As economists warn of a possible impending recession, banks
are raising their rates and tightening their lending standards. How
should lenders navigate this new climate and reduce their risk and
exposure? And are there areas of opportunity?
“We've seen that some delinquency is starting to spike in
sectors like credit card, personal loan, and auto,” said Jesse
Hardin, a risk advisor at Equifax during the Market
Pulse podcast. “This poses a real concern then for lenders as
they start to see that their portfolios are impacted based on those
delinquencies. So, some of those lenders are starting to tighten
access to credit.”
But Hardin says there is opportunity for lenders during
times of economic downturn.
“We've helped customers in all credit sectors accomplish
their goals in the face of headwinds,” he said. “The key to success
in a tightening economy is to understand and really look for
customers who can manage additional credit.”
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What are the areas of opportunity for lenders?
Looking at customers’ credit durability is something that
can really accomplish that objective. For example, Equifax has a
product called Financial
Durability Index, which looks at non-FCRI data. So, looking at
non-FCRI data and the customer’s capacity to handle additional debt is
important because there's good credit risks and bad credit risks in
every credit score band. More specifically, a 720 credit score may
have some customers in that score band who are heavily leveraged, and
they may perform very differently than other 720 scores. And
conversely, there could be some in 660 credit scores who have less leverage.
In summary, the secret in a tightening environment is to
have a clear understanding of:
The organization’s risk tolerance
The organization’s goals for growth
The risk profile for both new and existing prospects
How those prospects are going handle additional
access to credit
What else do you think may cause lenders to evaluate or
re-evaluate their credit policy and strategy right now?
I think of it in terms of a book with three chapters.
Chapter one is really driven by policy. You know, the Fed has had
to act because inflation is causing pain for the consumer. The
Fed's job right now is tricky because it has to figure out how to
bring down inflation while they don't break everything else. So,
there is uncertainty about how much the Fed has to react to that
high inflation. If we start to see cooling in the labor market and
we start to see consumer spending fall off, we may see that
there's going to be a halt to those rate increases this year,
which we expect. And that's going to bring down borrowing costs.
Chapter two is driven by the consumer. Does consumer
spending on things like automobiles and houses continue, while
meeting their debt obligations? Intuitively, consumers are more
likely to meet their obligations if they're employed. So that
employment number is going to be critical moving forward. As the
consumer faces job losses, we watch their ability to meet those
demands. And that's going to be a key area of focus.
The last chapter of that book is what I would characterize
as the unknown. Those are things like the banking crisis that we
just saw, the upcoming debt ceiling battle or even the expiration
of the student loan moratorium, geopolitical tensions, and energy
prices. It's all those unknowns that are coming through.
The reality is that a lot of those events could happen. So,
lenders should monitor all three of those chapters, and then really
keep up to speed on which of those chapters are growing. And that's
where we're going continue to see that challenge.
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For more on this interview, listen to the full
episode How Credit Unions Can Succeed in an Uncertain Economy. The
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This episode was a continuation of our conversation of the
February Market Pulse webinar. You can access
it on-demand and sign up for our next webinar.