Carpe Valorem, which primarily buys distressed second lien mortgages, is looking to begin investing in consumer MPL loans in mid-2018, according to Gary Gal, portfolio manager at the firm.
The company’s MPL plans are in the exploratory phase right now, he said.
The consumer MPL space has been performing well in the low interest-rate and low unemployment-rate environment, according to Gal. “But as the economy turns, we expect there will be distressed opportunities, especially among the less-established platforms,” he said. Specifically, borrowers will likely have troubles repaying their debt to these platforms. “These customers are jumping from one loan to another, and can get multiple loans, but won’t necessarily be able to repay them,” he said.
Currently, the typical loan balance carried by borrowers on MPL platforms is two to three times higher than the total outstanding unsecured debt for an average non-MPL borrower, as reported (see story, 20 September). In addition, financially stressed borrowers aren’t incentivized to pay unsecured consumer loans back first because there’s no threat of losing assets, according to analysts.
The New York-based small investment firm, launched last year, has seen an increased demand for unsecured consumer loans from its UK investors. Next year, as the company moves into the consumer MPL space, it will be targeting yields in the 15%-20% range, according to Gal. Carpe Valorem wants to grow their funds by drawing more investors who seek exposure to the MPL space.
In addition to repayment concerns, many of the less-established entrants in the consumer lending space are overly reliant on technology for underwriting purposes, Gal said. “[We see] some of the originators use new and untested algorithms [for underwriting], which are not tested through the cycles,” he said. “They sometimes don’t use traditional characteristics, including income verifications.” Alternative data points can supplement the credit analysis, but won’t completely replace the traditional metrics, he said.
Student lender CommonBond, for instance, includes Fico for scoring its customers. While investors and rating agencies are more accepting of alternative scoring methods today, they still want to see lenders include traditional data in their underwriting process, according to CommonBond’s CEO David Klein (see story, 22 September).
The acting Comptroller of the Currency Keith Noreika also raised concerns about the performance of unsecured consumer loans during the Online Lending Policy Summit held in Washington, DC, yesterday. “While the consensus expects the economy to expand through 2018, we may be seeing cracks in performance with consumer unsecured charge-offs for marketplace lenders having increased since the fourth quarter of 2015,” he said. “It remains to be seen how online lending companies and loans originated using new models will perform under stress.”
But Noreika sees opportunities in the consumer MPL space, noting that companies are increasingly diversifying their funding sources or partnering with banks in order to manage the market’s risks.