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SoFi's next consumer loan ABS has more borrowers from lowest credit tier

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Social Finance’s next consumer loan securitization includes a higher proportion of loans from the lowest credit tier in its proprietary scoring model, Tier 7.

Tier 7 loans are underwritten to the same guidelines as Tiers 1-6, however Tier 7 borrowers can have a lower free cash flow (as low as $1,000) and negative personal net income (up to $500). These loans are limited to three-, four- and five-year terms and are no larger than $50,000; by comparison, borrowers in higher tiers can also get six- and seven-year loans of up to $100,000.

The $480 million transaction, SoFi Consumer Loan Program 2019-1 Trust, is only the third to include Tier 7 loans, though SoFi has been originating them since late 2016, according to Kroll Bond Rating Agency. On Feb. 16, 2018, the marketplace lender adjusted its credit and pricing model to allow the inclusion of Tier 7 loans. They account for $38.1 million, 7.26% of the pool balance, of the latest transaction, which is up from the concentration in the prior deal, per Kroll.

The latest deal also has a higher concentration of Tier 2 and Tier 6 loans and a lower concentration of Tier 1 and Tier 4 and Tier 5 loans, according to the presale report.

Since performance data for Tier 7 loans is limited to 27 months, Kroll forecast forecast future performance by adding incremental losses to the performance of Tier 6 loans.

Despite the inclusion of additional Tier 7 loans, the overall credit characteristics of the pool of collateral are better, by some measures, than those of SoFi's previous consumer loan securitization. Borrowers have a weighted average free cash flow of $5,696 vs $5,595 for the prior deal, and a weighted average FICO of 753 vs 750.

Kroll expects losses over the life of the deal to be in the range of 5.6% to 7.96 of the original balance of the collateral; that’s slightly less than SoFi’s previous consumer loan securitization (5.9% to 7.9%).

And the average interest rate on the collateral has increased slightly, to 11.2% from 11.09% for the prior deal, while the weighted average coupon on the bonds to be issued has decreased. The results in additional excess spread of 6.63%, up from 6.46% for the prior deal.

As a result, SoFi was able to lower the credit enhancement for each tranche of notes to be issued and earn the same credit ratings. The AAA rated note have 33.46% credit enhancement, down from 37.29% from the comparable tranche of the prior deal. The AA+ rated notes have 25.96% enhancement, down from 29.29%. The A+ rated notes have 16.15% enhancement, down from 17.96%. The BBB rated notes have 8.91% enhancement, down from 8.96%.

SoFi is making additional changes to its product lineup. In December, it started originating two-year loans, according to Kroll. None of them were included in the latest deal, though they may be used as collateral in future deals.

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