It's just a little tougher for U.S. consumers to get credit as lenders retreat throughout the coronavirus crisis, The Wall Street Journal reported.
The primary reason is that banks can no longer easily determine who's creditworthy.
\”Banks are looking cautiously at their underwriting models to see if they should be adjusted to factor in latent risk,\” Robert Strand, senior economist at the American Bankers Association, told the WSJ.
As the unemployment rate reached nearly 15 percent a week ago and most 40 million Americans are collecting jobless benefits, it's likely that some are behind on their payments.
But the missed payments aren't reflected in their credit scores and are not uniformly recorded on borrowers' credit history, the newspaper reported.
A provision in the CARES Act states that if your lender provides a forbearance on a mortgage, auto loan or other payment, they cannot report them as late to credit reporting companies.
Data from TransUnion, one of the nation's biggest credit agencies, revealed that from March 1 through May, there were a lot more than 100 million accounts on a deferred debt payment program, the newspaper reported.
As an effect, the Federal Reserve Board said a week ago that the nation's biggest U.S. banks could be saddled with as much as $700 billion in loan losses.
\”Without accurate information, their only choice is to pull back on credit,\” Michael Abbott, head of banking for North America at consulting firm Accenture PLC, told the paper. \”Banks don't know who's going to pay and the ones won't be. It's like flying blind right into a credit storm.\”
By early April, 33 percent of banks told the Fed they'd increased their minimum credit rating requirements for charge cards within the previous three months, up from 14 percent in January.
Equifax Inc., another large credit bureau, said the number of loans has fallen. About 79,000 personal loans were issued for the week ending May 10, in contrast to 226,000 within the week ending March 22, a 65 percent dip as customers and lenders retracted.
As car sales fell, so did auto loans and leases, to 266,000 from 390,000, nearly one-third lower during the same period. Charge card originations totaled 483,000, down from 856,000.
Fair Isaac Corp., the FICO score provider, said the organization plans to launch an index which will appear next to loan applicants' scores to predict how likely the applicants will be to withstand financial difficulties during the downturn.
\”It gives [lenders] that extra filter of methods one is likely to handle an economic downturn,\” FICO CEO William Lansing told the paper. \”The rise in approvals could be more than the increase in rejections.\”
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