SOFI Shows Signs of Trouble
SoFi hits CNL
I know there are many community members who have followed, or continue to follow, the SoFi story, and I wanted to explain to you what has transpired in the last few weeks.
Before I do, I need to provide you with a brief cash course in how SoFi makes money on its loans. In a typical credit transaction, there is Party A - The Lender and Party B - The Lendee or Borrower.
Lending by itself is a low-margin, crappy business; therefore, leverage is always needed to make the activity worth it for those lending money. To solve this problem, banks use deposits from you, the customer. The public puts money in its bank and earns a yield on his/her savings account. For our purposes lets call it 4%. The customer puts their money in the bank for no cost to the bank, the bank then pays you 4% but is going to lend your money out to another party at a higher rate than your 4% earned. That difference between what you receive and what the bank gets on the money it loans out is what's known as its Net Interest Margin or NIM.
For businesses that loan money that are not banks, they use what is called securitization. Securitization is when a business, like SoFi, writes, let's say, $500M in loans and then packages and sells that to securitization investors. SoFi will then pay those securitizations an interest rate; however, it will be lower than what they are receiving from the individual loans they own. The reason is that a massive pool of loans is going to be less risky than owning the individual debt itself, it can pay the securitization investors less than what it receives in interest from the individual loans.
Where SoFi runs into issues is that there are protections in place for the securitization investors, similar to covenants on debt to individual companies. This "covenant" for securitization is called a Cumulative Net Loss or CNL. This is a metaphorical glass ceiling that should losses mount in excess of that rate, the payments from the securitization investors to SoFi ceases, until they are paid back what they are owed.
SoFi's SCP/SCLP 2025-1 hit 2.97% in losses vs the 2.60% CNL in place. This made it so the money being paid to SoFi from securitization investors is halted until they are paid back. In addition to this, it looks like the 2025-2 fund is also going to breach its CNL as well. This, among other things, points to a doozy of a credit cycle that is 17 years in the making.
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