Sallie Mae's foray into personal loans proves short-lived

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Less than two years after hopping into the personal loan business, SLM Corp. is getting out.

The company known as Sallie Mae, whose main business is offering student loans, announced this week that it has suspended personal loan originations in order to focus its resources on core strategic priorities.

Sallie Mae originated and acquired more than $1.6 billion in personal loans over the last two years. The Newark, Del., company reported this week that its portfolio was around $1 billion at the end of 2019, which was around 5% of the size of its book of student loans.

“We accomplished what we wanted to do, which was to successfully introduce a second product with the opportunity for revenue increases,” Sallie Mae CEO Raymond Quinlan said Thursday during the company’s quarterly earnings call.

Quinlan said that Sallie has no intention of restarting personal loan originations but indicated that the company plans to hold onto its existing portfolio. Only 2.4% of the company’s personal loans that were in repayment at the end of December are classified as delinquent.

Sallie separately announced that it plans to sell $3 billion in private student loans this year, and to use the proceeds to fund share buybacks.

Personal loans are relatively easy for lenders to originate, generate strong margins, and provide a way to eat into the big banks’ credit-card franchises. After online lenders sparked the product’s revival earlier last decade, lots of banks got into the game. SunTrust Banks, BBVA, HSBC, Citizens Financial and Goldman Sachs are among the lenders that have entered the U.S. personal loan market in recent years.

As of Sept. 30, there were 22.5 million unsecured personal loans outstanding in the U.S., which was up 39% from three years earlier, according to TransUnion.

When Sallie Mae got into the personal loan business in 2018, the new offering seemed like a logical extension of its existing student loan business, since both products are forms of unsecured consumer debt. “We do believe that we have all the requisite skills to underwrite, service and collect personal loans,” Quinlan said in July 2018.

The $32.7 billion-asset company announced its plan to retreat from personal loan originations the week after Goldman Sachs released data showing that it sharply reduced its own originations of the product amid of the rollout of its credit card partnership with Apple.

The retreats by Sallie and Goldman both appear to be at least somewhat idiosyncratic, according to Todd Baker, a former banker who is managing principal at Broadmoor Consulting. He said that in Sallie’s case, student loans are less risky than personal loans from a credit performance standpoint, and they fare better under the Current Expected Credit Losses accounting standard.

But he also noted that little historical data exists on the performance of installment loans to consumers with prime credit scores, since before the financial crisis those loans were generally offered only to subprime borrowers.

“So caution is the watchword for everyone,” Baker said in an email.

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