Banks are loosening the purse strings for consumer borrowers.
Credit cards, auto loans, and other personal loans are all becoming easier to obtain, more than a year after a pandemic that scared lenders and drastically tightened lending standards.
The net share of banks that relaxed credit card underwriting standards peaked in about the first quarter, according to a Federal Reserve survey of loan officers. The net share of banks easing underwriting on other consumer credit such as installment loans also hit a record. For auto loans, this share was the highest in over eight years.
For example, about 29% of banks relaxed their underwriting standards for credit cards in the first quarter, and only 2% tightened them, according to the Fed. About 19% of banks relaxed auto underwriting, while less than 2% tightened standards.
The easing reflects a pandemic about-face in consumer loans. A year ago, lenders expected people to stop paying off their loans en masse, and they made loans harder to get.
But then the government stepped in by expanding unemployment benefits and stimulus checks, and the expected flood of defaults never happened. Now the banks have a different problem: the demand for loans is declining. Many people even pay off their credit card balances. And while this indicates that Americans are doing well even during the pandemic, it is problematic for lenders looking to increase their income.
Some banks are lowering minimum credit score requirements and offering more generous loan terms to try and attract new customers. Borrowers who may have been turned down for loans around this time last year may be more likely to be approved now. Many lenders offer new customers the option of transferring their credit card balance from another lender at 0% interest.
“This is only the beginning of the turn back,” said Warren Kornfeld, analyst at Moody’s Investors Service. “The fact that consumers today are stronger than they were on average before Covid, as well as the expectation that the economy will improve, is very supportive of lenders who are starting to slack off . “
One exception is mortgages. Some banks have told the Fed they have relaxed the standards for government guaranteed mortgages this year. But for many people, mortgages are still difficult to obtain. In a booming housing market, with multiple bidders competing for a limited number of homes for sale, many banks only lend to people with good credit and large down payments.
Underwriting, where a lender assesses the risk of issuing a loan to a certain client, fluctuates with the economy. When the economy is booming, lenders may be more willing to extend loans to customers with less than stellar credit or higher debt levels.
Loan Club Corp.
, an online lender focused on personal loans, raised interest rates and restricted lending to existing customers last spring, chief executive Scott Sanborn said in an interview. Production fell to $ 326 million in the second quarter of 2020, from $ 2.5 billion in the first.
LendingClub has since slashed most of its more stringent requirements and resumed marketing its products to new customers towards the end of 2020. In the first quarter of this year, creations reached $ 1.48 billion, an increase of 63% from the fourth quarter.
But the San Francisco-based company didn’t just go back to its pre-Covid-19 playbook. A change reflected in the company’s updated risk models: More and more LendingClub customers are using their personal loans for large purchases, Mr. Sanborn said.
“It’s a different economy now than it was then,” he said, “and the consumer is in a different place.”
Kabrina Boyd needed a car to move from Norfolk, Va. To Phoenix this summer for work. Earlier this month, his credit union approved a loan of around $ 25,000 for a 2020 Hyundai Sonata.
“I thought I was going to have to get one from 2017 or 2018, and I was able to get something new,” Ms. Boyd said. “I was really shocked.”
Ms Boyd, 25, said she took out her first credit card last fall, so she had little credit history when she applied for the car loan.
Yet lending standards generally remain stricter than they were before the pandemic. Most lenders said they did not change their underwriting practices during the first quarter.
Brent Beardall, chief executive of WaFd Bank in Seattle, said his bank did not change its consumer lending requirements in 2020.
“We’re conservative underwriters to begin with, so when the world seems to be falling off a cliff, we don’t tighten up and then relax,” Beardall said. “We’re pretty darn consistent. “
Write to Orla McCaffrey at [email protected]
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