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Data & Analytics, Risk Management & Regulatory Compliance

4 minute read

A New Strain of Credit Storm: Consumer Lending at Risk

Mar 27, 2020

Written by: Spinnaker Team

Normally, we don’t get confirmation from the National Bureau of Economic Research on whether we’ve hit a recession until long after its start. Whether that confirmation comes sooner during the COVID-19 crisis is beside the point – many experts agree that as of March 2020 we’ve entered a recession.

In a little under a week, lenders have aggressively cut marketing; tightened credit; reduced existing borrowing capacity; expanded forbearance, extensions, and deferrals; and waived late and overdraft fees. And while there will surely be calls for lenders to expand credit availability when people need it most, we are not afraid to say that lenders are doing the right thing. Now is a time for the government to step up to help those in need.

In a typical recession, lenders dust off their downturn playbooks and execute on the plan: hiring more call center staff, calling borrowers earlier following a missed payment and expanding assistance tools to help them.

While the actions already taken by lenders are appropriate, we’ve identified three key departures from past recessions that make this one a fundamentally different, and perhaps, more virulent strain that creates risk for consumer lending as a whole.

Differentiator #1: Unprecedented lender actions

We’ll start with the obvious change that occurred in literally one week. Nearly all Americans have been sent home in an effort to flatten the curve and minimize exposure. And while many business activities can be coordinated remotely, this will put a significant strain on teams, limiting their ability to coordinate activities and ultimately decreasing productivity.   

On a positive note for borrowers, lenders have taken several steps to decrease the impact felt by those already facing financial difficulty. The entire lending industry is temporarily ceasing foreclosures and repossessions as well as halting auctions of repossessed automobiles they’ve already recovered.  Additionally, they’re considering halting outbound calls to delinquent borrowers, an action that would sound nonsensical in a traditional downturn strategy.

The financial services industry also is investigating the possibility of pausing derogatory reporting to credit bureaus, which would make it nearly impossible for other lenders to accurately assess the risk of an applicant seeking new credit. It isn’t clear how this will impact future lending decisions, but it will make future lending riskier.

Differentiator #2: The virus is directly attacking constituents of the repayment system

Coronavirus could literally sicken all constituents of the repayment system: borrowers, contact center staff, and collectors alike. Looking at the banking workforce, employees will need paid-time-off to either care for themselves or a loved one.  With nearly 60,000 confirmed cases in the US (a figure that is growing in the thousands daily), this need is already presenting itself.  Traditionally, lenders will turn to third-party collections agencies for short-term workforce expansion. Unfortunately, those agencies will face inevitable workforce shortages, especially with the added challenge of managing their teams remotely; something third-party risk management teams are now making exceptions to permit because of the circumstances.

Lastly, and quite possibly the single most important element of our repayment system, is the direct impact to borrowers. Similar to the effects we’re already seeing on the workforce, borrowers are beginning to come down with the virus.  This impacts their ability to work (and earn a paycheck) and could impact their physical capacity to manage their finances. Sadly, some borrowers will succumb to the virus, and since most debt is unsecured, it won’t be recovered.

Differentiator #3: We’re operating in an increasingly digital economy

The sheer blunt force of this virus, coupled with several fundamental shifts in the global economy that were in play long before anyone was paying attention to coronavirus, are shaping our go forward plan.  First, let’s address the gig economy.  As one of the greatest economic revolutions over the past decade, it has provided critical secondary income for Americans in the face of workforce labor shifts.  While some of these will continue – Etsy makers as an example – gig income from Uber, Lyft and Airbnb is grinding to a halt as Americans hunker down.

And while companies such as Zoom, Comcast, Netflix, Hulu, and Apple will thrive in this distanced environment, many of these organizations have limited need for additional employees in order to scale services.  Couple that with retail and service industries closing their doors, and we will quickly have millions of Americans unemployed with no avenues of income.

Unlike a traditional recession, which creeps up slowly, this recession will come at lenders like a ton of bricks over the next several weeks.  According to Treasury Secretary Steve Mnuchin, it wouldn’t be unreasonable to see unemployment rates hit 20% and a recent survey of economists by the Wall Street Journal put estimates of at least 5 million jobs lost over the course of the year. While governments and healthcare professions can attempt to curb the virus from spreading, the curve for missed payments will inevitably spike in the next several months.  Lenders will not be able to scale for it in time, nor would it be advisable, even if they could.

So Where Do We Go from Here?

Government intervention is critical. With a massive swell of unemployed on its way, leveraging the existing unemployment benefits system and providing states with the flexibility to support their residents is an important first step. Additionally, banks will need liquidity and possibly additional capital. Don’t be surprised if the financial system proposes an outright, albeit temporary, “pause” on loan repayment requirements. We’re referring to the concept of delaying due dates with no additional interest on entire loan portfolios; a costly proposition. Officials at all regulatory agencies are surely hard at work using advanced analytics to determine what options are the best for the economy, the borrower and the industry. Bottom line, an unprecedented bailout is on its way.

But, let’s not forget what this crisis is all about. Many of us won’t see our loved ones in person until the crisis abates. Our family members, friends and fellow citizens may fall ill to the virus, and some will succumb. For those of us with boomer parents who separated and remain unmarried, they are alone, self-quarantined and trying to stay sane while riding out this long storm. It’s only appropriate, given these circumstances, that the last thing on any of our minds is whether or not we’re making our credit card payment.