DBRS Morningstar Finalizes Provisional Ratings on FREED ABS Trust 2020-2CP

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes (the Notes) issued by FREED ABS Trust 2020-2CP (FREED 2020-2CP):

-- $123,120,000 Class A Notes at AA (low) (sf)
-- $37,710,000 Class B Notes at A (low) (sf)
-- $27,730,000 Class C Notes at BBB (low) (sf)

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

(1) DBRS Morningstar’s assessment of how collateral performance could deteriorate because of macroeconomic stresses related to the Coronavirus Disease (COVID-19) pandemic. This assessment was guided by DBRS Morningstar’s set of macroeconomic scenarios for select economies related to the coronavirus, available in its “Global Macroeconomic Scenarios: Implications for Credit Ratings” commentary published on April 16, 2020.

(2) DBRS Morningstar applied transaction stresses in consideration of its moderate scenario for the United States whereby DBRS Morningstar anticipates that containment of the coronavirus will begin during Q2 2020, resulting in a gradual relaxation of stay-at-home measures and nonessential business closures and allowing a gradual economic recovery to begin starting in Q3 2020. As a result, the transaction assumptions include an increase to the expected loss as well as a hardship deferment stress, in consideration of the GDP and unemployment estimates in its moderate scenario.

(3) The transaction’s form and sufficiency of available credit enhancement.
-- Subordination, overcollateralization, amounts held in the Reserve Fund, and excess spread create credit enhancement levels that are commensurate with the ratings.
-- Transaction cash flows are sufficient to repay investors under all AA (low) (sf), A (low) (sf), and BBB (low) (sf) stress scenarios in accordance with the terms of the FREED 2020-2CP transaction documents.

(4) Structural features of the transaction that require the Notes to enter into full turbo principal amortization if certain triggers are breached or if credit enhancement deteriorates.

(5) The experience, sourcing, and servicing capabilities of Freedom Financial Asset Management, LLC (FFAM).

(6) The experience, underwriting, and origination capabilities of Cross River Bank (CRB).

(7) The ability of Wilmington Trust National Association (rated AA (low) with a Stable trend by DBRS Morningstar) to perform duties as a Backup Servicer and the ability of Nelnet Servicing, LLC doing business as Firstmark Services to perform duties as a Backup Servicer Subcontractor.

(8) The annual percentage rate (APR) charged on the loans and CRB’s status as the true lender.
-- All loans included in FREED 2020-2CP are originated by CRB, a New Jersey state-chartered Federal Deposit Insurance Corporation-insured bank.
-- Loans originated by CRB are all within the New Jersey state usury limit of 30.00%.
-- The weighted-average APR of the loans in the pool is 25.42%.
-- Loans may be in excess of individual state usury laws; however, CRB as the true lender can export rates that preempt state usury rate caps.
-- For the C+ Loans, CRB holds the loans for the “disbursement period,” which generally lasts for three months or longer. CRB bears the risk of credit loss during these holding periods.
-- Loans originated to borrowers in states with active litigation (Second Circuit (New York, Connecticut, Vermont), Colorado, and West Virginia) are excluded from the pool.
-- The FREED 2020-2CP loan pool includes loans originated to borrowers in Maryland, a state with active litigation. DBRS Morningstar incorporated an additional stressed cash flow analysis assuming that loans to borrowers in Maryland with APRs above the state usury cap of 24.00% were subsequently reduced to the state usury cap. Transaction cash flows are sufficient to repay investors under all AA (low) (sf), A (low) (sf), and BBB (low) (sf) stress scenarios.
-- Under the Loan Sale Agreement, FFAM must repurchase any loan if there is a breach of a representation and warranty that materially and adversely affects the interests of the purchaser.

(9) The impact of the coronavirus has considerably dislocated the world economy and drastically altered the course of most industries and companies through, among other things, forced shutdown of operations, sharp declines in demand for products and services, altered consumer behavior, as well as supply chain and labor supply shocks. While considerable uncertainty remains with respect to the intensity and duration of the shock, DBRS Morningstar has revised the base case for this transaction in light of the expected impact on consumer behavior.
-- DBRS Morningstar increased its expected cumulative net loss to 16.35% because of the expected impact of the coronavirus.
-- DBRS Morningstar incorporated in its analysis a hardship deferment stress as a result of an increase in utilization related to the impact of the coronavirus on borrowers. DBRS Morningstar stressed hardship deferments to test liquidity risk early in the life of the transaction’s cash flows.

(10) The legal structure and expected legal opinions that address the true sale of the personal loans, the nonconsolidation of the trust, that the trust has a valid first-priority security interest in the assets, and consistency with the DBRS Morningstar “Legal Criteria for U.S. Structured Finance.”

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is Rating U.S. Structured Finance Transactions (November 6, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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