Upstart Securitization Trust 2023-3 is preparing to sell $263.1 million in asset-backed securities to investors, collateralized by unsecured consumer loans that three banks located in New Jersey, Pennsylvania and Utah, had originated.
Cross River Bank, Finwise Bank and Customers Bank are the originating banks, according to a pre-sale report from Moody's Investors Service. The transaction will issue notes through three tranches of notes, an A and B class, and an overcollateralization piece, Moody's said.
Goldman Sachs is the initial purchaser on the notes, according to Moody's. The class A notes, representing 55.00% of the pool balance, will be rated 'A2'. Both tranches have the same legal final maturity of Oct. 20, 2033, an initial (OC) of 26.00%, and an initial reserve of 0.50%, the rating agency said, pointing out the latter as a credit strength. The class A notes have a total initial hard credit enhancement level of 45.50%, while the level on the class B notes was 26.50%, the company said.
Upstart Network is sponsoring the deal and will act as the transaction's servicer, and the latter is a potential credit weakness in Moody's eyes. Upstart has issued prior securitizations, totaling more than $7 billion in issuances, but the platform has a limited operating history and has not been through a recession, Moody's said.
Another potential challenge is that Upstart doesn't maintain exposure to the transaction's credit risk. During the origination process, Upstart acquires loans from the three previously mentioned banks. Loans originated under the banks are sold to other institutional investors, which might have sold the loans back to Upstart on the onset of the transaction. Should a loan default, the direct impact is limited to the loss of future servicing fees, according to Moody's.
Moody's also noted that the collateral itself presents a potential challenge, in what boils down to adverse borrower selection and low payment priority. Unsecured consumer loans are typically made to highly levered borrowers, often to consolidate debt. During periods of macroeconomic stress the performance of these loans has proven weaker than their credit profiles would indicate. The rating agency expects repayment on the unsecured loans to take lower priority compared with other outstanding loans such as credit cards and auto loans
