How to calculate excess spread on a loan pool, and the floor a credit line sets under it
Cash collected, minus every senior fee and the line's own interest, over the loans that still pay, times 12: the definition in two filed credit lines, the floor by loan term, and the margin Mexican non-bank books leave.
Excess spread is what a loan pool earns over what it costs to carry: the interest and fees collected in a month, minus servicing fees and interest on the line's advances, times 12, over the pool's average performing principal. Lines test the three-month average; Upstart's 2020 line with Goldman Sachs set the floor at 3.75% for three-year loans.
Excess spread is a cash margin on the performing pool, annualised from one month
A warehouse line is a revolving loan to a lender, secured by a pool of its loans and drawn as advances against them. The lender that seeks its first one meets excess spread as a covenant, and the definition sits in the credit agreement, not in an accounting standard. Two filed agreements show what it contains.
On Deck Capital described its 2018 facility with Ares in a Form 8-K filed with the SEC. The pool had to keep «the three month average gross excess spread» above a minimum, and the filing said how it is counted: «the amount by which collections received … during a collection period (primarily interest and fees) exceed its fees and expenses during such collection period (including interest expense and servicing fees)».
Upstart's 2020 line with Goldman Sachs, filed with the SEC as an exhibit to its S-1, calls the same number Net Interest Margin and writes out the arithmetic: «12 times» the interest proceeds received in the month, plus hedge receipts, minus the Guaranteed Distribution, «divided by» the average daily Aggregate Principal Balance. The Guaranteed Distribution is the top of the payment waterfall in section 9.01: trustee, servicer, custodian, verification agent and backup servicer, then the lenders' interest and utilisation fees. Unused fees are left out.
So the calculation has four steps. Take the cash interest and fees the pool collected in the month. Subtract every senior fee and the interest due on the advances. Divide by the average performing principal. Multiply by 12, then average the last three months, as both SEC filings do.
Worked example, modelled: average performing principal of $10.0m, $9.6m and $9.2m; advances at 80% of the pool, interest at 11% a year; fees for servicer, trustee and agents as shown; net losses are charge-offs less recoveries. Annualised by 12, as in both filed definitions. Our computation, offered as such.
| Month | Collections, interest and fees | Fees | Interest on advances | Gross excess spread | Net losses | Net excess spread |
|---|---|---|---|---|---|---|
| 1 | $250,000 | $18,000 | $73,333 | 19.0% | $95,000 | 7.6% |
| 2 | $236,000 | $17,300 | $70,400 | 18.5% | $104,000 | 5.5% |
| 3 | $221,000 | $16,600 | $67,467 | 17.9% | $112,000 | 3.3% |
| Three months: totals and average rate | $707,000 | $51,900 | $211,200 | 18.5% | $311,000 | 5.5% |
The three-month average gross margin is 18.5%, which clears any floor in the Upstart agreement. Net of losses it is 5.5% and down by more than half in two months, which is the figure the fund will compute even when the covenant does not.
The advance rate decides how much of the funding cost the pool carries
Interest is paid on the advances, not on the pool, but excess spread divides by the pool. At an 80% advance a line priced at 11% costs the pool 8.8 points a year; at 87.5%, the advance rate in On Deck's 2018 SEC filing, it costs 9.6. Each extra ten points of advance takes a tenth of the funding rate out of the margin, so a lender with a thin book trades advance rate against headroom under the floor.
Three details in the definition move the number
Cash, not accrual. Both agreements count what was received in the collection period. A lender's income statement counts interest earned, including interest on loans that will never pay it, so the figure from the accounts runs higher than the figure the line tests.
Recoveries are principal first. In the Upstart agreement, money received on a defaulted loan «will constitute Principal Proceeds (and not Interest Proceeds) until the aggregate of all Collections … equals the outstanding Principal Balance». Collecting on bad loans does not prop up the margin.
The denominator holds only good loans. In the Upstart agreement filed with the SEC, Aggregate Principal Balance counts eligible loans that are not delinquent, more than 30 days past due, and not defaulted, at 120 days. The margin is measured on the part of the pool that still pays, and losses are tested by a separate default ratio.
Source: Upstart Loan Trust and Goldman Sachs Bank USA, Amended and Restated Revolving Credit and Security Agreement, 22 May 2020 (EX-10.11 to Upstart's S-1, filed 5 November 2020): definitions of Level I and Level II Net Interest Margin Trigger; Accelerated Amortization Event, clause (iii); section 6.01, clause (u)(iii). Each floor is the pool-weighted sum by term. Read on 15 October 2026.
| Loans in the pool | First floor: line stops revolving | Second floor: event of default |
|---|---|---|
| Three-year loans | 3.75% | 0.00% |
| Five-year loans | 7.00% | 3.00% |
| Seven-year loans | 9.00% | 5.00% |
| Example pool, 60% three-year and 40% five-year | 5.05% | 1.20% |
A longer loan must earn more each month because its losses arrive later. Below the first floor on a three-month average the line stops revolving; below the second the lenders may call it.
the window a credit line averages excess spread over before it acts
On Deck 2018 and Upstart 2020 both test a three-month average.
Gross excess spread ignores losses, and the fund will subtract them
The covenant number is gross: it leaves losses to the default ratio. The analyst sizing the line computes net excess spread as well, gross minus annualised net losses, because that is the cushion that absorbs losses before they reach the advances. Net losses are charge-offs minus recoveries, read cohort by cohort from the loan tape, the way a static pool is built.
On Mexican non-bank books, the segment decides the room under a floor
HR Ratings reads the audited statements of 84 rated Mexican non-bank lenders. At June 2026 they earned 22.4% on productive assets and paid 12.4% on debt that bears interest, a spread of 10.0 points. That is a balance-sheet spread, not excess spread: funding is spread over every asset, credit cost is not deducted, and the income is accrued.
Put through a line's arithmetic, the segments come apart. We charged the funding rate on an 80% advance and deducted provisions over the average portfolio as the credit cost. Servicing fees are not in HR Ratings' tables and are not deducted, so the true margin is lower still.
HR Ratings, NBFIs Sector Analysis 2026 (25 August 2026), audited quarterly data of 84 rated non-bank financial institutions, 2Q26: active rate (interest income over productive assets, 12 months), passive rate (interest expense over interest-bearing liabilities, 12 months), provisions for credit risk (12 months) and loan portfolio at 2Q25 and 2Q26. Pool margin = active rate minus 0.8 times passive rate; credit cost = provisions over the average portfolio. HR notes that the SME active rate is diluted by cash and securities. Modelled, our computation, offered as such.
| Segment, rated lenders | Active rate | Passive rate | Pool margin at 80% advance | Credit cost | Margin after credit cost |
|---|---|---|---|---|---|
| Agricultural finance, 25 | 12.1% | 9.4% | 4.6% | 2.6% | 2.0% |
| Microfinance, 22 | 34.4% | 9.6% | 26.7% | 11.2% | 15.5% |
| Payroll lending, 10 | 22.6% | 12.2% | 12.8% | 4.0% | 8.9% |
| SME lending, 27 | 17.4% | 16.7% | 4.0% | 2.0% | 2.1% |
| All 84 rated lenders | 22.4% | 12.4% | 12.5% | 4.6% | 7.9% |
Segment, not size, decides how much a lender can give up to a floor. A book that keeps 2 points after losses has almost nothing to spare, and its first lever in a negotiation is the advance rate, not the price.
A sector average is not a pool. It tells a lender where it starts the conversation: a microfinance book can promise a high floor and must defend it against losses, while an agricultural or SME book has to show the month-by-month margin of the exact loans it will pledge before it accepts any floor at all.
Sector rates and portfolios are HR Ratings' published figures; the pool margins, the credit cost and the worked example are our computation from them and from the two filed definitions.
Questions this raises
- What is excess spread on a loan pool?
- Excess spread is the cash a pool of loans collects in interest and fees beyond what it pays out ahead of the lender: servicing and agent fees and interest on the credit line's advances. Expressed as an annual rate on the pool's performing principal, it is the cushion that absorbs losses before they reach the advances.
- How is excess spread calculated in a warehouse line?
- Take the interest and fees received in the month, subtract the senior fees and the interest due on the advances, divide by the average daily principal of eligible loans that are not delinquent or defaulted, and multiply by 12. Upstart's 2020 line with Goldman Sachs and On Deck's 2018 facility both test the three-month average.
- What is the difference between gross and net excess spread?
- Gross excess spread is the margin before losses, the figure most credit line covenants test, with defaults measured by a separate ratio. Net excess spread subtracts annualised net losses, charge-offs minus recoveries, and is the figure a fund computes to see how much cushion is left before losses reach the advances.
- What minimum excess spread does a credit line require?
- The minimum depends on the loans. Upstart's 2020 line with Goldman Sachs required a three-month average of 3.75% for three-year loans, 7.00% for five-year and 9.00% for seven-year, weighted by the pool's mix; below that the line stopped revolving. Below a second floor of 0%, 3% and 5% it was an event of default.
- How does the advance rate affect excess spread?
- Interest is paid on the advances but excess spread is divided by the whole pool, so the funding cost a pool carries is the advance rate times the line's interest rate. At an 80% advance an 11% line costs the pool 8.8 points a year; each extra ten points of advance takes another tenth of the rate out of the margin.
Where every figure on this page comes from3 sources
- 01Upstart Loan Trust and Goldman Sachs Bank USA, Amended and Restated Revolving Credit and Security Agreement, 22 May 2020, Exhibit 10.11 to Upstart Holdings' Form S-1 filed with the SEC on 5 November 2020: definitions of Net Interest Margin, Interest Proceeds, Aggregate Principal Balance, Guaranteed Distribution, Defaulted Collateral Loan, Delinquent Collateral Loan, Level I and Level II Net Interest Margin Trigger and Accelerated Amortization Event; sections 6.01 and 9.01.
- 02On Deck Capital, Form 8-K filed with the SEC for 8 August 2018: ODAF II asset-backed revolving facility, advance rate 87.5%, portfolio performance covenants and the definition of gross excess spread.
- 03HR Ratings, NBFIs Sector Analysis 2026, 25 August 2026: sample of 84 rated non-bank financial institutions, sector tables at 2Q26 and glossary of the active rate, passive rate and rate spread.