An Overview of Personal Loans in the U.S.

Finance and Economics Discussion Series Federal Reserve Board, Washington, D.C. ISSN 1936-2854 (Print) ISSN 2767-3898 (Online) An Overview of Personal Loans in the U.S. Jessica N. Flagg, Simona M. Hannon 2023-057 Please cite this paper as: Flagg, Jessica N., and Simona M. Hannon (2023). “An Overview of Personal Loans in the U.S.,”FinanceandEconomicsDiscussionSeries2023-057. Washington: BoardofGovernors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2023.057. NOTE: Staff working papers in the Finance and Economics Discussion Series (FEDS) are preliminary materials circulated to stimulate discussion and critical comment. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors. References in publications to the Finance and Economics Discussion Series (other than acknowledgement) should be cleared with the author(s) to protect the tentative character of these papers.

An Overview of Personal Loans in the U.S.* JessicaN.Flagg‡ SimonaM.Hannon§ FederalReserveBoard FederalReserveBoard August29,2023 Abstract Personalloansusedforavarietyofpurposes,suchasdebtconsolidation,medicalbills,vacations,orthepaymentofalargeticketitem,reached$356billionorabout10percentofnonrevolvingconsumercreditattheendof2022. Althoughdepositoryinstitutionssuchasbanks, thrifts,andcreditunionsdominatethepersonalloanmarket,financecompanies,institutions thattypicallylendtononprimeconsumers,holdnearlyafourthoftheseloans.ThispaperprovidesanoverviewofthisnascentbutrelativelyunderstudiedsectoroftheUnitedStatescredit market. Keywords:ConsumerCredit,PersonalLoans,InstallmentLoans. JELclassification:G21,G23 *WethankSarenaGoodman,GengLi,andKamilaSommerforhelpfuldiscussions,comments,andsuggestions,Anuj ShahaniforgeneroushelpwithMintelComperemediadata,andShannonLukforoutstandingediting. Theviewsin thispaperarethoseoftheauthorsanddonotnecessarilyreflectthoseoftheBoardofGovernorsoftheFederalReserve Systemoritsstaff. ‡Address: BoardofGovernorsoftheFederalReserveSystem,20thStreetandConstitutionAveN.W.,Washington, D.C.20551,U.S.A.E-mail:jessica.n.flagg@frb.gov. §Address: BoardofGovernorsoftheFederalReserveSystem,20thStreetandConstitutionAveN.W.,Washington, D.C.20551,U.S.A.E-mail:simona.m.hannon@frb.gov.

1. Introduction IntheaftermathoftheGlobalFinancialCrisis,personalloansreturnedtoprominenceasasource ofcredittoconsumers,partlyhighlightedbysomeofthetechnologicaladvancesintheconsumer creditspacecharacteristicofthepastdecade. Whilenewfinancialtechnology(FinTech)lenders entered the market and some even morphed into other types of institutions, traditional lenders continuedtoplayanimportantroleinprovidingpersonalloanstoconsumers.Astheoutstanding balancesoftheseloanshaverecentlystartedtoaccelerate,weaimtoprovidemoreinformationon thisunderstudiedsector,employingtworelativelynewdatasources. As of the end of 2022, personal loans—also known as installment loans or other loans, used foravarietyofpurposes,suchasdebtconsolidation,medicalbills,vacations,orthepaymentofa largeticketitem—reached$356billionorabout10percentofnonrevolvingcredit.1 Fromaninstitutionalperspective,thesectorisdominatedbydepositoryinstitutions—thatis,banks,thrifts,and creditunions—andfinancecompanies, consistingofpersonalloancompaniesandsalesfinance companies.2 Finally, some payday lenders have recently started to offer installment loans. Our data allows us to highlight this new trend. Each lender type’s distinct characteristics shape their underwritingpractices,pricing,geographicalconcentration,andultimatelyloanholdings. Althoughpersonalloanscanhaveavarietyofcharacteristics,theycanbebroadlycategorized intosecured—backedbycollateralsuchasjewelry, savingsaccounts, orfineart—andunsecured loans. That said, they can also take the form of note loans or promissory notes, which are less formalagreementsusuallyforsmalldollaramountsamongpartieswithanexistinglendingrelationship.3 Alternatively,aconsumercouldalsoborrowfromafinancecompanyindirectlythrough aninstallmentsalescontract,anagreementwherebytheloanisissuedbyaretailerandthensubsequentlypurchasedbyasalesfinancecompany. Personalloanscanhaveeitherfixedorvariable interestrates. Intheremainderofthispaper, wefirstreviewtheregulatoryenvironmentforpersonalloans in the United States and then discuss select characteristics of the outstanding balances and the 1ThisestimateisbasedonthepersonalloanholdingsreflectedintheFederalReserveBankofNewYorkConsumer CreditPanel(CCP)/Equifaxdata.Itreflectsloanholdingsbytraditionallenderssuchasbanks,creditunions,andfinance companiesanddoesnotincludeestimatesofBNPL,paydaylenderorpawnshoploanholdings,northosethatarenot reportedtotraditionalcreditbureaus. (Forexample, banksalsooffertowealthierclientspersonalloansbackedby securitiesthatarenotreportedtocreditbureaus. Inaddition,asmorerecentlyselectpaydaylendersstartedtooffer installmentloans, someofthemoreestablishedonesreporttoalternativecreditscoringcompaniessuchasClarity ServicesandDataX.NoneoftheseloansarereflectedintheCCP.)Thenonrevolvingcreditestimateissourcedfromthe G.19ConsumerCreditrelease:https://www.federalreserve.gov/releases/g19/current/default.htm. 2Personalloancompaniesprovideloansdirectlytoconsumers,whilesalesfinancecompaniesbuyinstallmentcredit contractsatadiscountfromretailersorfinanceretailsales. FinTechlendersalsoholdanotableshareofthepersonal loansector,but,giventheirbusinessmodelsandthatsomelendersmorphedintoothertypesofinstitutions,theirloan balancesareaccountedforunderotherinstitutiontypeholdings. WewilldiscussmoreaboutFinTechlendersina subsequentnote. 3Theseloanscanbemodifiedmoreeasilyifthepartiesagreeandtheyhavelegallybindingrequirementsforthe borrowerwhilenotlegallybindingthelendertolegalrequirements. Atthesametime,therearefewerlegalremedies forthelenderiftheborrowerdefaults. (Source: https://www.annuity.org/personal-finance/banking/loans/ promissory-note-vs-loan/.) 1

supplyofpersonalloans,whileprovidingsomeestimatesforthesectorbasedonrelativelyrecent datasources. 2. BriefRegulatoryOverview TheUnitedStatesconsumercreditregulatoryenvironmentisdynamic,multilayered,andcomplex,inparticularfornonbankissuedpersonalloans,withstateshavingfullflexibilitytoadoptand repealpiecesoflegislation.4 Themostimportantregulatoryelementsaffectingthepersonalloan spaceareinterestrateceilingsandbanks’interestrateexportationability.Inaddition,overthepast decade,variousdevelopments,suchastheMaddenv. MidlandFunding ruling,thePaydayRule, ortheadoptionofcapsforsmallloans,alsoputtheirmarksonthesector.5 First,historically,thepersonalloansectorintheUnitedStateshasbeenregulatedbythestates through interest rate ceilings. State credit price ceiling laws generally included usury laws and a variety of special laws allowing higher rates than those allowed under usury laws for specific types of credit from certain classes of lenders.6 Currently, 15 states have high or no interest rate ceilings. These are South Carolina, Georgia, Texas, Oklahoma, Louisiana, Tennessee, Missouri, Illinois,NewMexico,Kentucky,Alabama,Wisconsin,Indiana,Mississippi,andIdaho. Inaddition tostateinterestrateceilings,creditunionsaresubjecttotheirown18percentceilingfortraditional personal loans imposed by the National Credit Union Administration. More recently, after 2010, creditunionsareabletomakesmall-dollarshort-termloans,labeledpaydayalternativeloansthat canhaveinterestratesofupto28percent. Second, in1978, theU.S.SupremeCourtinMarquetteNationalBankv. FirstOmahaService Corporationruledthatnationalbankscouldchargeinterestratespermittedbythelendingbank’s home state regardless of the rate permitted by the borrower’s state of residence. Until more recently, this significant court ruling had its greatest effect on the credit card market as it enabled creditcardcompaniestoexpandtheirofferingsgeographicallytoconsumerslocatedacrossstates withvariousinterestrateceilings.AsaresultoftheMarquetteruling,creditcardcompaniesmoved 4"Forexample,"notesAmericanFinancialServicesAssociation(2016),"inAlabama,traditionalinstallmentlenders aregovernedbytheSmallLoanAct,theConsumerCreditAct,andtheInterestUsuryStatute. InArkansas,theyare governedbytheArkansasConstitution, theArkansasBusinessandCommercialLawProvisions, theInsuranceSales ConsumerProtectionAct, theCreditLifeandDisabilityProvisions, andtheUniformCommercialCode. InGeorgia, traditionallendersfollowtheUsuryStatuteandtheIndustrialLoanAct.InIllinois,theyfollowtheConsumerInstallment LoanAct,ConsumerInstallmentLoanActRegulations,andtheInterestAct.Thelistgoesonforeachstate." 5DespiteitsnamethePaydayRuleaffectedthesupplyofallexpensivesmallloans,irrespectiveoftype. 6Forexample,the36percentinterestratecapemergedinthefirsthalfofthetwentiethcenturyinanefforttoallow (asanexceptionfromusurylaws)foralegalsmalldollarconsumerloanmarket,asbeforeitscreation,theprecursorsof paydaylenders,the"salarylenders",wereillegallymakingsmallloanswithfour-digitannualinterestrates.TheRussell SageFoundationiscreditedwiththeideabehindthe36percentinterestratecap.Theadoptionofaninterestratecapof 36percentatthestateandfederallevelhasbeendynamicwithstatesadoptingitatvariouspointsintimeandvarious piecesoffederallegislationimposingit(Saunders,2013). TheTalentAmendmenttothe2007defenseauthorization billwasthefederallawimposinganovel36percentratecaponpaydayloansprovidedtomilitarymembersandtheir immediaterelatives(PewCharitableTrusts,2012). Theadoptionofthe36percentinterestratecapdoesnotoutright prohibitpaydaylenderactivity.Itmakespaydayloansunprofitableandillegal. 2

tostateswithhighornocreditcardrateceilingsandthecreditoperationsofmanylargeretailstores andconsumerfinancecompanieswereacquiredbyorotherwisebecameaffiliatedwithnational banks and their subsidiaries. For a while payday lenders also used this "rent a bank" model in the1990sandmanagedtocircumventrestrictivestatelegislationbypartneringwithbanks,until thelegislativeloopholewasclosedforthem(Stegman,2007). Today, specializedfinancecompaniesand,especially,FinTechlenderspartnerwithbanksforthesamereason(Bhattacharyya,2021, ElliehausenandHannon,2023). Third,otherdevelopmentsalsoputtheirmarkonthepersonalloansectorinrecentyears,but toasmallerextent. Amongthem, SecondCircuit’s2015Maddenv. Midland ruling(discussedat length by Danisewicz and Elard, 2018) restricted FinTech-bank partnership-issued loans in New YorkandConnecticutbyrenderingloanswithinterestratesabovetheusuryratesinthosestates nullifsoldtonon-banks,akeyfeatureoftheFinTech-bankpartnershipmodel(highlightedbyElliehausenandHannon,2023). TheConsumerFinancialProtectionBureau’stransientrulingtitled Payday, VehicleTitle, andCertainHigh-CostInstallmentLoans(thePaydayRule)temporarilyrestrictedtheavailabilityofexpensivepersonalloansbetweenthetimeitwasproposed,in2016,and itsrevocation,lessthanthreeyearslater.7 Finally,morerecentlyIllinoisandNewMexicoadopted 36percentcapsonsmallloans. Withtheexceptionsofthecreditunion18percentinterestrateceilingandofthePaydayRule, whichactedlikea"stealth"interestrateceiling(Calomiris,2001)andwasapplicabletohigh-cost loans across all states, the aforementioned regulatory restrictions apply locally and thus shape lenders’geographicalconcentrationorcreditsupply.Forexample,financecompaniesrestricttheir lendingtohighornoconsumerfinanceinterestrateceilingstates,whileFinTechlenderspartner with banks in order to circumvent low interest rate ceilings and disproportionately target riskier consumerslivinginlow-ratestates(ElliehausenandHannon,2023). 3. PersonalLoansOutstanding In order to examine the personal loan outstanding universe, we use a newly-released loanlevel version of the Federal Reserve Bank of New York quarterly Consumer Credit Panel (CCP), a database on consumers’ credit use and payment performance drawn from anonymized Equifax creditbureaurecords.8 Thesamplehascoverageofpersonalloan(oraccount)holdingsissuedby 7ThePaydayRulecoveredallshort-termloans,longer-termballoon-paymentloans,andotherlonger-termloans withtermsofmorethan45daysandwithAPRsinexcessof36percentinadditiontopaymentmechanismsthatallowed thelendertowithdrawpaymentsdirectlyfromtheconsumer’saccount.Short-termloansarethosewithtermsof45days orlessandinclude14-dayand30-daypaydayloans,vehicletitleloans,whichareusuallymadefor30-dayterms,and short-termloanswithleveragedpaymentmechanisms. Inaddition,theRuleimposedabilitytorepayrequirements,a setofpayment-relatedrules,andadditionalrequirementsmeanttoprotectconsumers.ThePaydayRulewasproposed onJune2,2016,finalizedonOctober5,2017,andrevokedonFebruary6,2019. 8Thesamplingprocedureensuresthatthesameindividualsremaininthesampleineachquarterandallowsfor entryintoandexitfromthesample,sothatthesampleisrepresentativeofthetargetpopulationineachquarter. See LeeandderKlaauw(2010)foradescriptionofthedesignandcontentoftheCCP.Seealsohttps://www.newyorkfed. org/medialibrary/interactives/householdcredit/data/pdf/data_dictionary_HHDC.pdf. 3

financecompaniesanddepositoryinstitutions—banks,thrifts,andcreditunions—andreflectsup tofouraccounts(orloans)perindividual. Our sample contains industry code indicators that allow us to categorize the personal loan holdings by sector—finance companies, banks, thrifts, and credit unions. In addition, a new indicator has been recently added to allow the identification of personal loans issued by FinTech lenders.Moreover,theseindicatorscanbeusedtofurtherdifferentiatethefinancecompanyholdingsbyfinancecompanytype:personalloancompanies,salesfinancecompanies,andamiscellaneouscompanycategory,thusofferingauniqueperspectiveintotheusuallyopaquefinancecompanyuniverse.9 Furthermore,ourdataincludenarrativecodesthatenablethegroupingofholdings by product type: secured and unsecured. The latter also includes "other" loans, a category thatprimarilyconsistsofnoteloans,linesorcredit,andinstallmentsalescontractsamongothers. Importantly, the narrative codes enable us to remove charge card accounts and closed accounts fromourestimates,whichisnotpossibleusingtheindividual-levelCCPdata. Thisisparamount becausethechargecardbalancesarequitenotable.10 AlthoughtheCCPdatadonotcontaininterestrateinformation,thetradelinedatasetthatweareusingcontainsnarrativecodesindicating whethertheinterestrateonacertainloanisfixed. Aspersonalloanstendtohavelowerincidencethanotherloantypes,toensurepropercoverage, we use a10 percent random sample from the total available 5 percentsample, covering the periodbetween2010:Q1and2022:Q4. Asoftheendofthefourthquarterof2022, theconsumer financeCCPloan-levelsampleshowedthatmorethan31millionindividualsorabout11percent oftheentireadultpopulationcoveredbytheCCPhadpersonalloans.11 Thepersonalloansector reached $356 billion and consisted of 36.2 million accounts. The median personal loan account balanceis$4,198andthemedianmonthlypaymentis$202.Aboutone-fourthofloanbalancesare secured,closeto60percentarefixedrate,and40percentareheldbynonprimeborrowers(those withEquifaxRiskScoreslowerthan720). Lookingatoutstandingbalances(Table1,columnI),wenotethatdepositoryinstitutionsdominatethepersonalloanmarket,holdingof77percentofbalancesor$273.6billion,withbanksand thrifts covering 49 percent of the market and credit unions covering 28 percent. The remainder marketshare,of23percentor$82.5billion,belongstofinancecompanies.Althoughpersonalloan companies—thoseprovidingloansdirectlytoconsumers—dominatethefinancecompanysector, ourdataallowsustohighlightthepresenceofsalesfinancecompanies,thosebuyinginstallment credit contracts at a discount from retailers or financing retail sales, and reveals the existence of growing number of miscellaneous finance company balances issued by lenders not traditionally 9Althoughweinquiredaboutthecompanytypesincludedinthemiscellaneouscategory,inordertopreservedata confidentiality,nofurtherdetailscouldbemadepubliclyavailablebyEquifax. 10Allcalculationsexcludechargecardaccountsandbalances,debtowned,andnumberofaccountsheldbydeceased borrowers,thosedebtsandaccountsthathavebeenchargedoff,andclosedaccountswithzerobalances,themajority ofwhichwerelikelysubjecttoCFPB’sNationalConsumerAssistancePlan. 11Asof2022:Q4,theCCPcovered282millionindividuals,237millionwithcreditscores. 4

Figure1.PersonalLoansOutstanding (cid:52)(cid:88)(cid:68)(cid:85)(cid:87)(cid:72)(cid:85)(cid:79)(cid:92) Dollars (Billions, Real) 400 Banks Credit Unions Sales Finance Companies Thrifts Personal Loan Companies Miscellaneous Companies 300 200 100 0 2010 2012 2014 2016 2018 2020 2022 Note:Thisfigureshowsthetotalpersonalloansoutstandingbysector. Source:FederalReserveBankofNewYorkConsumerCreditPanel(CCP)/Equifax. classifiedasfinancecompanies,butthatofferpersonalloans.12 FinTechlenderbalancescurrently standat$49.9billionor14percentofthemarket.AsFinTechloansaretypicallyofferedinpartnershipwithbanks,dependingonthemomentinthelifecycleofthetransactioncapturedinthecredit bureaudata,FinTechbalancescanbereportedacrossthetraditionalsectorsdiscussedpreviously. WewilldedicateasubsequentnotetoFinTechlending. Looking at the number of outstanding personal loan accounts (Table 1, column II), we note that depository institutions and finance companies hold about the same number of accounts— about18million. Takentogetherwiththedepositoryinstitutions’muchlargerbalanceholdings, this points to the larger balances on accounts held by depository institutions versus those held by finance companies and larger monthly payments (Table 1, columns V and VI).13 Indeed, the medianaccountbalancefordepositoryinstitutionsis$6,299withamedianmonthlypaymentof $251,while,incontrast,themedianaccountbalanceforafinancecompanyaccountis$2,864with a monthly payment of $163. FinTech lenders hold 7.7 million accounts, with a median account balanceof$4,256andamedianmonthlypaymentof$197. Next,whenexaminingthepersonalloansectorthroughtheborrowerscreditriskprofileslens (Table1,columnIII),wenotetheinfluenceofinstitutionalcharacteristics.Inlinewiththeirknown riskaversion,depositoryinstitutionsprimarilyofferpersonalloanstohighercreditscoreborrowers,while,incontrast,financecompaniesstaytruetotheirpositionasatraditionalsourceofcredit forriskierborrowers. Themediandepositoryinstitutionborrowerriskscoreis727,whiletheme- 12Assubsidiariesthatfinanceretailpurchasesfromtheparentcompany,captiveautofinancecompanies,notcovered inthisstudy,haveafunctionsimilartothatofsalesfinancecompanies,butforautopurchases. 13Asof2022:Q4,themedianloanmaturityisfouryearsforloansissuedbydepositoryinstitutions,threeyearsfor salesfinance-andmiscellaneouscompany-issuedloans,andtwoyearsforthoseissuedbypersonalloancompanies. 5

dian borrower risk score for a finance company account holder is 626. Among depository institutions,banksaremostriskaverse,evidencedbytheirborrowershavingthehighestmedianrisk score—741. In contrast, among finance companies, the largest credit providers—personal loan companies have the lowest median risk score—610. As FinTech lenders typically focus on nearprime and low-prime borrowers, the median borrower risk score is 670, somewhere in between thatforfinancecompanyborrowersanddepositoryinstitutionborrowers. Lookingattheborrowers’agesreflectedintheCCPdata(Table1,columnIV),wefinddifferencesinaccountholdingsreflectingthebusinesspracticesofeachlender. Forexample, wefind thatdepositoryinstitutionstendtolendtoslightlyolderandmoreestablishedborrowers.Themedianageofaborrowertakingapersonalloanfromadepositoryinstitutionis48,twoyearsolder thanthatofafinancecompanyborrower. Moreover,withinthefinancecompanysector,wefind thatthesalesfinancecompanyborrowermedianageisnotablylowerthanthatofapersonalloan companyborrower.Thismaybeareflectionofthenatureofgoodsfinancedbysalesfinancecompanies, such as appliances, acquisitions more consistent with younger borrower habits. In contrast, personal loan company accounts are less likely to be held by younger consumers, as older borrowersare morelikely tousepersonal loansfromtraditional finance companies to refinance debt. ThemedianborrowerageonaFinTech-issuedpersonalloanaccountis45. Datafromthe twolargestFinTechlenders—LendingClubandProsper—showthatastableshareoftheirloanissuance,about70percent,isfordebtconsolidationpurposes.14 Finally,lookingatpersonalloanholdingsbyproducttypeandborrowerriskprofile(Table2), we note that about one-fourth of total outstanding balances are secured, about 60 percent have fixedinterestrates,and40percentareheldbynonprimeborrowers(thosewithEquifaxRiskScores lowerthan720).15 Althoughintermsofaccountholdings,depositoryinstitutionsandfinancecompaniestendtoholdsimilarsharesofsecured,unsecured,andotherloans,theirholdingsofunsecuredandotherloanbalancesdiffer.Depositoryinstitutionsholdmoreotherloanbalances,while finance companies hold larger unsecured loan balances. Moreover, we note differences in fixed rate loan holdings, with depository institutions holding larger shares of fixed rate loans and balancesincomparisontofinancecompanies(about65percentrelativetoalittleover40percent). Exposurestononprimeborrowersalsovarybysector, withfinancecompaniesleadingthecredit offeringsforsuchborrowers.NearlyallFinTechloansandbalancesareunsecuredandaboutthreefourthshavefixedrates. MorethanhalfofFinTechloanbalancesareloansextendedtononprime borrowers. 14LendingClub’sLoanStatsdatawasavailabletoresearchersviahttps://www.lendingclub.com/untilDecember 2017. 15Thenatureofthecollateralusedtosecureloanstendstovarybylendertype. Banksusuallyoffersecuredloans collateralizedbysavingsaccountsorcertificateofdeposits,whilefinancecompaniesuseotherpersonalgoodstosecure loans. 6

Table1:PersonalLoanHoldings,bySectorasof2022:Q4 LenderType Outstanding Numberof BorrowerEquifax Borrower Balanceper AccountMonthly Balance Accounts RiskScore Age Account Payment (billion$) (million) (median) (median) (median) (median) I II III IV V VI Depository 273.6 18 727 48 6,299 251 Institutions Banks 172.4 8.9 741 49 8,348 293 Thrifts 2.5 0.1 720 50 5,058 242 CreditUnions 98.7 9 714 47 4,966 221 Finance 82.5 18.2 626 46 2,864 163 Companies PersonalLoan 53.8 12 610 47 2,905 169 SalesFinance 7.7 1.4 632 41 2,861 164 Miscellaneous 21 4.8 654 44 2,713 147 InTotal 356.1 36.2 685 47 4,198 202 FinTech* 49.9 7.7 670 45 4,256 197 Note: *Althoughseparatelyidentifiedinthetable, becauseofFinTechlendersspecificbusinessmodels, FinTech balancesarereflectedacrosssectors. Wewillprovidedetailsinasubsequentnote. Asof2022:Q4,themedianloan maturityis2.9yearsforloansissuedbybanks, 2.7yearsforloansissuedbythrifts, 2.6forloansissuedbycredit unions,1.5forloansissuedbypersonalloancompanies,2.4forloansissuedbysalesfinancecompanies,and1.25for loansissuedbymiscellaneouscompanies.TheFinTechmedianloanmaturityis2.3years.ThemedianEquifaxRisk Scorefortheentirecoveredpopulationis742,andthemedianageis49. Source:FederalReserveBankofNewYorkConsumerCreditPanel(CCP)/Equifax. Table2:PersonalLoanHoldingsbySector,ProductType,andRiskSharesasof2022:Q4 SectorHoldings Secured Unsecured Other FixedRate Nonprime (%) (%) (%) (%) (%) I II III IV V All Balance 24 40 36 59 40 Accounts 22 57 21 53 67 Depository Institutions Balance 23 34 43 64 29 Accounts 20 57 23 65 49 Finance Companies Balance 27 60 13 43 79 Accounts 24 58 18 42 85 FinTech* Balance 0.3 99 0.7 72 56 Accounts 0.15 97 2.85 75 71 Note: *Althoughseparatelyidentifiedinthetable, becauseofFinTechlendersspecificbusinessmodels, FinTech balancesarereflectedacrosssectors.Wewillprovidedetailsinasubsequentnote.NonprimeisEquifaxcreditscore under720. Source:FederalReserveBankofNewYorkConsumerCreditPanel(CCP)/Equifax. 7

4. TheSupplyofPersonalLoans Inordertobetterunderstandthesupplylandscapeforpersonalloans,weturntoMintelComperemediadata(Mintelfromnowon),adatasetconsistingofmonthlyacquisitionoffers(solicitations)forpersonalloans.Asthesolicitationsarecreditoffers,theyareameasureofcreditsupply.16 Thedatarepresentmonthlycampaign-levelmailvolumesenttoconsumers. Mintelrandomlyselectsroughly4,000consumersfromapoolof1millionconsumersthatMintelpurchasedfroma largesurveyserviceprovider.17 Thecompanyrecordsalltheofferdetailsinitsdatabases,thusofferinginsightsintotherichsupplyofferlandscape.18 Finally,Mintelappliesweightstoabout2,500 consumersparticipatinginthesurveytorepresenttheentireU.S.adultpopulation. Importantlyforouranalysisofthesupplylandscape,thedataenableustoobservethename ofthecompanysendingtheofferandtheproducttype,which,inturn,enablesustocategorizethe offersbylendertype.19 Mintel data estimates show that in 2022 approximately 1.5 billion personal loan acquisition offers were sent to consumers.20 Offers for unsecured loans dominate the personal loan supply, withonly7percentofoffersbeingforsecuredloans. FinancecompaniesandFinTechlendersin partnershipwithspecialistbankscurrentlydominatethepersonalloansupplylandscapewith34 percentand33percentofmailoffersolicitations,respectively. Theremainderofoffersareissued bybanksotherthatthoseinvolvedinpartnerships(16percent),FinTechlenderswithouttheparticipationofbanks(7percent),banksthataretypicallyinvolvedinpartnershipsmakingindependent offers(6percent),otherfinancialinstitutions(3percent),paydaylendersmakinginstallmentloan offers(2percent),andcreditunions(lessthan1percent).21 The2022personalloansupplylandscapewasnotmuchdifferentfromthatofthepastdecade. LookingmorecloselyattheFinTech-bankpartnershipsectoroverthepasttenyears,weobserve thenotableparticipationofthemarketleaders: WebBankandCrossRiverBank, alongsideother participants such as First Bank of Delaware, First Electronic Bank, Farmers Merchant Bank, Mid AmericaBank&TrustCompany,CountyBankofRehobothBeach,RepublicBank,TheBrandBankingCompany,FinWiseBank,GoldmanSachsBankUSA,FirstBank&Trust,andCapitalCommunity Bank. When examining the partnership structure, we note the dominance of WebBank (55 16DettlingandHsu(2021)andHanetal.(2018)discusstheuseofsolicitationsasameasureofsupply. 17TheMintelpanelisbalancedonfourmajordemographiccharacteristics:region,age,income,andhouseholdsize. Eachmonth,about2,500consumersparticipateintheMintelsurveybymailingbacktoMinteloffersfromacrossthe sectorsmonitoredbythecompany.Mintelmotivatesparticipationwithraffles,offeringprizessuchasgiftcards. 18Everymonth, postcollection, thedataaresenttoTransUnionalongsidethenameandaddressofthepanelist. TransUnion,then,appendstheVantageScoreforeverypanelist.Mintelconductsanadditionalsurveyonparticipating consumerstocollecthousehold-leveldemographicandsocioeconomicinformation. Thisadditionalinformationis mergedwiththemailofferinformation.ThedemographicandsocioeconomicinformationcollectedbyMintelapplies tothehouseholdheadandisrepresentativeatthehouseholdlevel,whiletheVantageScoreisthatofthepanelist. 19Wecategorizethelendersprogrammaticallywhentheirnameallowsustoandmanually,withthehelpoftheGoogle searchengine,otherwise. 20AccordingtoMintel,solicitationsforpersonalloansrepresentthelargestmailvolumecategory,supersedingthat formortgageloansorcreditcards. 21Percentagesdonotaddto100becauseofrounding. 8

Figure2.PersonalLoanOfferMailVolume Annual Mail Volume (Billions) 3 FinTech-Bank Partnerships FinTech Companies Payday Lenders Specialist Banks 2 Mainstream Banks Credit Unions Other Companies Finance Companies 1 0 2010 2012 2014 2016 2018 2020 2022 Note:Thisfigureshowstheannualpersonalloanoffermailvolumeforeachlendercategory.In2022,finance companiesdominatedthisspace. AfterbecomingabankinFebruary2021,LendingClubBankN.A.’smail volumesolicitationisincludedinthemainstreambankcategory. Source:MintelComperemedia. percentofofferings)andCrossRiverBank(36percentofofferings). TheFinTechcompanypresenceinpartnershipstructuresislessconcentratedthanthatofpartnerbanks. Beforebecominga bank,LendingClubhadthelargestshareofofferings(37percentofofferings),closelyfollowedby BestEgg(25percentofofferings)andProsper(18percentofofferings). UpstartandUpgradehave muchsmallersharesofofferings(9percentand3percentofofferings,respectively). Next,regardingthefinancecompanysectorovertheanalyzedperiod,itisimportanttonotethe robustnessofthesupplyofcreditprovidedbythissectoroverthepastdecade,whichincludesthe pandemicyears(Figure2).Whilethesupplyofcreditfromalltheothersectorsreflectedinthedata shrankattheonsetofthepandemic,thesupplyofcreditfromfinancecompaniesremainedvirtuallyunchanged. Thiscouldbeexplainedbyfinancecompaniesrisk-inclinedtraditionalbusiness model. OneMain/Springleaf leads both the unsecured and secured mail offer solicitation campaign volume, followed by Big Picture Loans and World Finance Corporation.22 Also of note, as mentioned in the previous section, finance companies concentrate their credit supply in states that allow them to be profitable. In Figure 3, we show the mail volume concentration over the period. Banks,whethertraditionalorspecialist—thosetypicallyengagedinpartnershipswithFinTech lenders—made about the same number of solicitations over the period. Among them, Discover Bank is the leader among traditional banks, and Goldman Sachs Bank USA dominates the mail volumesolicitationssentbyspecialistbankswithoutaFinTechpartner. 22SpringleafFinancialacquiredOneMainFinancialinNovember2015. ThesurvivingbrandisOneMainFinancial. OneMain/Springleafdominatesthefinancecompanymailvolumesolicitationsovertheperiodwith45percentoffinancesolicitations. 9

Figure3.FinanceCompanyMailVolumeSolicitations Share 60 50 40 30 20 10 Note: Thisfigureshowstheshareoffinancecompanymailvolumeintotalmailvolumeovertheperiod. Highconsumerfinanceinterestrateceilingstatesarehatched. Financecompaniesconcentratetheirmail solicitationsinstateswheretheregulatoryenvironmentallowsthemtobeprofitable. Source:MintelComperemedia. RISE, Payoff Inc., and Social Finance, Inc. lead the mail volume solicitations from FinTech lenderswithoutabankpartner. Finally, as our data allows us to observe the participation of payday lenders to the personal loanspace,wenotethatCheck’nGoisthemarketleaderintermsofpaydaymailoffersolicitation campaigns for personal loans, with 31 percent of mail volume solicitations. Castle Payday and ArrowheadAdvanceeachofferedabout10percentofthemailvolumesolicitationsmailedoverthe period,followedbyAdvanceAmericaandCashStorewith8percentofsolicitationseach. 5. Conclusion In this paper, we provided an overview of the personal loan sector in the U.S. by combining data sources to allow for a deeper look into an otherwise opaque sector. We started by briefly reviewing the regulatory environment for personal lending, which is governed by state interest rate ceilings and banks’ ability to export their home state interest rate. We examined the stock of personal loans with the help of a newly released CCP data set, and we were able to examine the supply landscape with the help of Mintel data. Our data revealed that, in 2022, there were approximately1.5billionmailacquisitionofferssenttoborrowersandthat31millionconsumers owedabout$356billioninpersonalloandebt,representingabout10percentoftotalnonrevolving consumer credit. The average monthly payment on a personal loan is about $202. About onefourthofloansaresecured, andthemajorityarefixedrate. Exposurestononprimeholdingsare concentratedwithinthefinancecompanysector. Inasubsequentnote,wewillexamineindepth personalloansbelongingtotheFinTechsector. 10

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