economy looks promising now, but Bank of America is worried about the next recession.

“The government cannot take such extraordinary measures,” she said. If this happens, Lipchak added, the bank expects that there will be a normal relationship between rising unemployment and increasing delinquencies and defaults.

In terms of the collateralized asset securitization pool, installment loans to individuals tend to be at the bottom of the payment hierarchy after auto loans, mortgages and leases, and credit cards.

“This should lead to a deterioration in credit indicators,” Lipchak said. The short-term picture looks more positive. “Improving employment, preserving the benefits of incentives and savings, and tightening underwriting standards should provide support by the end of 2021.”

Now what is a real lender?

Recently, President Joseph Biden signed an ordinance overturning the Comptroller’s Office ruling determining when a national bank or federal savings association grants a loan and identifying as the so-called true lender.

A rule, adopted only last October, stated that a bank is the true lender of a loan if it is listed as the lender in the loan agreement and finances the loan at the time of disbursement. In addition, if, at the time of disbursement, one bank is listed in the loan agreement as the lender and another bank finances the loan, the bank that is listed as the lender in the agreement will finance the loan, Lipchak said.

Thus, as a true lender, the bank will retain its financing obligations.

But President Biden’s approval for cancellation introduces uncertainty into the asset class, which increases legal uncertainty, discourages partnerships, and stifles innovation resulting from such partnerships, Lipchak said.

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