SoFi earns 1st AAA on consumer loan ABS from Kroll, DBRS, S&P
Social Finance has garnered the first-ever triple-A ratings for an online marketplace consumer loan securitization.
Kroll Bond Rating Agency, DBRS and S&P Global Ratings have each issued a preliminary AAA rating on the senior notes of SoFi’s fourth asset-backed transaction this year of unsecured consumer loans originated by the San Francisco-based fintech firm.
Previously, SoFi and other fintech players such as LendingClub, Prosper and Marlette Funding have attained no higher than a double-A for the esoteric ABS class portfolios of Web-based loan originations.
The AAA rating from Kroll brings SoFI's consumer loan platform in line with the AAA ratings it has also accrued for SoFi's signature professional student-loan refinancing securitization platform. SoFI's Professional Loan Program shelf received triple-A ratings for the first time earlier this year through S&P Global Ratings and DBRS.
SoFi Consumer Loan Program (SCLP) 2018-4 Trust is a $549 million portfolio of mostly prime fixed-rate loans that have terms between three-to-seven years. They carry an average balance of $32,626 with an 11.09% average interest rate, with three months seasoning. (A small percentage, 0.04%, are variable-rate loans.)
The triple-A notes total $379 million, with 37.29% credit enhancement.
In its report, Kroll said it has previously capped MPL deals at AA+ because of limited performance data and the corporate risk from “thinly capitalized,” highly leveraged startups reliant on debt and capital raising for operating funds.
That is not the case with SoFi, which grown consumer loan originations every quarter since early 2017 and has $1.9 billion in equity and $2.9 billion of available borrowing capacity for its personal loan originations.
(That total does not include another $2.9 billion it can tap for student-loan refinancing from its collection of private education warehouse lenders.)
Kroll says SoFi is also uniquely positioned to offset the legal and regulatory challenges that other MPLs face. SoFi is licensed to lend in 48 states, making it “less vulnerable” to litigation that has produced so-called “true lender” disputes on whether national MPLs are subject to state-by-state usury and licensing laws.
SoFi last year had applied for a national industrial bank charter with the Federal Deposit Insurance Corp., but withdrew following the eruption of a sexual harassment scandal involving former chief executive Mike Cagney.
Kroll also cited the installment of a management team this year – two Goldman Sachs alums in CEO Anthony Noto and chief financial officer Michelle Gill – as a positive development that puts the turmoil over executive changes behind SoFi.
The lessened corporate risk was augmented by a lengthier track record of loan performance. SoFi has originated consumer loans since 2015 totaling $12.9 billion among 340,000 prime-quality borrowers.
SoFi has completed 23 student-loan securitizations and this year launched its first rated mortgage securitization.
The new consumer loan transaction features 18,390 borrowers (over 82% homeowners) with incomes over $145,000, a weighted average FICO of 750 and monthly free cash flow of $5,595. That is a similar profile to the borrowers that SoFi targets with its primary product of student-loan refinancing for professional graduates of partnering universities.
The corporate-risk reduction as well as the strong prime borrower base was enough to offset SoFi’s decision to include more higher-risk accounts in the new pool. For the first time, SoFi is including customers scoring the lowest in its internal credit decisioning system – the so-called Tier 7 bucket making up 6.19%, or $37.1 million, or the total collateral balance.
The Tier 7 borrowers aren’t riskier in terms of credit scores or troubled payment backgrounds, Kroll says, but are prime borrowers who are generally have lower monthly free cash flow (below $1,000). These loans are limited to three-, four- and five-year terms with a maximum loan amount of $50,000.
Kroll noted SoFI’s consumer loan securitizations have had increased 60-plus day delinquency rates in the 2016 vintage transactions as well as early 2017 deals, which is “in line” with overall consumer lending sector performance. In response, SoFi “has taken a number of steps” to shorten original loan terms, tighten credit requirements and implemented a new scoring model.
Kroll has an expected net loss rate of 5.9%-7.9% for the deal, the lowest of five previous comparable SCLP transactions.
DBRS projected cumulative net losses based on the loan tenor, from 2.75% for the three-year loans and a range of 11.15%-13% for the seven-year loans.