Consumer Credit Freeze?

Over the years we have posted periodically on movement in the Federal Reserve’s Senior Loan Officer Survey. You can browse those posts here. The Fed recently released their latest survey results. What we find most interesting in the latest data, and focus on in this post, is the demand and supply responses for consumer loans, a category that includes credit cards, auto loans, and consumer loans that are neither credit cards nor autos. In our own industry HealthScore data we’ve been seeing weaker scores for loan growth over the last few quarters. The Fed data expands the picture.

So what did the latest data say, with specific regard to consumer loans? Take a look at the chart below. It tracks the net percentage of survey respondents reporting stronger consumer loan demand.

Here’s a quick primer on net percent change charts in case you need one. If you have 100 reporting institutions, and 50 indicate stronger demand and 50 indicate weaker demand, the net percent change is zero (% reporting stronger demand less % not reporting stronger demand, or 50%-50%=0% net percentage reporting stronger demand). When a line in the chart is above zero, that means the majority of respondents are reporting stronger demand. Consider the same 100 reporting institutions, with 60% reporting stronger demand and 40% not reporting stronger demand. The net percent reporting stronger demand is 20%, or 60%-40%. For lines below zero the inverse is true. For example, if 40% are reporting stronger demand and 60% are not reporting stronger demand the net percentage is -20%. Using net percentage is an instructive way to illustrate movement.

Survey participants were indicating generally weaker demand starting in 2017 for all loan types with the exception of a few positive bumps in the later parts of 2018 and 2019. But then we hit 2020. Demand was off going into Q1 … and then we saw a large drop in Q2 data with a sizable negative net percentage for each loan type. Welcome to the COVID recession.

Couple that with the supply side of the equation, which includes both underwriting standards and willingness to make loans. We’ve charted that data below using the same “net percentage” data type.

The chart illustrates that organizations are not only tightening standards, or making it harder for consumers to qualify for loans, they are also unwilling to make loans (see the green line). Of course the driving factor is the incredible uncertainty faced by lenders and consumers. The first chart shows us that consumers are wary of diving into debt, and we know that some have received cash infusions at the same time as many living expenses have decreased (commuting costs, dining out, etc.) meaning some have less need for credit. Lenders are wary of granting credit, illustrated in the second chart, due to the high levels of unemployment and inability to really determine creditworthiness using traditional underwriting tools (see the WSJ article on the subject).

This may all combine to suggest a consumer credit freeze is pending, if not here already. In the event the economy remains constrained, and unemployment remains consistently high as a result, consumers will eventually need credit – and will not likely find many willing to grant it.

What to Do?

Credit unions could be caught in an unfortunate conflicting push/pull similar to the Great Recession experience. On one side is the philosophy of people helping people, of granting credit to those who cannot get it elsewhere, of being available to members when other institutions turn their backs. This perspective suggests credit unions should maintain loose (relatively speaking) lending standards for the benefit of member owners. And, maybe even seek to boost lending demand to drive income for the benefit of savers left in the lurch due to a return to low savings yields.

On the other side is pragmatic risk management, with an eye toward minimizing exposure to credit risk and losses. This perspective suggests credit unions follow the standards and willingness trends above, not only tightening standards, but taking the position that making loans to “average” consumers is not a strategic path to take at the moment.

Whatever the decision a given credit union makes, it should act decisively and align the credit unions resources and efforts accordingly. During the Great Recession, especially in the early days, many credit unions were slow to react. Indecisiveness caused decision paralysis for a large swath of the industry, which served to amplify the downside risk. We cannot be similarly wishy-washy today.

Image by Gerd Altmann from Pixabay

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