Freedom Financial boosts prime-loan pool in $408M consumer loan ABS
Freedom Financial Network is de-emphasizing its trademark, but controversial, consumer debt-settlement program in its next securitization of unsecured consumer loans.
According to presale reports, Freedom Financial is pooling most of the collateral for the $408 million FREED ABS Trust 2019-1 from its prime/near-prime online loan origination program, instead of the subprime loan-consolidation platform that was the focus of the San Mateo, Calif.-based lender’s first two asset-backed transactions in 2018.
The consolidation loans took up the majority share in pools for both of the lender’s securitizations last year, but make up only 36.9% of the $453.7 million loan pool balance in Freedom Financial’s first deal for 2019.
Over 63% of the loan balances backing FREED 2019-1 are derived from the lender’s FreedomPlus unsecured loan program, serving borrowers that have an average credit score of 699 in the new pool. The consolidation-loan portion of the pool has an average borrower FICO of only 563, according to reports from Moody’s Investors Service and DBRS.
Freedom Financial has been issuing FreedomPlus loans since 2014, building on a debt-settlement loan program the company launched with in 2002.
The debt-settlement program has drawn recent regulatory scrutiny, including enforcement action, by federal regulators on allegations of deceptive trade practices and violations of federal truth-in-lending and electronic funds transfer regulations.
FREED ABS Trust 2019-1 will include three classes of notes, with a $249.6 million Class A tranche with preliminary ratings of A3 by Moody’s and A by DBRS. The senior-note ratings are on par with the single-A ratings DBRS applied to the FREED 2018-1 and FREED 2018-2 transactions. (Moody’s did not rate the 2018 deals.)
The capital stack also has $102.1 million in Class B notes, rated Baa3 by Moody’s and BBB (high) by DBRS, plus a $56.7 million Class C tranche carrying only a BB (high) rating from DBRS. Moody’s is not rating the Class C notes.
Moody’s said the deal’s strength include a hard 45.5% credit enhancement level for the Class A notes, aided by a cash reserve account that grows to 1% of the initial pool balance, as well as loss triggers requiring expansion of overcollateralization levels if breached.
The 27,353 loans securing the notes have an average remaining loan size of $16,588. The high-interest loans have an average term of 49 months and carry a blended weighted average APR of 22.11%, with borrower rates ranging from 4.99% to 26.99% for both loan products.
The bucket of FreedomPlus loans have a WA APR of 20.21%, and an average three months of seasoning.
For the subprime consolidation loans, the average APR for is 25.36%. The loans have longer terms (50 months) with five months of seasoning behind them, as of the cutoff date for the pool.
DBRS has an assumed default rate of 12.36% on the combined loans pool, while Moody’s cumulative net loss expectation is 15.7%. Moody’s projects higher losses of 17% for the consolidation-loan portion of the pool.
While the ABS transaction is Freedom Financial’s first with a majority of prime loans that have lower expected default rates, Moody’s notes the FREED 2019-1 transaction still remains weaker than some rival marketplace lender securitizations. Moody’s cited the fee and retention structures between Freedom Financial and its underwriting partner, Cross River Bank of New Jersey, for the FreedomPlus loans.
Moody’s considers it a credit challenge to the deal that the bank is paid based on origination volume rather than loan performance. In addition, the bank does not retain any FreedomPlus originations, instead selling all the assets into the trust after issuance. Cross River remains the servicer on the loans.
In contrast, Cross River retains a portion of loans it underwrites for the online marketplace lender Marlette Funding (d/b/a Best Egg).
Cross River will retain consolidation loans on its books, but only during the average three-to-six month process for Freedom Financial to negotiate settlements of a consumers’ outstanding third-party loan balances. When all of the settlements are paid, Cross River releases the new consolidated loan into institutional investment circles, including Freedom Financial’s own investment fund that is sponsoring the FREED 2019-1 transaction.
Freedom Financial’s consolidation loans have been the subject of a November 2017 lawsuit from the Consumer Financial Protection Bureau related to its debt settlement business, as well as March 2018 consent order settlements with the Federal Deposit Insurance Corp. (which regulates Cross River) over its consolidation loans.
The FDIC alleged unfair and deceptive practices by the lender in violations of both the Truth in Lending Act and the Electronic Fund Transfer Act, requiring Freedom Financial and the bank to provide up to $20 million in consumer restitution and pay civil penalties ($641,750 by Cross River and $493,500 by Freedom Financial).