Fitch: Expiring deferrals may lead to near-term spike in MPL defaults

Online, and unsecured, consumer marketplace loans have so far weathered the economic fallout of COVID-19, with data research showing delinquencies and defaults have tapered off after a short spike in April.

But the stresses on MPL loan performance, and the impact on outstanding securitizations, may grow more apparent in the months ahead, warns a report Tuesday from Fitch Ratings.

According to the agency’s U.S. Marketplace Loan Monitor 3Q20 issued Tuesday, borrowers’ hardship deferrals and payment holidays that have staved off late-pays are beginning to roll off – and this will lead to “a spike in delinquency and, eventually, defaults,” without extended government support programs or “considerable progress” in re-opening the economy from pandemic-related shutdowns.

"As payment holidays end, borrowers may be forced to selectively pay some loans over others,” said Harry Kohl, a director at Fitch, according to a release. “Mortgage and rent payments, auto loans and credit cards are expected to take priority over unsecured consumer instalment loans.

“Marketplace loans tend to provide little ongoing utility for borrowers after they first take out the loan, and are therefore lower on their payment priority," he added.

The deferral programs vary between lenders, with hardship terms of either two or three months, either as a single-time forbearance or as part of a month-to-month deferral plan that must be requested each month. Borrowers in these programs are not delinquent, “potentially preventing performance-based amortization triggers from going into effect,” noted Fitch’s report.

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Defaults (as measured on a constant default rate basis) reached 8.34% in the July pay period, according to Fitch, which was actually a decline from the same period a year ago at 9.15% – showing the impact of the deferral programs and government-offered support for U.S. consumers.

The cumulative take-up rates of loan deferrals peaked at about 20% for most of the ABS platforms of fintech lenders whose securitizations are tracked by Fitch, but new take-up rates have recently approved. SoFi, which offers personal loans to prime borrowers with high levels of disposable income, has had a “notable differentiation” in performance with active deferments remaining under 3%.

The survey includes securitizations sponsored by SoFi, Avant, LendingClub, Prosper, Upstart, Upgrade, Freedom Financial, Marlette, LendingPoint and Liberty Lending.