Assessing potential consumer credit implications of recent U.S. tax changes
One Big Beautiful Bill Backdrop
As active participants in the US and European consumer credit markets, Castlelake regularly analyzes consumer balance‑sheet trends and shifts in credit availability using data from owned origination platforms and partner originators. These data sets provide Castlelake with visibility into borrower behavior across multiple economic cycles and income cohorts.
Throughout 2025 and into early 2026, limited partners and other market participants have shown increased interest in the resilience of the US consumer and the direction of consumer credit performance. Headlines have often emphasized risk: inflationary pressures, softening in the labor market, mixed indicators on delinquency trends and debt‑service capacity.
At the same time, policy developments have materially altered the consumer income backdrop. On July 4, 2025, the One Big Beautiful Bill Act (OBBB) was signed into law, introducing the most significant changes to individual taxation since 2017. Key provisions included the extension of lower individual tax rates and the standard deduction, with the stated intention of creating large income uplift for middle-income households[1] – the borrower cohort to whom Castlelake has the most exposure and an income segment heavily financed outside of the banking markets[2].
Castlelake’s Early Observations
At the start of 2025, Castlelake anticipated that ongoing stability in consumer credit performance would lead to a loosening of credit standards by lenders; however, uncertainty around the effects of ‘Liberation Day’ in April 2025[3] injected fear into markets. Then, the OBBB’s passage in July of 2025 compelled the firm to reevaluate initial expectations.
Castlelake developed a new thesis that the OBBB would increase household liquidity at a time when macroeconomic uncertainty stemming from tariffs would encourage lenders to reduce risk exposure[4]. Castlelake observed that lenders generally did, in fact, reduce exposure by lowering approval rates, raising minimum credit score thresholds, and increasing pricing for risk-tier borrowers[5].
Castlelake sought to evaluate whether the combination of more stringent lending standards and significant liquidity entering the system from OBBB could result in a meaningful performance uplift, particularly for middle-income borrowers. Similar patterns were noted in Castlelake’s portfolio during COVID-19, when stimulus funds were used to reduce individual debt levels, improving both delinquency and charge-off rates[6].
Potential Portfolio Impact Assessment
To assess the potential impact of the OBBB on consumer investments, Castlelake segmented its consumer investment portfolio into income-based cohorts and modeled expected average aggregate tax savings in 2026 for each group[7]. The analysis indicated that a substantial portion of Castlelake’s consumer credit portfolio would potentially capture a material dollar impact from the OBBB[8].
Castlelake then used proprietary data to understand how this impact would apply to the underlying loans within each of its programs. Castlelake calculated that the incremental tax benefit would equate to an average of ~5 months of debt service for Castlelake borrowers in these investments[9].
Castlelake’s analysis shows that incremental disposable income can translate into improved payment capacity, reinforcing current performance and supporting early-stage delinquency cures[10],[11]. Individual tax filings and subsequent refunds must be monitored for their impact on delinquency roll rates, though the real impact is expected to develop in mid and late Q2 2026. Castlelake concludes that consumer investments made in 2025 may capture payment lift and delinquency and charge-off outperformance in 2026 because of the significant incremental liquidity entering the system.
This analysis shows that access to detailed data is important for gaining a clearer understanding of underlying trends, beyond what is reflected in headlines. Additionally, considering the impact of capital flows on consumer portfolios is important for evaluating the broader macroeconomic environment and its influence on credit performance.
Ongoing Considerations
There are still outstanding questions as to how consumers will ultimately respond to the tax savings. During COVID-19, households predominantly used stimulus to de-lever due to ongoing employment uncertainty[12]. As of February, the employment picture and consumer sentiment appeared relatively flat[13],[14], which could potentially tilt behavior towards spending rather than balance‑sheet repair. Castlelake believes that monitoring credit card portfolios for additional draw rates and underlying purchases is warranted. Lower purchase rates may be indicative of consumers’ lower reliance on credit after receiving incremental tax refunds.
It is also important to continue monitoring lender behavior. If originators loosen underwriting standards, loan quality could compress. Castlelake generally expects caution to prevail, however, given lessons learned from 2021–2022.
[1] “FAQ: The One Big Beautiful Bill, Explained” Tax Foundation, July 23, 2025
[2] “Report on the Economic Well-Being of Households in 2024,” Federal Reserve, May 2025
[3] On April 2, 2025, President Trump announced a package of global tariffs after invoking the International Emergency Economic Powers Act (IEEPA) and declaring a national economic emergency tied to US trade deficits. The “Liberation Day” tariffs applied import tariffs to nearly all US trading parties. On February 20, 2026, the U.S. Supreme Court struck down the tariffs, ruling that IEEPA does not authorize the president to impose duties or tariff-like taxes.
[4] Castlelake’s view was that banks may tighten underwriting standards in anticipation of increasing household expenses and a subsequent increase in delinquencies and charge-offs
[5] Based on Castlelake’s observation of both existing and prospective consumer lending partners during 2025. For example, Castlelake observed that from January 2024 to December 2025, Upstart re-priced borrowers with higher coupons such that the same credit quality individual was paying a higher interest rate. This trend was also noted in markets more generally and outlined in “Credit Card Companies Tighten Lending Standards As Defaults Increase,” Finance Handler, August 19, 2025
[6] Based on Castlelake’s observation of consumer loan investment performance during and following the Covid-19 pandemic. This trend was also observed in the markets more broadly and outlined in the report “Consumer Response to Economic Impact Payments during the COVID-19 Pandemic and the Role of Subjective Assessments of Well-Being: A View from the U.S. Using a Rapid Response Survey,” authored by Jake Schild and Thesia Garner of the U.S. Bureau of Labor Statistics and published on May 4, 2021
[7] Sources for estimated tax savings include “How H.R.1, the Big Beautiful Bill Act, Would Affect the Distribution of Resources Available to Households,” Congressional Budget Office and “One, Big, Beautiful Bill provisions – Individuals and workers,” IRS. Castlelake estimates of total savings include baseline provisions, payroll tax interactions effects, withholding reconciliation (one-time), and other / interactions effects
[8] Borrower data and information does not necessarily correlate to investment performance, which can depend on a number of factors
[9] Calculation based on the weighted original loan amount and associated weighted average monthly payment, by income quintile
[10] A payment cure is when a delinquent borrower makes past-due payments to achieve current pay status
[11] Castlelake’s analysis also included stratification of delinquency status by income quintile. Delinquency status is relatively consistent across income cohorts, with marginally higher delinquency in the higher quintile cohorts
[12] “Consumer Response to Economic Impact Payments during the COVID-19 Pandemic and the Role of Subjective Assessments of Well-Being: A View from the U.S. Using a Rapid Response Survey,” authored by Jake Schild and Thesia Garner of the U.S. Bureau of Labor Statistics and published on May 4, 2021
[13] Recent economic data showed that US employment declined by 92,000 jobs in February and 2025 figures, including a higher-than-expected January 2026 report, were revised downward, indicating a relatively flat 2025 and beginning to 2026, “The Employment Situation – February 2026,” US Bureau of Labor Statistics, March 6, 2026
[14] University of Michigan Consumer Confidence Index shows stabilization as of February 2026
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