Online Lending Sees Drop in Loan Impairments, Majority of Modified Loans Have Resumed Payments

A report this week indicates that in aggregate, loan impairments from online lenders continue to decline.

dv01, a data provider in the online lending sector that has partnered with over 25 issuers and provided securitization reporting and analytics on over $100 billion transactions across consumer unsecured, mortgage, small business, and student loans,  has published an end of month report that claims total impairments have fallen since the end of April to 11.4%, a decline of 520 bps since April’s peak of 16.6%, and have retraced nearly half of its increase from historical levels. These numbers are as of July 23rd.

The report states that new payment impairments over the last three months are at multi-year lows dating back to pre-2019 levels.

Over 60% of all COVID-19-modified loans have resumed post-modification payments, good news for the industry as well as for investors.

Many platforms offered loan modifications as the health crisis sank the economy. In doing so, these platforms boosted the chance of repayment while lowering the probability of borrower default. dv01 says that loan impairments have dropped across income levels, which “contrasts the suggestion that good performance is solely being driven by stimulus.”

Top Grade loans have retraced over 50% of their COVID-19- related impairment increases, reports dv01, while stronger declines are being experienced in lower grades.

On the other side of the equation, dv01 sees a re-emergence of the online lending sector in regards to originations.

June issuance volume is said to have shown the first signs of wholesale recovery in new volumes among online lenders, says dv01:

“June volume increased 21% MoM from May, but was still down 58% YoY. As we have stated throughout our reports, issuers continue to voluntarily tighten underwriting standards and decrease their revenue to better safeguard investors and ensure new originations meet the continued challenges of a difficult economy. Even as issuers have tightened underwriting, they have also raised rates on high-quality loans, providing further protection for investors. Beyond the visibly improved credit characteristics described below, issuers have also introduced substantial qualitative changes to underwriting. There has been decreased focus on new applicants in favor of prioritizing existing relationships; stringent income verification and electronic payment requirements; and wholesale elimination of riskier loan offerings.”

dv01 says there are discrepancies from other data providers. To quote the company:

“As borrowers enroll and extend their deferral schedule, we have noticed significant discrepancies in performance reporting between dv01 and other reporting sources (third-party data aggregators, master servicer and trustee reports), resulting in underreporting of modifications and impairments across the mortgage market. This misreporting can adversely affect investor confidence, as well as delay sector recovery.”

The report says that online loan performance has challenged preconceived notions of what a downturn may look like. In fact, the authors state expectations have been “entirely rebuked.”

The entire report is available on the dv01 after you hand over your contact information.

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