By Ray Birch
ATLANTA–Knowing who has a loan with the credit union now—and not just when the loan was made—has never been more important as the coronavirus crisis continues to take its toll, one expert is advising. It’s especially true with so many loans being made remotely.
Getting that more accurate view includes a stronger emphasis on real-time employment data, says Jenn Reid, vice president of strategy and marketing leader, automotive at Equifax. One big reason: Reid warned rising delinquencies are likely ahead.
“Credit unions and all lenders need to understand very clearly now who they are lending to, but that has become much more difficult with less face-to-face interaction with many more loans having to be opened online due to the pandemic,” said Reid.
At the root of the challenge is the speed with which consumers’ financial health is changing due to the health crisis’ effects on the economy, with workers losing employment, changing jobs and having hours reduced.
Reid told CUToday.info lenders should focus on the most recent financial snapshot the borrower can provide.
“You need more reliance on real-time assets to verify a person’s identity quickly,” Reid explained, adding must ensure it is guarding against synthetic ID and standard identity theft fraud.
But more important, she said, lenders need to know if the borrower’s employment is stable.
“You need something beyond the credit score and the credit profile,” she said. “It's really around their financial picture. You need a solution that allows you to access the income and employment database 24 hours a day, seven days a week. There, you can actually get the most accurate picture of a consumer as of the last paystub. In the pre-pandemic, old world of auto lending, lenders would take a pay stub up to 60 days. Well, in this environment 60 days is too old.”
The Focus Changes
Reid acknowledged that lenders during March and April were largely focused on how they could help consumers, setting up forbearance programs, waiving fees, and just finding ways to work with consumers who were struggling to make monthly payments.
“Now, we're starting to see that going into May and June lenders are asking questions around portfolio delinquency, particularly with all these accommodations and how those are going to work out,” Reid said, noting credit unions have been ahead of banks in offering forbearances. “There is much more discussion now about getting an accurate picture of the consumer.”
When it comes to direct loans, credit unions have an advantage, according Reid, saying they are closer to their borrowers than banks and typically know to whom they are lending, which makes it easier to offer a forbearance. However, as CUToday.info has extensively reported, credit unions in the last few years have become much larger players in the indirect space, making it difficult to know those borrowers who often take no additional products from the CU.
Jenn Reid
“If a credit union is handing out a forbearance, it’s more likely to go to someone they know,” noted Reid.
Tighter Standards
Not surprisingly, Reid cited Equifax data showing the pandemic has driven lenders to tighten their lending standards.
“Lenders are getting more conservative with good reason—delinquencies are likely coming once the forbearance period ends and people are still without their jobs,” she said. “We’ve seen banks and credit unions becoming more conservative in terms of the paper they are buying. We are seeing a lot of prime and super-prime being added, so that's changing the concentration of what lenders are originating. You can definitely see the conservativeness.”
Reid said lenders are not reacting to the lending slowdown by reaching deeper into subprime.
“And I am not saying that subprime lending is slowing, I am just saying that we are seeing more prime and super-prime loans being added to the books, which is lowering the percentage of subprime in the portfolios,” Reid explained.
What to Do Now
With rising delinquencies on the horizon, Reid said it is important for lenders to segment their portfolio based on income status. She urged lenders to spend time now working with troubled borrowers whose income has been cut off or reduced, versus someone who is still employed and making the same dollars as before the pandemic.
“The key now is to find out who needs help and who doesn’t,” Reid said.