Online lender Enova issued unrated consumer-loan ABS last year
New CFPB proposal would loosen standards for subprime lending
Online subprime lender Enova International Inc. bundled consumer loans with eye-popping interest rates — some topping 99 percent annually — into bonds last year. And there may be more such debt deals to come.
The deal reflects online lenders’ growing focus on non-prime borrowers — what Enova calls a “large, expanding market segment” in a November public investor presentation on its website. The company estimates there are at least $69 billion of untapped non-prime lending opportunities for unsecured consumer loans in the U.S. alone.
The subprime consumer-loan industry may now get a boost under a proposed rule issued Feb. 6 by CFPB Director Kathleen Kraninger that would remove the requirement for payday lenders, auto title lenders and certain installment lenders such as Enova to determine a borrower’s ability to repay the high-interest rate, short-term loans. Fair-lending advocates warn that the proposed change will erode consumer protections.
It turns out some of these high-cost loans have gone into bond deals. Enova’s $125.4 million unrated bond issue securitized so-called installment loans from its “near-prime” consumer product line. Investors were rewarded for the elevated risk with yields as high as 7.4 percent for an unrated, 2.2-year slice of the transaction, according to data compiled by Bloomberg News. And thanks to structural protections and enhancements built into the transaction, it is arguable that the bond is relatively safe.
However, the deal’s batch of bundled underlying loans had an overall weighted-average coupon of 62.86 percent, compared to an average of only about 20 percent for other consumer-loan-backed bonds from issuers such as OneMain Financial Inc., Social Finance Inc., and Oportun Financial Corp., the Bloomberg data show.