FinTech lenders are backing more loans with deposits as investors become tougher to find amid rising interest rates and expectations for higher yields.
Banks and investors have also become more selective about where they put their money and are guarded about credit risk and the overall economy, the Wall Street Journal reported Monday (Aug. 22).
The current climate has reduced the credit quality of loans, as people with less-than-ideal credit scores and other borrowers have been increasingly posting late payments.
Upstart Holdings, a personal lender for subprime borrowers, is seeking investors that would be willing to buy loans when other investors pull back, Chief Financial Officer Sanjay Datta told the Journal. The Silicon Valley-based FinTech originates most of its loans through Cross River Bank in Fort Lee, New Jersey.
“We’re in a bit of a paradigm shift now, going from using what historically would have been purely at-will capital to finding more permanent-style, long-term capital partners,” Datta said.
Meanwhile, Affirm CFO Michael Linford said during an investor conference in June that the buy now, pay later (BNPL) firm is planning to put together a cross-section of loan buyers and funding channels. Affirm funds its installment loans through a mix of securitizations, whole loan sales and warehouse lines of credit, per the report.
“We’ve thought about building our capital program to not be reliant on any one channel, any one partner, any one kind of partner,” Linford said.
Additionally, the report noted that personal loan firm LendingClub, which acquired Boston-based Radius Bank last year for $185 million along with its bank charter, is funding more loans with bank deposits.
“If you don’t have the ability to fund your own loans, you’re going to be dependent upon the capital markets and disparate funding,” said Tom Casey, the company’s finance chief. “That always becomes challenging for you to predict the price you can sell your loans.”