DBRS Morningstar Finalizes Provisional Ratings on Regional Management Issuance Trust 2022-1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following notes issued by Regional Management Issuance Trust 2022-1 (Regional):

-- $170,630,000 Class A at AAA (sf)
-- $37,040,000 Class B at A (sf)
-- $21,160,000 Class C at BBB (sf)
-- $21,170,000 Class D at BB (sf)

The ratings are based on DBRS Morningstar’s review of the following analytical considerations:

-- DBRS Morningstar's projected losses include the assessment of the impact of the Coronavirus Disease (COVID-19). While considerable uncertainty remains with respect to the intensity and duration of the shock, the DBRS Morningstar-projected cumulative net loss (CNL) includes an assessment of the expected impact on consumer behavior. The DBRS Morningstar CNL assumption is 11.15%.
-- The transaction assumptions consider DBRS Morningstar’s baseline macroeconomic scenarios for rated sovereign economies, available in its commentary Baseline Macroeconomic Scenarios For Rated Sovereigns December 2021 Update, published on December 9, 2021. These baseline macroeconomic scenarios replace DBRS Morningstar’s moderate and adverse coronavirus pandemic scenarios, which were first published in April 2020. The baseline macroeconomic scenarios reflect the view that recent coronavirus developments, particularly the new omicron variant with subsequent restrictions, combined with rising inflation pressures in some regions, may dampen near-term growth expectations in coming months. However, DBRS Morningstar expects the baseline projections will continue to point to an ongoing, gradual recovery.
-- Transaction capital structure and form and sufficiency of available credit enhancement.
-- Credit enhancement is in the form of overcollateralization, subordination, amounts held in the reserve fund, and excess spread. Credit enhancement levels are sufficient to support DBRS Morningstar’s stressed projected finance yield, principal payment rate, and charge-off assumptions under various stress scenarios.
-- The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested. For this transaction, the ratings address the timely payment of interest on a monthly basis and principal by the legal final maturity date.
-- Regional’s capabilities with regard to originations, underwriting, and servicing.
-- DBRS Morningstar has performed an onsite operational review of Regional and, as a result, considers the entity to be an acceptable originator and servicer of unsecured personal loans with an acceptable backup servicer.
-- Regional’s senior management team has considerable experience and a successful track record within the consumer loan industry.
-- Regional has remained consistently profitable since 2007.
-- In February 2018, Regional completed a system migration to Nortridge, allowing for the implementation of custom scorecards for all branches, which led to the ability to implement a hybrid servicing model.
-- The credit quality of the collateral and performance of Regional’s consumer loan portfolio. DBRS Morningstar has used a hybrid approach in analyzing the Regional portfolio that incorporates elements of static pool analysis employed for assets, such as consumer loans, and revolving asset analysis, employed for assets such as credit card master trusts.
-- The weighted-average (WA) remaining term of the collateral pool is approximately 38 months.
-- The WA coupon (WAC) of the pool is 30.00% and the transaction includes a reinvestment criteria event that the WAC is less than 25.00%.
-- The DBRS Morningstar base-case assumption for the finance yield is 25.00%.
-- DBRS Morningstar applied a finance yield haircut of 10.00% for Class A, 6.00% for Class B, 4.00% for Class C, and 2.00% for Class D. While these haircuts are lower than the range described in the DBRS Morningstar “Rating U.S. Credit Card Asset-Backed Securities” methodology, the fixed-rate nature of the underlying loans, lack of interchange fees, and historical yield consistency support these stressed assumptions.
-- Principal payment rates for Regional’s portfolio, as estimated by DBRS Morningstar, have generally averaged between 3.0% and 8.0% over the past several years.
-- The DBRS Morningstar base-case assumption for the principal payment rate is 3.13%. The Regional transaction has a higher principal payment rate assumption compared with prior DBRS Morningstar rated Regional transactions due to the inclusion of the Small Loan and Convenience Check products in the transaction. These two products tend to have higher prepayment speeds then the Large Loan product.
-- DBRS Morningstar applied a payment rate haircut of 45.00% for Class A, 35.00% for Class B, 30.00% for Class C, and 20.00% for Class D.
-- Charge-off rates on the Regional portfolio have generally ranged between 2.00% and 12.00% over the past several years.
-- The DBRS Morningstar base-case assumption for the default rate is 11.15%.
-- Regional offers insurance products to customers that could mitigate credit losses under certain circumstances; however, DBRS Morningstar does not give recovery credit for this.
-- DBRS Morningstar has slightly decreased the base-case charge-off assumption rate to 11.15% for the Regional 2022-1transaction, which contrasts with the charge-off rate of 11.50% for the Regional 2021-2 transaction.
-- The legal structure and presence of legal opinions that address the true sale of the assets from the Seller to the Depositor, the nonconsolidation of the special-purpose vehicle with the Seller, that the Indenture Trustee has a valid first-priority security interest in the assets, and the consistency with the DBRS Morningstar “Legal Criteria for U.S. Structured Finance” methodology.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies are Rating U.S. Structured Finance Transactions (October 20, 2021) and Rating U.S. Credit Card Asset-Backed Securities (August 9, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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