During the Covid-19 pandemic, many fintechs began lending to borrowers with imperfect credit, but Wall Street investors were comfortable buying their asset-backed securities (ABS) as government stimulus ensured consumers had the money to meet repayments. ABS are a type of bond backed by a pool of assets, such as auto or credit card loans, which pay a fixed yield. They are a key source of financing for some fintech lenders, which have fewer funding options than banks.
As the end of pandemic stimulus and rising inflation led delinquency rates to normalises, investors shunned the fintech ABS market late last year. Fintechs like Upstart, Affirm and OneMain Financial say they are boosting credit quality, in another example of how lenders have been pulling back amid uncertainty over the economic outlook. That in turn has improved the quality of their ABS offerings, executives say.
«As delinquencies have risen over the past year and a half, we've adjusted accordingly in how we calibrate our models and assess default risk,» said Sanjay Datta, the chief financial officer at Upstart, which specialises in loans for subprime borrowers. «The outcome of that is the collateral that's forming the basis of these ABS deals looks very different and is much more conservative now,» Datta added. Buy-now-pay-later giant Affirm mostly lends to near-prime and prime borrowers, but has tightened its credit standards further this year, said CEO Max Levchin.
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