Citizens returns to unsecured personal loans using Pagaya's AI underwriting

The fee split is where the deal terms start, because it is how Citizens pays for a credit model it does not own ^[4]. Every loan booked through Pagaya's underwriting hands part of the origination fee to Pagaya, so the bank's cost for the model goes up and down with volume ^[4]. American Banker did not report the size of the split or whether Citizens considered building a model of its own.

Citizens keeps the parts of the loan that touch the customer. It will originate and service the loans itself to keep the relationship ^[3]. Courtney Mitchell, its head of credit card and unsecured personal lending, said personal loans were "one product that we have not been able to offer our customers" ^[6]. The part the bank rents is the approval model. Pagaya's software plugs into a lender's origination system to help it approve more loans ^[7].

For Pagaya, the deal puts a bank's app in front of its biggest business. Personal loans are its largest origination pipeline and securitization shelf, according to co-founder and president Sanjiv Das ^[9]. "It is our estimate that we currently have about two and a half percent market share in personal loans," Das said ^[10]. That puts Pagaya at roughly one-fortieth of the market ^[15], and SoFi and U.S. Bank already run personal loans through the same model ^[8].

The capital-markets history is the part I find most interesting. Citizens already invests regularly in Pagaya's asset-backed securities, and the lending deal grows out of that relationship ^[11]. "They have even participated in our most recent ABS transactions, and so they know that the quality of what we produce is actually pretty high," Das said ^[12]. Suppose loans Citizens sells end up in Pagaya deals that Citizens then buys. The bank would then hold the same underwriting twice, once as lender and once as bondholder. Citizens will keep some of the loans ^[3], and Mitchell said, "We're going to continue to evaluate what that mix is, but there will be a mix of [on- and off-balance sheet lending]" ^[5].

As evidence that regional banks are renting credit models to widen who they lend to, the record is thin. It shows one regional bank, Citizens, alongside SoFi, U.S. Bank and Ally Financial, which uses Pagaya for auto loans ^[8]. American Banker sets the launch against a wider move by banks to expand their credit box with AI ^[16].

How this turns out depends on the mix. If it leans on-balance-sheet, Citizens is a lender using a rented model, and the fee share is what the model costs. If it leans off, Citizens originates and services loans for Pagaya's securitizations, keeping the customer and its part of the fee while bond investors carry the credit ^[7]. The credit cycle can override either version. JPMorgan analysts, in a research note quoted by American Banker, wrote that "Low income consumers have been squeezed for a while" and that the "key is when the middle income group starts to crack" ^[14].

I think the off-balance-sheet version is closer to what Citizens bought. It chose a partner that sells the loans it originates so lenders can keep them off their books ^[7], and it already knows that shelf as a buyer ^[11]. The thesis is wrong if Citizens ends up holding most of the loans. In that case the bank has judged its own app customers to be better credit than the borrowers in Pagaya's bond deals.