Spring and summer storms are a staple of Midwest living. Yet every time the storm alert sounds, the hairs on the back of my neck stand up. In my sophomore year, what began as beautiful spring day ended with a tornado decimating my college and the small Minnesota prairie town. Classmates still share memories of picking textbooks out of toppled trees and FEMA trailers turned dorms and classrooms.
When a Wall Street Journal headline posited that lenders are “flying blind into a credit storm,” it caught my attention. Much like a halcyon spring day, the first two months of 2020 saw healthy loan growth and continued low losses.
Today, tens of millions of consumers are in some kind of accommodation status on their loans. Payment behavior and delinquencies have been promising, but the CARES Act payments have an uncertain future. Some states and municipalities are reversing course on steps to get the economy moving, threatening further economic malaise and credit impacts.
At the same time, $2 trillion has moved onto balance sheets in the form of insured deposits seeking refuge from volatile markets — April alone saw more deposit growth than in all of 2019. And it’s not easy to deploy those deposits: we’ve seen marketing drop and underwriting standards tighten as lenders look into the metaphorical storm.
There’s never been a clearer time for better risk strategies and tools, yet modifying long-standing policies at this moment can be far from appealing. For lenders to weather the storm and come out in a strong, competitive position, you need proven tools that don’t require large-scale disruption.
Don’t reinvent or complicate: get back to the basics
In the same way that I have apps to track weather, lenders don’t need to fly blind into the storm. There are simple tools that help you understand and take the right actions. It’s not things that are shrouded in mystery or complicated; it’s sound lending that community lenders have always done.
Faced with decisions of whether to increase a credit line, to approve a new loan, or to extend a loan modification, what are the insights you’d find most valuable? And what would those things tell you — in aggregate — about your portfolio?
How is my portfolio changing?
Where is your portfolio today? Your answer is limited if you don’t know where it was a month ago. Lenders are ramping up the frequency of portfolio reviews to monitor stability and manage shifts.
To do that well, it’s critical to use scores that look at consumer behaviors over time, not just a single point-in-time view. The static nature of traditional credit reports, scores, or indices fail to take into account the challenge of today: a consumer today may look very different than they did a month ago, and next month may yet be a different story.
Is this borrower in distress?
Every week shows a different picture of how lenders are reporting consumers in some kind of accommodation. Some lenders put entire portfolios in a deferral status. Some consumers requested it. Up to two-thirds of borrowers in an accommodation status continue to make payment. Some borrowers have just one account in accommodation, while others have many.
These are critical insights to know how to manage an existing relationship or underwrite new credit. It can seem complicated to parse inconsistent data to identify borrowers that didn’t request accommodation or those that did yet continue to make payments. With a handful of attributes, lenders can easily understand and act on these insights.
Is this borrower solving an income problem with credit?
You’re going to receive applications from consumers who need more credit to make ends meet. And you’ll receive applications from consumers who are drawn to your product and want to use credit in safer ways.
Trended credit data and scores can deliver a view of a consumer’s reliance on credit over time. Especially as tens of millions of people faced changed income scenarios, it’s critical to identify those who appear to be building balances and relying more heavily on credit to make ends meet.
What’s this borrower’s capacity?
Capacity is all but invisible in traditional credit risk models and credit reports. Taking balance changes and payment amounts into account over time, lenders can quickly understand how much — if anything — a consumer pays above the minimum required payments. This gives strong indications of stability, liquidity and ability to service existing or new obligations.
Simple questions, simple answers to weather the storm
Getting these insights doesn’t require an overhaul of lending policy or reprogramming multiple lending platforms to work with new scores. In the past months, many community lenders made incremental changes to loan underwriting and review procedures to incorporate these insights.
Storms aren’t cute images of houses landing on wicked witches or cows propelled through the sky; they can be powerful, dangerous, and frightening. Just as a small Minnesota town identified quick, pragmatic actions that allowed it to emerge a stronger community, so too can community banks and credit unions employ tools and strategies now to help themselves and their communities fully see and navigate through challenges ahead.