ABS Issuances, by the Numbers
Nine ABS deals totaling $3 billion closed in Q2 2017, a 76% increase from Q2 2016. Q2 ABS issuances included approximately $2 billion in consumer (up 28% versus Q1 2017) and approximately $1 billion in student (down 5% versus Q1 2017). All deals were rated. Total ABS issuance is expected to be over $11 billion in 2017.
Performance and Practices
Performance continued to weaken as delinquencies and charge-offs increased in Q2 for personal, student, and subprime auto loans. Prime credit card portfolios are showing multi-decade delinquency rate lows. Non-bank lenders have seen increased losses due to loans to borrowers with riskier credit, re-normalization of credit performance, “loan stacking” and re-leveraging of consumers’ balance sheets caused by the increase in available credit.
In response to legal and regulatory uncertainty, platforms are operating in ways to address “true lender” risk as issuers structure ABS transactions to protect against usury law risks.
Regulatory uncertainty will continue to be a significant challenge going forward. Practices will be shaped by the standards imposed on fintech and other non-bank entities, which in turn, depends in part on the outcome of the tussle between the Office of the Comptroller of the Currency (OCC), which has begun offering a special purpose national charter, and state regulators who believe they are best suited to protect consumers. The industry may soon also be impacted by legislation introduced recently in the Senate and the House that would overrule the 2nd Circuit’s Midland v. Madden decision denying purchasers of high-interest loans the benefit of preemption of state usury laws afforded their sellers under federal law. Despite the ongoing debates, there appears to be momentum for more uniform and streamlined laws in the future that will provide greater certainty and, consequently, cost advantages for marketplace lenders.
Massimo Giugliano, an associate in the Insolvency, Creditors’ Rights & Financial Products Practice Group of Davis & Gilbert, contributed to this post.