Banks are easing the wallets for consumer borrowers.
Credit cards, auto loans, and other personal loans are becoming easier to come by, more than a year after a pandemic that scared lenders and caused them to significantly tighten lending standards.
According to a survey of loan officers conducted by the Federal Reserve, the net percentage of banks that relaxed credit card underwriting standards peaked around the first quarter. The net share of banks easing underwriting on other consumer credit, such as consumer loans, also hit a record high. For car loans, this percentage was the highest in more than eight years.
According to the Fed, for example, around 29% of banks relaxed their credit card underwriting standards in the first quarter and tightened only 2%. About 19% of banks eased auto-underwriting while less than 2% tightened standards.
The easing reflects a pandemic turnaround in consumer lending. A year ago, lenders expected people to stop paying their loans en masse and made it harder for them to get loans.
But then the government stepped in with expanded unemployment benefits and economic controls, and the expected deluge of defaults did not materialize. Now banks have another problem: the demand for credit is falling. Many people even pay off their credit card balance. And while this signals that Americans are doing fine even in the pandemic, it’s problematic for lenders looking to increase revenue.
Some banks are reducing the minimum credit requirements and offering more generous credit terms to attract new customers. Borrowers who may have been denied credit at this time last year may now be more likely to be approved. Many lenders offer new customers the option of transferring their credit card balance from another lender at 0% interest.
“This is just the beginning of the return,” said Warren Kornfeld, an analyst at Moody’s Investors Service. “The fact that consumers are now stronger than the pre-Covid average, as well as the expectation that the economy will improve, are helping lenders begin to loosen up.”
Mortgages are an exception. Some banks told the Fed that they had eased standards for government-sponsored mortgage lending this year. But for many people, mortgages are still hard to come by. In a hot housing market where multiple bidders compete for a limited number of houses for sale, many banks only lend to people with immaculate credit and sizeable down payments.
Underwriting, in which a lender assesses the risk of extending a loan to a particular customer, fluctuates with the economy. When the economy is booming, lenders may be more willing to lend to customers with less-than-outstanding creditworthiness or higher levels of indebtedness.
Lending Club Corp.
, an online personal loan-focused lender, hiked interest rates and restricted lending to existing customers last spring, Chief Executive Scott Sanborn said in an interview. Issuing volume decreased from $ 2.5 billion in the first quarter to $ 326 million in the second quarter of 2020.
LendingClub has since rolled back most of its stricter requirements and started marketing to new customers again towards the end of 2020. Originations rose to $ 1.48 billion in the first quarter of this year, a 63% increase over the fourth quarter.
But the San Francisco-based company hasn’t just returned to its pre-Covid-19 playbook. One change is reflected in the company’s updated risk models: More and more LendingClub customers are using their personal loans for major purchases, said Sanborn.
“It’s a different economy today than it was then,” he said, “and the consumer is in a different place.”
Kabrina Boyd needed a car this summer moving from Norfolk, Virginia to Phoenix for her job. Earlier this month, their credit union approved a loan of about $ 25,000 for a 2020 Hyundai Sonata.
“I thought I had to get one in 2017 or 2018 and I could get something new,” said Ms. Boyd. “I was definitely shocked.”
Ms. Boyd, 25, said she signed up for her first credit card last fall, so she only had a brief credit history when she applied for the car loan.
Still, lending standards generally remain stricter than they were before the pandemic. Most lenders said they didn’t change their underwriting practices in the first quarter.
Brent Beardall, CEO of WaFd Bank in Seattle, said his bank hadn’t changed its consumer lending requirements in 2020.
“We have been conservative underwriters from the start. So when the world looks like we’re going to fall off a cliff, we don’t tighten and then loosen up, ”said Beardall. “We’re fucking constant.”
Write to Orla McCaffrey at [email protected]
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