Demand remains for some consumer loan types, but borrowers may face tighter standards as lenders take a careful approach to issuing new credit amid the coronavirus pandemic.
In some cases, government relief is obscuring the credit quality picture. The CARES Act, the legislation aimed at addressing the economic effects of the coronavirus crisis, includes relief checks for Americans below a certain income threshold and requires lenders to grant forbearance to borrowers with government-insured mortgages who are experiencing virus-related hardship. The legislation also includes the Paycheck Protection Program, which is providing billions of dollars of loans to small businesses to maintain their payrolls during COVID-19 lockdowns.
"In general, banks want to grow, but they want to do it carefully," Janney Montgomery Scott analyst Christopher Marinac said in an interview. "Because of the recession and the pandemic and uncertainty about how reopening occurs, the credit being provided is going to be to existing customers to help them grow or survive."
Senior loan officers responding to the Federal Reserve's April survey reported that they have tightened standards on commercial and industrial, commercial real estate and consumer loans, including credit cards and auto loans, during the first quarter of 2020.
The nation's largest bank is proceeding carefully. JPMorgan Chase & Co. is "bringing on new customers in this environment, but at a much slower level," as the bank focuses primarily on meeting the needs of existing customers, Gordon Smith, CEO of the consumer and community banking business, said during a June 9 presentation.
While Smith pointed to encouraging trends in payments from credit card customers who have requested forbearance, he noted that severe downside scenarios are still possible, including a second coronavirus outbreak followed by an additional wave of shutdowns.
"I would want to be reserved for all the eventualities," he said. "And so you're much more likely to see us be more on the conservative side as we move into the second quarter."
Similarly, Wells Fargo & Co. has pulled back from higher-risk loans, including home equity lines of credit. The bank wants to "make sure that we're prepared for what might happen" in terms of factors like unemployment and home prices, CFO John Shrewsberry said during a June 10 presentation.
Waiting, watching, tightening
The cautious approach to underwriting extends to nonbanks as well. At LendingClub Corp., second-quarter originations are down around 90% compared to activity in the fourth quarter of 2019.
"We see this as an adjustment period. We think tightening underwriting standards is the prudent thing to do given the magnitude and the speed at which job losses are coming," CEO Scott Sanborn said during a June 9 presentation. "Until we see a stabilization in that unemployment rate and investors are able to kind of get a handle on some of their own issues that get created in an environment like this, we'll be watching and monitoring and looking for an opportunity to kind of begin to scale again."
Anu Shultes, CEO of LendUp Global Inc., a fintech that offers small-dollar consumer loans, said many of her company's customers had recovered after an initial wave of forbearance requests, with stimulus checks helping them to make payments. But she noted that expanded unemployment insurance under the CARES Act is due to expire at the end of July, and another spike in requests for help could arrive in August and September.
Given the uncertainty, LendUp has tightened credit for new customers, and lowered loan amounts and loan terms for existing customers.
"A lot of our business is from repeat customers. They've been with us three, four, six, sometimes 12 to 18 months. So we know their behavior and there's a strong bond," Shultes said. "Customers you don't know, you just want to say, hey, now is not the time to let a flood of new customers into an existing lending platform."
For some lenders, strong demand — and caution
While wary consumers have cut spending and demand for credit card and auto loans has been weak, purchase mortgage applications have been surprisingly resilient, rebounding to levels higher than before the pandemic hit the U.S. Refinance applications continue to be in high demand as borrowers look to take advantage of low interest rates.
At Wells Fargo, Shrewsberry said that mortgage originations and profit margins are strong, even as the bank revives the modification apparatus it used after the 2008 housing crisis in preparation for borrowers who might not regain their footing after the pandemic. "You've got plenty of demand for mortgage," he said.
Some borrowers may be turning to credit unions to meet their credit needs. Credit Union National Association Chief Economist Mike Schenk said credit unions are seeing a widespread increase in loan originations, especially in mortgage lending and refinancing in the current low-rate environment. He called this momentum "surprising."
"What I'm hearing almost universally is that loan demand remains quite strong and many of the larger institutions are reporting that they're originating record numbers of loans," Schenk said in an interview. "I was a little bit taken aback — I figured that members would be hunkered down and anxious about the economic environment and about the prospects for continued employment."
Schenk has not heard much discussion about credit unions changing their approach to lending or tightening standards. The credit union industry entered the coronavirus crisis with capital levels near all-time highs, and federal relief legislation provided a significant shot in the arm for borrowers, he said.
"The unemployment numbers are going up substantially, but the PPP and the amount of fiscal and monetary stimulus that has been thrown at the crisis has been unprecedented," Schenk said. "If policymakers are right, it should make a really significant difference and help to head off the possibility of real long-term unemployment. Everybody is doing that calculus."
Credit unions want to lend as much as possible to help their members, but lending decisions are difficult in the current environment, said Ann Kossachev, director of regulatory affairs at the National Association of Federally-Insured Credit Unions, another industry trade group.
"Generally the credit union industry is well capitalized and safe and sound overall, but everyone is a little cash-strapped," Kossachev said in an interview. "Even if they're not right now, they could be six months down the line when perhaps some of the loans that are now in forbearance may be going into default. Hopefully not, but that's a possibility. So there are some losses that potentially need to be accounted for."