Why some lenders are selling out to banks, brokers, and hedge funds

Some lenders and brokers are turning to more sophisticated ways of financing debt for a growing number of borrowers, who are wary of paying the high interest rates and risk of default, according to research and banking executives.

The moves come as investors are buying up assets that were previously held by companies that were insolvent, and as banks are looking to boost profits and increase their lending, according a report by Credit Suisse, the Swiss bank. 

While the industry has seen a dramatic increase in its volume of financing, its share of total debt issuance is still relatively small, according the research firm.

That is why some banks are also turning to “hedge fund financing,” or HFO, a way to hedge their risks, said Paul Buehler, an executive vice president at Bankers Trust, which is the largest Fannie Mae insurer in the country. 

Some banks, such as Ally Financial, JPMorgan Chase, and Citigroup, are expanding the types of funds they offer for those borrowers who do not have the cash or other resources to pay off their debts, according TOHSA data.

Ally recently expanded its HFO program to include those with “lower-than-average credit scores,” as well as borrowers with lower incomes, which could include people with jobs that pay less than $100,000 a year, according of the bank.

The plan allows borrowers to borrow up to $2,000 for up to 90 days with an annual interest rate of 3.5%, according to Ally. 

“It’s an investment option that is much more appealing to people who are looking for an option,” Buella said. 

Another key factor is that those who are eligible for a HFO can use their funds to purchase other loans that will help them pay their debt.

The interest rate is usually lower than the interest rate on the original loan, but it still offers a great option for those who do need to borrow money, Buellas said.

The banks that offer HFO are not allowed to sell the debt back to the borrowers, but they are allowed to make the loans available to them.

The funds also allow borrowers to use the funds to make payments for their other credit cards and other credit needs, according Ally.

“A borrower can choose to use his or her funds for those other expenses as well,” Bucellas added. 

Buells office found that a significant portion of the HFO borrowers are not able to pay their bills with their HFO funds.

Some borrowers are able to borrow $1,000 to pay for an emergency, but the interest on that loan is much higher than what the HMOs are offering. 

The data shows that the industry is shifting away from traditional loan origination, which involves the origination of loans from a financial institution, and to a more complex system where banks lend to people to help pay their debts.

“What we’re seeing is that more and more banks are going to be looking at using a hedge fund approach,” Buesa said.

“In the HFC, the leverage is a little bit higher, but there’s also a risk that the risk is there,” said Paul Hilderbrand, chief investment officer at Ally.

Ally has also found that most of its HMO customers are not as confident as other borrowers about the long-term financial status of their debts and their ability to pay them. 

In the end, the only way to get a good loan is to have a job that pays a good wage and has a plan to pay it off, said Hildarbrand. More: