Reach, a debt consolidation lender, announced a new $236M securitization.
Debt Settlement and loans for debt consolidation are big businesses for PE. VCs don’t touch it with a 10-foot pole.
But it makes money. One of the largest in this space is National Debt Relief.
The same owner operates Reach Financial, an unsecured lender focused on debt consolidation.
Let’s have a look.
Overview of the company:
– Founded in 2015 in New York, NY
– Shares common ownership with National Debt Relief (NDR)
– Profitable since 2018
– $780 million in loan receivables outstanding as of May 31, 2024
– FinWise Bank and Pathward, N.A. as originating banks
Loan Products:
1. Express Settlement Loans (E-Loans):
– For consumers enrolled in NDR’s debt relief program
– Fixed rate, fully amortizing unsecured loans
– Up to $75,000, 1-6 year terms, 21-24.99% interest rates
2. Consolidation Loans (C-Loans):
– For borrowers not in debt relief programs
– Fixed rate, fully amortizing unsecured loans
– Up to $40,000, 2-5 year terms, 4.99-30.95% interest rates
Portfolio:
– Total pool balance: $249,854,568
– Number of loans: 18,844
– Average loan balance: $13,259
– Weighted average interest rate: 22.79%
– Weighted average original FICO: 570
– Weighted average current FICO: 623
– E-Loans: 86.3% of balance
– C-Loans: 13.7% of balance
Excess Spread: 14.12%
The loans are primarily to subprime borrowers. Distribution by FICO score breakdown:
<=500: 11.39%
501-550: 36.27%
551-600: 28.19%
601-650: 8.96%
651-700: 7.19%
701+: 8.00%
Top 3 states (25.01%):
– CA: 9.83%
– TX: 8.96%
– FL: 7.22%
Portfolio growth:
– Originations increased from $29 million in Q3 2020 to $126 million in Q3 2023
– C-Loan originations grew from 8.7% to 31% of total originations from Q3 2019 to Q3 2023
E-loan originations are limited by debt settlement volume. Only a small % of customers enrolled in the debt settlement program qualify for the consolidation loan.
Underwriting Policy:
– Proprietary risk models approved by originating banks
– E-Loans: min. 6 months in debt settlement program, min. FICO 450-500 based on risk tier
– C-Loans: min. FICO 640, at least one open revolving line
– Automated, non-discretionary process with limited exceptions
Servicing and Collections:
– Reach serves as the primary servicer
– Servicing fee: 1.00%
– 95% of borrowers use recurring ACH payments
– Nelnet Servicing, LLC as backup servicer
– Collections begin as early as 1 day past due
– Loans charged off at 120 days past due
Historical performance:
– Static pool gross loss levels increased for both E-Loans and C-Loans starting with Q3 2021 vintages
– Multiple vintages reached 20% CNL within 2 years for C-Loans. It’s ~2x of other vintages.
– Reach implemented credit tightening measures in 2022-2024 to address performance issues
While recent vintages have shown increased losses, the company has tightened underwriting. The high interest rates and excess spread provide some cushion against potential losses.