U.S. lenders are walking a tightrope to balance consumer loan demand and COVID-19 risk

Demand remains for certain types of consumer loans, but borrowers may face stricter standards as lenders take a cautious approach to issuing new loans amid the coronavirus pandemic.

In some cases, government relief obscures the image of credit quality. The CARES Act, legislation to combat the economic effects of the coronavirus crisis, includes relief checks for Americans below a certain income threshold and requires lenders to grant forbearance to borrowers with mortgages insured by the government who are experiencing difficulties related to the virus. The legislation also includes the Paycheck Protection Program, which provides billions of dollars in loans to small businesses to maintain payrolls during COVID-19 lockdowns.

“In general, banks want to grow, but they want to do it with caution,” Christopher Marinac, analyst at Janney Montgomery Scott, said in an interview. “Due to the recession and pandemic and the uncertainty as to how the reopening occurs, credit will be given to existing customers to help them grow or survive.”

Senior loan officers who responded to the Federal Reserve’s April survey said they had tightened standards on commercial and industrial, commercial real estate and consumer loans, including credit cards and credit cards. auto loans, during the first quarter of 2020.

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The country’s largest bank is proceeding cautiously. JPMorgan Chase & Co. “attracts new customers to this environment, but at a much slower level,” as the bank is primarily focused on meeting the needs of existing customers, said Gordon Smith, CEO of the consumer bank and community, during a presentation on June 9.

While Smith highlighted the encouraging trends in payments from credit card customers who requested forbearance, he noted that serious downside scenarios are still possible, including a second coronavirus outbreak followed by an additional wave of closures.

“I would like to be reserved for all eventualities,” he said. “And so you’re a lot more likely to see us being more conservative as we move into the second quarter.”

Likewise, Wells Fargo & Co. pulled out of higher risk loans, including home equity lines of credit. The bank wants to “make sure we are prepared for what might happen” in terms of factors such as unemployment and house prices, CFO John Shrewsberry said in a June 10 presentation.

Wait, watch, squeeze

The cautious approach to underwriting also extends to non-banking institutions. At LendingClub Corp., second quarter mounts are down approximately 90% from fourth quarter 2019 activity.

“We see this as a period of adjustment. We believe that tightening underwriting standards is the prudent thing to do given the scale and speed at which job losses are coming,” said CEO Scott Sanborn during a presentation on June 9. “Until we see a stabilization of this unemployment rate and investors are able to get a handle on some of their own problems that are created in an environment like this, we will be watching, monitoring and looking for an opportunity to start over. to evolve.”

Anu Shultes, CEO of LendUp Global Inc., a fintech that offers low-value consumer loans, said many of his company’s clients have recovered after a first wave of forbearance requests, the stimulus checks. helping them make payments. But she noted that expanded unemployment insurance under the CARES Act was due to expire at the end of July, and another spike in requests for help could come in August and September.

In light of the uncertainty, LendUp tightened credit for new customers and reduced loan amounts and terms for existing customers.

“A lot of our business comes from loyal customers. They’ve been with us for three, four, six, sometimes 12-18 months. So we know their behavior and there’s a strong connection,” Shultes said. “Customers you don’t know, you just mean, hey, now’s not the time to let a flood of new customers get into an existing lending platform.”

For some lenders, strong demand – and caution

As suspicious consumers cut spending and demand for credit cards and auto loans has been weak, demand for purchase mortgages has been surprisingly resilient, rebounding to higher levels than before the market. pandemic does not hit the United States. advantage of low interest rates.

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At Wells Fargo, Shrewsberry said mortgage structuring and profit margins are strong, even as the bank is relaunching the modification device it used after the 2008 housing crisis in view of borrowers who may not get back on their feet. after the pandemic. “You have a lot of mortgage applications,” he said.

Some borrowers may turn to credit unions to meet their credit needs. Credit Union National Association chief economist Mike Schenk said credit unions are seeing a widespread increase in loan origination, especially mortgages and refinancing in the current low rate environment. He called this momentum “surprising”.

“What I hear almost everywhere is that the demand for loans remains quite strong and that many large institutions are reporting that they are making a record number of loans,” Schenk said in an interview. “I was a little taken aback – I thought the members would be squatting and worried about the economic environment and the prospects for continued employment.”

Schenk hasn’t heard much about credit unions changing their approach to lending or tightening standards. The credit union industry entered the coronavirus crisis with capital levels near all-time highs, and federal relief legislation provided a big boost to borrowers, he said.

“Unemployment figures are rising dramatically, but the PPP and the amount of fiscal and monetary stimulus that have been launched against the crisis are unprecedented,” Schenk said. “If policymakers are right, it should make a really significant difference and help avoid the possibility of true long-term unemployment. Everyone’s doing that math.”

Credit unions want to lend as much as possible to help their members, but lending decisions are difficult in today’s environment, said Ann Kossachev, director of regulatory affairs at the National Association of Federally-Insured Credit Unions, another group. industry professional.

“Generally, the credit union industry is well capitalized and sound and safe overall, but everyone is a bit strapped for cash,” Kossachev said in an interview. “Even if they’re not right now, they might take six months down the road when maybe some of the loans that are now on hold might be in default. Hopefully not, but it’s a possibility. therefore has losses that could potentially have to be taken into account. “

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