Over the last 5 years, a small number of banks and nonbank finance companies have captured...

  

 

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Over the last 5 years, a small number of banks and nonbank finance companies have captured 80% of the personal loan market. The market has exploded in the last two years, making it possible to originate and securitize these loans into asset-backed securities that have been in great demand by a number of medium- to large investors looking for strong yields on a relatively stable credit profile. For example, the underwriting criteria for personal loans was very strict, only allowing borrowers with FICOS over 700 with verifiable incomes and a minimum of 3 year employment histories to obtain loans. Over the last two years as demand for personal loan ABS increased, lenders significantly relaxed their underwriting guidelines, although with economic conditions very good, had little impact on elevating defaults. To incent focus on this product which had been generating ROES of 25% consistently over time, product managers were provided with product delivery bonuses for meeting their target origination goals set by the business. As competition heated up, lenders began allowing 80% of the business to be approved by automated scorecards that were built on data extracted over the last two years. Lenders in an effort to squeeze out more expenses decided that they could let most of their long-term personal loan underwriters, QC, and risk personnel go. a. What type(s) of risk does this market and its lenders face? Over the last 5 years, a small number of banks and nonbank finance companies have captured 80% of the personal loan market. The market has exploded in the last two years, making it possible to originate and securitize these loans into asset-backed securities that have been in great demand by a number of medium- to large investors looking for strong yields on a relatively stable credit profile. For example, the underwriting criteria for personal loans was very strict, only allowing borrowers with FICOS over 700 with verifiable incomes and a minimum of 3 year employment histories to obtain loans. Over the last two years as demand for personal loan ABS increased, lenders significantly relaxed their underwriting guidelines, although with economic conditions very good, had little impact on elevating defaults. To incent focus on this product which had been generating ROES of 25% consistently over time, product managers were provided with product delivery bonuses for meeting their target origination goals set by the business. As competition heated up, lenders began allowing 80% of the business to be approved by automated scorecards that were built on data extracted over the last two years. Lenders in an effort to squeeze out more expenses decided that they could let most of their long-term personal loan underwriters, QC, and risk personnel go. a. What type(s) of risk does this market and its lenders face?

Answer rating: 100% (QA)

The market for personal loans and its lenders face several types of risks including Credit Risk This is the risk of borrowers defaulting on their loan ... View the full answer