Widespread Deferrals Make Lending More Difficult
June 29, 2020
Lenders are approving fewer loans for credit cards, cars, and other forms of consumer debt. This is largely because, in the aftermath of the coronavirus, they cannot determine who is creditworthy.
The lending blindspot is caused by a provision in the government’s relief bill that says that lenders cannot report deferred payments as late payments to the credit-rating agencies. With more than 100 million American accounts differing payment, according to TransUnion, the problem is widespread.
Lenders are now left guessing as to how many of their outstanding loans will resume regular payments and how many will default. It also means that they cannot accurately gauge potential applicants’ financial health.
This has led to far fewer loan originations in recent weeks. For example, credit card originations for the week of May 10 were at just 483,000. In 2019, weekly card originations averaged 1.2 million.
This could mean not only that lenders’ profits will be hurt, but if Americans cannot get car loans or consumer credit, consumer spending could suffer, causing the economic recovery to slow.