Rosemary Kelley, Senior Managing Director at Kroll Bond Rating Agency

Rosemary Kelley, Senior Managing Director at Kroll Bond Rating Agency

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One of the consistently positive trends in marketplace lending over the past several years has been the growth of securitization. Many, if not most, major platforms now have securitization as a key component of their capital markets strategy.

Our next guest on the Lend Academy Podcast is someone who has been in the securitization space for a couple of decades and has been following marketplace lending closely for more than five years. Rosemary Kelley is a Senior Managing Director at Kroll Bond Ratings Agency (KBRA) and is co-head of ABS there. She has worked on pretty much every consumer lending deal KBRA has rated in the marketplace lending space.

In this podcast you will learn:

  • How KBRA got started and how their focus has evolved.
  • When marketplace lending first got on Rosemary’s radar.
  • What made KBRA comfortable enough to be able to provide their first rating in the space.
  • How KBRA has become the leader in rating unsecured consumer lending deals.
  • What has been driving the growth of securitization in marketplace lending.
  • What does the tightening of spreads tell us about investor appetite.
  • How platforms creating their own shelf has changed how these deals get done.
  • Why the deals that have breached their triggers have not tempered investor demand.
  • Some best practices for a platform doing their first securitization.
  • What leads to KBRA deciding to upgrade a deal.
  • Rosemary’s thoughts on the macro environment and how it will impact consumer credit.
  • What platforms can do to mitigate a slow down in securitization markets.
  • What Rosemary thinks about the competitive environment in marketplace lending.

This episode of the Lend Academy Podcast is sponsored by LendItFintech USA 2018, the world’s leading event in financial services innovation.

Please read a transcription of our conversation below.


Happy New Year everybody and welcome to Episode No. 133, the first episode of 2018. This is your host, Peter Renton, Founder of Lend Academy and Co-Founder of LendIt.


Today’s episode is sponsored by LendIt USA 2018, the world’s leading event in financial services innovation. It’s going to be happening on April 9th through 11th, 2018 at Moscone West in San Francisco. We’re going to be covering blockchain, digital banking and of course, online lending as well as other areas of fintech. There will be over 5,000 attendees, over 250 sponsors and registration is now open. Just go to to register.

Peter Renton: Today on the show, we are talking securitization. I’m delighted to welcome, Rosemary Kelley, she is a Senior Managing Director at Kroll Bond Rating Agency and she has been in the securitization space for a couple of decades now. She has been at Kroll for many years where she has really become one of their leaders in the marketplace lending space.

Many of you may not realize this, but Kroll is actually the leading agency when it comes to rating these unsecured consumer loan deals. So we talk about what has driven their interest in this space, we talk about how the securitization market is evolving in marketplace lending, we talk about some of the securitizations that have breached their triggers in 2015 and 2016. We talk about best practices, the changing economic cycle and much more. It was a fascinating interview, I hope you enjoy the show!

Welcome to the podcast, Rosemary.

Rosemary Kelley: Thank you, Peter.

Peter: So I like to get these things started by giving the listeners a little bit of background about yourself. Tell us what you’ve done in your career up to this point.

Rosemary: Sure, happy to do that. I’m a Senior Managing Director at Kroll Bond Ratings and I Co-Head the ABS Group at KBRA. I joined Kroll in 2011, really to startup our ABS efforts and I focus primarily on consumer ABS and I lead KBRA’s rating practice in marketplace lending. Prior to joining KBRA, I worked at DBRS for a few years and prior to that, I worked at MBIA Insurance Corporation for ten years and all of that was in consumer ABS and before that, I had worked in banking.

Peter: Okay, so you’ve got a long history in the ABS space. So just for those people who aren’t fully aware…I mean, a lot of people have heard of S&P and Fitch and those companies, but not necessarily know a great deal about Kroll so can you just give us a little bit of background on the company and what you guys do exactly?

Rosemary: Sure, happy to do that, so KBRA…the formal name of the company is Kroll Bond Rating Agency, but we go by KBRA so if you hear me using that acronym we are a global full service rating agency which was established in 2010 by Jules Kroll. KBRA offers timely, transparent and in depth research across various sectors.

When we started out, we initially started out really in structured finance, including commercial mortgage-backed securities, residential mortgage-backed, single family rental and ABS and we’ve expanded into corporates, municipal finance, financial guarantee; we have a financial institutions group; we have a group that focuses on project finance and then some other groups that do funds and insurance.

We currently have 275 employees and we have published over 9,000 ratings. Just in terms of issuers or transactions, we have rated over 1,200 issuers or transactions, depending on what it is, which totals $785 billion.

Peter: Wow!

Rosemary: We recently opened an office in Dublin, actually, as our European office in part due to Brexit is why we have chosen Dublin so we’re expanding into Europe right now as well.

Peter: Interesting and you’re based in New York, right?

Rosemary: I am based in New York, yes, but I am supporting the efforts in Europe as well.

Peter: Right, okay. And so then when did marketplace lending first get on your radar?

Rosemary: Yeah, that’s an interesting question, actually. We were first approached with marketplace lending in 2012 so it was actually quite a few years between the time that we first started having conversations with people about it and when we actually rated our first transaction in this space.

So during that time, we had several discussions with different platforms and potential issuers, investors, depending on who it may have been that was trying to bring something forward. We’ve spent a lot of time really doing work in this space to understand the different business models of the platforms and the specific risks associated with transactions backed by loans originated by marketplace lending platforms.

Peter: Interesting. So the first deals were unrated and they didn’t even happen until 2013.

Rosemary: That’s right.

Peter: So obviously you spent some time learning about it, I guess…what made you comfortable enough to come into this space and actually provide your first rating of a deal?

Rosemary: Yeah, I think we did spend a lot of time and I tend to emphasize that maybe more than (laughs)…people can understand that it really means we did a lot of work to understand the risks. I think that we have a very strong team here with extensive background and expertise in assessing transactions and risk.

You know, we have people that come from different areas of the capital markets, not just rating agencies. You know, some people worked at monolines like me, banking and I think we were able to use that expertise to get comfortable determining the risks associated with this space and developing an approach to rating transactions backed by marketplace loans.

Peter:  Interesting, okay. So when you look at…you know, PeerIQ does their quarterly securitization tracker and it’s always fascinating to read it. I was going back preparing for this interview and looking at sort of the league tables as they call them and you have done more unsecured consumer than any other agency and I’m just curious to…obviously, you’ve talked about multiple different lending verticals that your company covers, but what’s attractive to you and why are you so focused on the unsecured consumer lending space?

Rosemary: Yeah, well I think that we actually…that is the largest area in terms of what we’ve rated in terms of marketplace. We’ve done 35 consumer loan transactions to date, we’ve also done transactions in small business, student loans and we actually did rate…our RMBS group rated one RMBS transaction.

I think in terms of the consumer loan, I think it really goes back to looking at the expertise that we have. Prior to rating any of these transactions, we’ve rated several transactions in the consumer loan space for more traditional consumer loan lenders such as OneMain and Springleaf and we have a lot of expertise across consumer sectors.

I think that once we were able to start rating transactions in this space…you know, we spent a lot of time, like I said before, focusing on the business models, management team, looking at the operational strengths of the platforms and we boil that into a very detailed pre-sale report that investors can then use to understand what they’re potentially investing in and it shows our rationale for the particular ratings in the transactions.

I think that investors and issuers have looked at that and I think they appreciate that we’ve been thoughtful in terms of our approach in this space. I think that’s really helped us to develop with a number of different issuers in this space.

Peter: Right, right. And so then looking back again, if you look at the history of unsecured consumer over the last four years, as I said, the first deal didn’t even get done until 2013, and I think the first rated deal SoFi did it in 2014, I believe. Anyway, so you’ve got a reasonably short history, but it’s been growing quite dramatically over this timeframe. From your perspective, what’s driving this growth?

Rosemary: Sure, so I think you’re right, Peter, we have to go back and look at…you know, in the beginning there were several deals that were done that were not rated and it took time, I think, to really develop this…I’m not going to call it a sector, but really this space. I think part of the problem was really having not enough historical performance data for the platforms, for both rating agencies and investors to potentially get comfortable with us rating transactions or investors investing in the transactions.

I think that also there was not clear expectations or there wasn’t clear parameters around what the structure and terms & conditions of these transactions were. So early on, there was a lot of time spent on conversations talking about things like reps and warranties, and who would provide them and what that means for securitizations and what the platforms were willing to offer. It’s hard to blanket with one specific answer, but I think there was just a lot of time spent figuring out what is it going to look like going forward.

Now that we have established transactions for several different issuers that are doing repeat deals and multiple deals, I think that investors have a better idea of what they can expect. I also think 2016 was an interesting year in this space.

Peter: It was. (laughs)

Rosemary: (laughs) Yes, as being more of a transitional year because there were a lot of concerns early on even about funding sources and potential performance issues and then we had the events that occurred at Lending Club in the 2nd quarter of 2016 that really caused investors to pull back and caused a lot of the platforms to really put a big emphasis on making sure that they had the appropriate controls in place, that they had more disciplined underwriting and were focusing on the performance of loans and again, put a highlight on the continued need for diversified funding.

So I think that going out of 2016, we’ve seen definitely a very large increase from 16 to 17 as we had folks kind of getting back to…I’m going to say a more normal issuance that they didn’t really have at the end of 2016.

Peter: Right, right, and just on that, we’ve seen this year the new issuance spreads are tightening, it seems. What does that tell us now about investor optimism and the acceptance of this space?

Rosemary: Yeah, I think it tells us that the investors are increasingly getting more comfortable with the asset performance, underwriting and operations of the platforms as well as having comfort in the structures. I think that it’s been beneficial that we’ve seen for some of the earlier deals that we have rated in this space in early 2016, we’ve already had them come through a surveillance cycle in terms of our regular surveillance to look at how the deals are performing for potential upgrade. We’ve been able to upgrade some deals in this space which has helped investors get comfortable.

Peter: Right, and so another thing that’s changed in the last year, it seems that everyone has their own shelf now and it seems like there’s an attempt now to bring more consistency into the way these deals are structured, but how has that changed sort of the environment, the securitization environment, and the execution of these deals?

Rosemary: Yeah, I think that has actually been very helpful. So we’ve seen a shift from deals that were investor led securitizations. So an example of that might be the Jeffries securitization for Lending Club collateral that was done at the end of 2016 to moving towards more platform led securitizations. And so in the platform led securitizations there could be multiple investors that are contributing their collateral back to the platform that are then included in the securitization.

And I think that that’s been helpful actually for many parties in securitization because it helps the platform to have more control over the process so they can plan out the timing of issuance, it helps with providing collateral consistency and looking at somewhat consistent enhancement levels and ratings and it allows the investors to have the option for longer term financing by selling their loans into the securitization so the investors that were buying the loans can now contribute them back instead of having to plan out their own securitization.

Peter: Right.

Rosemary: And then in terms of the investors in the securitization itself, I think that’s helpful for them to know that there’s more consistency in the transactions being offered by platforms. So they have a sense of knowing what’s coming…knowing what similar transactions looked like before they were looking at something new.

Peter: Right.

Rosemary: And even if you go back…I mean, before I’d say maybe early 2016, we had several different investors speaking to us and inquiring about potential ratings for collateral by one platform. So you could potentially have had competing deals going or everyone might have a slightly different angle. So I think that was going to make things more challenging.

Peter: Right, right. So I want to get back to something you said earlier and touch on the performance issues, like you talked…some of the deals from 2015 and early 2016. I don’t know if any Kroll rated deals have done this, but some have breached their triggers in this space. I think PeerIQ actually lists them as well, but I’m curious to get your take on that. It seems like maybe that the changes you’ve mentioned just in the last couple of minutes have overcome kind of the negativity of these breaches. I’d like to get your perspective on sort of the triggers and why it hasn’t really tempered investor demand.

Rosemary: Sure. Yeah, I think it’s interesting because just, you know, looking at the headlines in this space I think that there were for a time…over maybe 2016 and early 2017, a lot of negative press coming out in terms of some of the deals hitting their triggers. I think that there’s a lot of reasons for that. I think it’s interesting to think about that because some of it goes back to what I said earlier about the platforms, you know, the early days of the transactions being securitized.

Some of those platforms didn’t have as much historical performance data which makes it more challenging to determine what your expected loss might be for that pool of loans. So if it’s more challenging and if the triggers are set somewhat tight then you’d be more likely to breach those triggers and I think that losses had been higher than what was originally expected potentially.

We didn’t rate a lot of those deals, but as a result platforms and issuers have actually tightened underwriting and increased pricing in some segments to try to stem the tide of that. But also, looking at how the trigger levels were set, I think there’s some other things that’s important to look at. The question is, who was setting the triggers to begin with?

Peter: Right.

Rosemary: It may be that if it was an investor that was trying to maximize the amount of leverage in a transaction then they may set the trigger tighter and it may be more likely to breach than someone else that wants to have more room with respect to those triggers. And it also may be a question of, you know, what were the characteristics of the pool upfront.

Some of the deals had seasoned collateral and some allowed delinquent loans in the pool; others did not. So all of those are important in terms of trying to assess the lost timing essentially, in terms of setting those triggers. But I think the most important thing from the investor perspective is that the triggers are actually set to protect the investors in the ABS deals.

So they protect the investors in terms of any potential deterioration in asset performance by capturing additional credit enhancement and paying down the deals quicker. So in terms of investors, it may not be beneficial because it may make the deal shorter, you know, the deal could payoff much quicker than they expected and there’s potential headline issues. But those triggers are potentially protecting them from any increase in losses down the road.

I would also say that in 2017, we saw fewer trigger breaches for deals that were issued in 2017 so I think that a lot of it related to deals that were done earlier on. Now that there’s more data and more time that has passed then there’s more accuracy in terms of setting those trigger levels.

Peter: Right, right. I’ve also heard from many people in the industry that 2017 has just been a better year when it comes to quality of underwriting and accuracy of loss rates, expected loss rates. So we’re all getting better at what we’re doing so that’s part of the whole story as well.

Anyway, I want to touch on something for newer platforms, I mean, there are some newer platforms that I’ve been speaking to that are planning securitizations in 2018 for the first time. So I wanted to just pick your brain for a minute or two here on what are some of the best practices for newer companies who are looking to do their first securitization.

Rosemary: Sure, we do speak to folks that are interested in doing their first securitization and try to help to guide them to the extent we can. I think that it’s important for the platform to have very clear policies and procedures with respect to how they’re underwriting and originating loans and in terms of how those loans are being serviced.

I go back to the main factors that I talked to before in terms of what we look at when we assess the risk of a transaction for an issuer, not only in marketplace, but in any space. It goes back to understanding who is this entity, who’s the management team, what is their business model and we look at what their experience has been and then how are they applying that at this company.

Another important aspect is the historical performance data that I’ve mentioned a few times. It’s important because it helps us to understand initially, you know, looking at the characteristics of what they’re underwriting and how they’re originating those loans, but then what they’re pricing the loans for in terms of performance. They need to have some sort of performance expectations for a pool, but having historical performance data helps us to then look at, are they performing as they expected and how do we think that the loans being originated now are going to perform.

So I think capturing that historical data and having a sufficient amount of it is important for getting a rating for a new issuer. I would say that it’s probably helpful for them to hire an investment bank which helps them to prepare for the questions and information being asked of them by rating agencies and by investors and to make sure that they’re actually ready to do a securitization, so I would always recommend to do that as well.

Peter: Right, right. So I want to go back and talk a little bit about…you mentioned upgrading deals. I’ve seen a few of them that have come through where you have issued an upgrade so what does it take for that to happen? What are you looking for, is it purely just the performance of the loans are exceeding expectations or what else is involved in upgrading a deal?

Rosemary: Sure, so we do track the performance of the securitizations on a monthly basis and we’re looking at the transactions themselves in terms of how are the deals performing relative to what we expected at closing. I think it’s also important to look at how is the credit enhancement potentially building.

In many cases the way the deals are structured…actually, really the way the deals are structured now, not in many cases, always…the deals have been structured so that enhancement builds over time and that has been incredibly helpful for the stability of ratings as well as potential upgrades. We’ve seen that as enhancement builds, even if losses tend to be a little bit higher than what was expected, that increase in enhancement may be greater than that potential increase in losses.

We also look at the overall entity itself in terms of what’s going on with the entity. Is it relatively stable in terms of how the loans are being serviced and we take that into account if there’s any potential question of future performance down the road. But I would say that it’s important to look at what’s going on with the deals themselves and then understand as well what’s going on with the company in terms of how that may impact loan performance.

Peter: Right, right, got it. Okay, I want to switch gears a little bit and talk about the economy. I mean, we’re recording this before Christmas and on the week where the big tax cut is going to come into being here in Washington which people are always talking about, you know, a boost to economic growth.

Obviously no one knows what’s going to happen in 2018, but this expansion is now one of the largest in history or one of the longest in history, I should say, but when you’re looking at the macro environment, what are your thoughts on how that’s going to impact the deals you’re doing and the marketplace lending industry as a whole when it comes to consumer loans?

Rosemary: Sure, so I would say that the potential changing economic cycle will impact marketplace consumer loans as it does all consumer credit, meaning if there is a change in terms of unemployment rates, an increase in employment rates it will impact these transactions potentially. We do look at that in terms of understanding, again, the stability of performance over time that we’ve seen and what the history of the management team and credit teams have been with respect to originating the loans.

It’s very important that…we even saw in 2017, that where there were certain segments where there was an increase in delinquencies and defaults that platforms have adjusted and tightened underwriting standards so that they can potentially try to stay ahead of any changes in terms of the performance or adjust quickly so that it’s something that they are adjusting constantly to.

I think that’s very important in terms of just on an ongoing basis that they need to continue to stay disciplined in terms of the underwriting standards that they’re applying to these loans and then also make sure that they’re staying disciplined with respect to fraud prevention and looking at any other issues that are affecting the performance.

I think that looking at the ratings that we’re applying, we do look at the stress levels in terms of potential changes in economic environment that equate to…obviously as you go up the rating scale, we need higher coverage of losses to get to the higher rating categories.

For marketplace deals, because we think that there is a higher risk associated with these deals just because of the relative newness in some of the platforms and looking at the high growth…you know, the fact that it’s internet lending…all of these factors we look at to say do we think that we need additional coverage for losses in marketplace. And we do actually look for higher coverage levels than we would for someone that’s more of a traditional lender.

Peter: Right, right, okay that makes sense. You’ve been around the securitization space for a long time and obviously you followed what happened in the financial crisis as did all of us where these markets pretty much seized up. I want to get your take now…we’re pretty much ten years, almost ten years removed from that time period, do you think that the ABS markets in general are in a better position now or do you think that securitization is always going to be cyclical and there will always be times when the markets will just seize up. What are your thoughts on that?

Rosemary: I think that it’s important for issuers and securitization platforms to have diversity in terms of the investor base and in terms of their funding sources. I think we’ve seen over time in the financial crisis and in other times that that really is very important in terms of the ongoing ability to maintain business if there is any sort of problem in the securitization market, you know, that they have other sources.

So I think that it’s always important to be diversified and I think that for these platforms the important thing is for them to maintain a focus on being disciplined and the controls in terms of underwriting because that’s going to help investors to be comfortable even if there is an increase in delinquencies and losses as a result of some economic cycle.

Peter: Okay, we’re almost out of time, but just one last question. You’ve been following this space now for a while and we’ve seen a lot of new entrants come in. Obviously, we talk a lot about Marcus, Goldman Sachs’ new platform that has been the fastest growing and they’re holding these loans on their balance sheet. They’ve gone on the record saying they’re planning on holding these loans to maturity, at least in the near term, but I’ve seen several other banks that have come into the consumer lending space.

What are your thoughts on the broader competitive environment in this space and the impact that some of these banks coming into this space is going to have on these existing unsecured consumer lending platforms?

Rosemary: Sure, so yeah, we definitely have seen increased competition and we’ve seen many of the platforms expanding in terms of the originations volume that they’re doing, not just Marcus, there’s other folks coming into this space. I think that we are going to see increased competition over the next few years in this space. I think that, again, it’s important for the platforms and issuers in this space to…I go back to being disciplined in terms of how they’re underwriting the loans and what sectors they’re focused on as we have increased competition.

We’ve seen other consumer segments increase competition over the past several years since the financial crisis and again, it always goes back to looking at who are their customer base, what is their business model, who are they focused on and making sure that as this competition increases that they’re doing what they need to do in order to make sure that the performance is relatively stable on a go forward basis.

Peter: Okay, well we’re going to have to leave it there. I really appreciate you coming on the show today, Rosemary.

Rosemary: Okay, thanks, Peter.

Peter: Okay, see you.

Rosemary: Bye.

Peter: As you look around the industry today, it’s very, very different than what it was three or four years ago where you’ve got every major platform now has their own shelf, they’re running their own securitization programs. It’s becoming a more and more important source of funds for these platforms.

Now having said that, as Rosemary pointed out, the key to success though is to have a variety of funding sources because as we’ve all seen these markets can seize up and if you are 100% reliant on securitization then you run the risk when the markets seize up of not really being able to originate loans.

So I think that’s happening, I feel like we’re in a good space right now. It’s going to be fascinating to see how it develops. As we get more into 2018, are we going to see even more record numbers of deals like we have seen in 2017.

Anyway on that note, I will sign off. I very much appreciate your listening and I’ll catch you next time. Bye.

Today’s episode was sponsored by LendIt USA 2018, the world’s leading event in financial services innovation. It’s happening April 9th through 11th 2018 at the Moscone West in San Francisco. It’s going to be the largest ever fintech event held in the Bay Area with over 5,000 attendees expected. We’ll be covering online lending, blockchain, digital banking and much more. You can find out more by going to