But some of their peers are. Typically, companies that provide unsecured loans to consumers at high interest rates, usually to cover sudden and unforeseen expenses, tighten their underwriting standards, which means that some consumers who would have qualified for credit before the pandemic takes hold in the United States now will not. .
For example, in a March 16 investor updateSaid the San Francisco-based LendingClub, “Like many other businesses during this period, we strive to retain our best customers. To this end, in partnership with our issuing bank, we strive to meet the needs from our existing members – significantly reducing exposure to new borrowers as well as certain populations of high-risk borrowers. “
He called his actions temporary and said he had been preparing for a crisis like this for years.
Likewise, OneMain Holdings, based in Evansville, India, which provides loans to stores, including 10 in the Chicago area, emphasizes caring for existing customers rather than lending to new ones, a- he said in a March 20 statement.
Securities and Exchange Commission deposit. The company also launched a $ 100 million share buyback program in early March, which it increased to $ 200 million later in the month.
For lenders like Avant who haven’t been around as long as OneMain, this will be the ultimate stress test. Avant lends to consumers with less than prime credit at rates up to 36%. The loans, averaging around $ 6,000, are repaid in installments over an average of three years. Before, like all these lenders, must now guarantee consumers in which unemployment is booming and where projections of unemployment peaks vary enormously.
And, since Avant is highly dependent on the willingness of investors to buy lots of these loans in the form of securities in order to make new loans, these investors’ confidence in Avant’s capabilities is essential.
Avant has averaged just over $ 1 billion in new creations per year over the past two years. Earlier this month, the company managed to float a $ 200million stock in which investors agreed to allow the company to make new loans in the facility as the old ones come in. reimbursed. The sale was a vote of confidence as coronavirus fears mounted, but that was three weeks ago – an eternity given how quickly the crisis has worsened.
Chicago-based Enova has been around a bit longer, long enough to have survived the Great Recession. Enova generated $ 2.1 billion in consumer installment loans last year, up 23% from the previous year. Unlike Avant, Enova is listed on the stock exchange. Unlike LendingClub and OneMain, it has not yet informed shareholders of its approach to the crisis.
But insiders buy stocks, a sign of confidence. William Goodyear, retired board member and CEO of Navigant Consulting, bought 5,000 shares on March 19 at an average price of $ 9.36 per share, according to a filing. Lead independent director James Gray, CEO of options trading firm G-Bar Ltd. Partnership, acquired 20,000 shares.
Enova shares fell to a low of $ 8.59 on March 18, but have since recovered to trade around $ 15. The stock is still down more than 45% since the end of January.
Online consumer lenders have grown rapidly after the latest crisis. Their mission, as they saw it, was to fill the vast need for credit among middle-class consumers when life turned them upside down – a demand mainstream banks all but abandoned after the 2008 collapse.
But many of the new generation of lenders have encountered hurdles, some self-inflicted, such as when Avant miscalibrated lending risk in its initial growth spurt, suffered larger-than-expected losses in 2016, and restarted his loan machine.
Without an immediate source of funding, as banks have done with federally insured deposits, businesses will not be able to operate if they lose the confidence of their investors.
In a March 26 report, analysts at Jefferies noted that lenders are better capitalized today than they entered the Great Recession of 2008 and that consumers in general are not as in debt as they are. were then.
But, analysts wrote, “Ultimately, the main driver of the loss rate migration will undoubtedly be the level of unemployment and the period of operation with higher unemployment rates.” Unemployment during the Great Recession exceeded around 10%, and this happened more gradually than in this crisis. Some economists are forecasting a 10 percent unemployment rate in the second quarter and much higher unemployment at the top.
The level of government assistance to consumers and businesses, however, exceeds what was provided during the Great Recession and was approved much faster.
Surviving a crisis where so little is known about its duration and what its lasting effects will be seems to be at the center of the concerns of consumer lenders who have shared their initial thoughts with investors. Given their desire to focus on existing customers and avoid new ones, this begs the question whether they are more helpful in times of dire need than the banks they have criticized for this behavior in the past. .
If lenders of last resort aren’t lending at a time like this, why do such animals even exist?