Beyond the Numbers: Answering Your Burning Questions on Delinquency, Interest Rates, and More

During March’s Market Pulse webinar, we gave our audience what they have been requesting: extended time for Q&A with our premiere lineup of experts. The dynamic Q&A session addressed the implications of increasing delinquencies and losses on various loan types and credit profiles as well as the impact of rising interest rates.

We were pleased to welcome back Amy Crews Cutts, President and Chief Economist at AC Cutts & Associates. 

From Equifax, we had:

• Maria Urtubey, Risk Advisor,

• Anna Fisher, Vice President, Specialty Finance Consulting,

• and Mariette De Meillon, Director of Presales Analytics.

Macroeconomic update

First, we heard from Amy Crews Cutts, who set the stage for the webinar with her macroeconomic update.  Key points from Amy’s presentation include:

Inflation

●      Good news: Although it’s not a smooth ride, inflation is slowly coming down.

●      Economists and the Fed mostly care about core inflation.

●      Consumers are concerned about necessity item inflation.

●      While disposable income is rising, it is not back on the pre-pandemic trend.

Interest rates

●      The Fed is expected to start cutting interest rates mid-2024.

●      Presumably, they could make three to four cuts of 25 basis points (bps) each.

●      The 2024 federal policy looks to remain restrictive.

Labor market

●      Labor markets show signs of slowing, despite monetary policy actions.

●      Payroll employment has slowed.

●      Unemployment rates are slowly rising.

Consumer Credit Trends

Next, Maria Urtubey shared the latest U.S. consumer credit insights.

Originations

●      First mortgage originations continue to decrease.

●      Auto November 2023 YTD originations have decreased; the subprime share has reached its lowest historic level.

●      November 2023 YTD bank card dollar limit originations continue to grow YoY.

●      Subprime share has declined since peaking in 2021; the number of new cards originated in November 2023 YTD is lower than 2022.

●      November 2023 YTD private label dollar limit originations, subprime share, and number of new cards originated are down YoY, with all metrics at historic record lows.

●      YTD through November 2023 unsecured private label dollar originations balances saw a steep decline; subprime share rose while the number of new loans originated was down.

●      November 2023 YTD home equity revolving dollar limit and unit originations declined after 2022 peak, although they are higher than in 2020.

Debt

●      Mortgage debt has increased to $12.6T through January 2024.

●      Non-mortgage debt has decreased MoM through January 2024.

●      Revolving debt in January 2024 was at its highest level.

●      Non-revolving debt has decreased through January 2024.

Utilization

●      Utilization decreased slightly for bank card and continued to increase for private label card and home equity lines through January 2024.

●      Credit limits have risen for bank card, private label card, and revolving home equity.

Delinquency

●      Delinquencies on auto, bank card, private label card, and first mortgage rose MoM through January 2024.

●      Auto and bank card delinquencies are severe compared to January 2020.

Q&A

What we’re recapping today are just a few of the numerous questions we received from our audience concerning the overall economy, credit affordability, and much more. Below are our experts’ summarized answers that they shared live during the webinar. 

Q: Are higher prime vintages performing worse than lower prime vintages?

No. The vintage score is still rank ordering risk, so we do see that lower prime vintages are doing worse than the higher prime vintages. However, we can see recent origination advantages do have a higher risk of default than older vintages.

For context, there has been enormous growth over the last four years with many new lenders stepping into this lending space, and we have seen a slight loosening of underwriting standards over that time period.

For example, consumers who are currently obtaining unsecured personal loans have an average of a five-point higher debt-to-income ratio than they did in 2019 - explaining the higher risk we are seeing.

Q: Are we seeing revolving utilization trends start to drive higher delinquencies in the near-prime credit area?

There certainly has been a sharp increase in utilization in the last few months. Within the last couple of months, utilization has now reached pre-pandemic levels. That by itself may not sound like a big deal, but the important context to provide there is that credit limits are now 26% higher than they were before the pandemic.

We know higher utilization is associated with increased risk, both at the point of origination and at the point of account management. So, when a consumer has a sudden increase in their rate of utilization, then their likelihood to default increases significantly.

Q: What are some insights on delinquent loans, specifically regarding near-prime and subprime credit profiles?

If we look specifically at the subprime space, we are seeing some leveling off in delinquency rates, but we're still about 5% higher than we were pre-pandemic.

When we start looking into the near-prime and subprime space, what's even more interesting is to consider the consumer profiles within that space: Those seeking financial services in what we historically consider a subprime industry area are not limited to this financially fragile 600-and-lower credit score we are used to; we now see consumers with scores spanning the entire spectrum.

Given the things we're facing in the economy right now, affordability is a real issue. From the end of 2023, reports are still indicating how 60% of people were living paycheck to paycheck. That's clearly more than the set of folks in this under-600 bucket, so that's a kind of scary statistic. And within that, even close to another 20% are struggling to make payments. So, how do you decipher where there's true hardship versus just an increase in consumer spending?

We know utilization is up, and limits are up. As we think about delinquency, it's important to think about how consumers are navigating it. One report indicated that many are choosing to rely on overdraft protection, which introduces a whole new set of risk and a different kind of delinquency component for lenders as well as the consumers themselves. Trying to evaluate how to help consumers and really understand some of their intrinsic motivation is an interesting way to start thinking about how to stay ahead of delinquency.

Q: Given this environment, what would it take to slow consumer spending?

Economists have been a little flummoxed by the strength of consumer spending. While some spending was driven by the pandemic-era relief payments, a lot of that went into checking or savings accounts and stayed there. One report on the balances in consumer checking accounts or savings accounts shows there's a little bit of gas left in the tank, although it's getting pretty close to empty.

It goes back to some of the around-subprime and near-prime credit. If folks are in a subprime credit situation, they often get there because income flows are uneven and hard to predict and, of course, some have not learned how to properly manage their finances.

It's indicative of the risk we are seeing because those who are seeking credit more often are in need of credit, not just shopping for the best points value. So, we believe we are starting to see a slowing of consumer spending out of necessity.

Q: How is student loan debt affecting consumer behavior?

Although federal student loan payments resumed last October, delinquency is not going to be reported to credit bureaus until the end of this year, so we have yet to see the full impact on consumer behavior.

Historically, student loans have been relegated to the bottom of the payment hierarchy, and income-driven repayment plans could become a factor, so we don’t have a full picture just yet.

Q: How can lenders calibrate their models to post-pandemic consumer behavior?

It is a very interesting question, and there are multiple customers who have observed a shift in the odds associated with those scores and those models. So, the questions really are these: How do we handle this? What can we do to mitigate it?

It definitely makes sense to review the decision strategies to get alignment between the consumers’ current risk behavior and your decision strategy. In a situation where your model is no longer separating out the good and the bad as well as it previously used to, there’s an opportunity to start bringing more data points into that decision strategy.

That could involve looking at an alternative data source; it could involve looking at any other secondary score like a bankruptcy score; it could involve any data point that will help you better understand your customers, your consumers’ current credit dates, commitments, and their spend capacity.

Q: Are you seeing more credit unions and financial institutions using complex algorithms, that is, models outside the traditional credit score?

This question really opens up a more philosophical debate around complexity as a whole: Is complexity always better? Or not?

In many cases, we see folks trying to simplify and streamline. It's really about finding a model that works for you and your business. The big hurdles to complexity are implementation and fair lending requirements, so if you can adapt and accommodate them, then complexity may have a big role to play there.

However, what's even more interesting, is getting creative with the business model. Are you layering in alternative data? Do you have multiple strategies deployed for different channels for different product lines as opposed to a one-size-fits-all approach? These aren't necessarily novel ideas, but it's really about when it's difficult to adapt to complexity. What are the easy levers you can pull to implement now — without going through a major regulatory overhaul, without having to make major structural changes to how you're doing business?

The goal is the same: Get more targeted offers that will be more profitable and have better performance. Can you get higher conversion rates? Can you increase retention? You can. There are more levels than just complexity and the creation of a better single magic model that will get you there.

Q: What innovative tactics can financial institutions deploy for better credit portfolio management?

It’s exciting to see customers use portfolio management as a response to the turbulence of the current economic challenges.

Month to month, we are changing our outlook on our own financial standing and making changes about how we're spending money. We are making changes about where we're looking for financing at a much more accelerated velocity than where we have historically. If consumers are doing that, why can't lenders do it too?

We've seen cases where increasing from an annual or quarterly review to a more frequent, even monthly, review can have an ROI of three to six times. This is huge for the lender and can provide many benefits for the consumer. If you can help them stay ahead of some of the looming problems that we've been discussing today, that can also help you increase loyalty.

In addition to staying on top of your business and managing the portfolio, that will be particularly useful in this current climate of higher debt exposure.

So how can you be the phone call they make? How can you anticipate what they're looking for? Offer them the products they need. Come up with new products. Can you build alternatives to what's out there in the market today? Become the trusted advisor, the trusted partner, and really use your portfolio management — not just as a tactical tool to manage the business and the cash flow but also to think strategically about your business as a whole.

Q: What do you feel the economic trends are going to look like for the next two to three years?

The challenge is there are so many unknowns looking ahead. In the big picture, though, we should see a normalization of the yield curve. That means long-term interest rates should go back to being higher than short-term interest rates, triggered by short-term rates coming down first.

Markets can go very quickly, and the market right now seems to think that the Fed is very serious about inflation. Still, we predict the GDP should start to get closer to pre-pandemic levels; things will get once again back on trend, especially regarding disposable personal income; and that we will start to feel a little more like it's a better economy.

Stay in the Know 

We hope you’ll register for our next Market Pulse webinar on April 18. By popular demand, we’ll be focusing on the latest small business data and the challenges commercial businesses are facing in the current landscape.

You can register for upcoming webinars, find our monthly Small Business Insights, and explore our National Consumer Credit Trends Reports on our Market Pulse hub[1] . All the Equifax data and insights presented on our Market Pulse webinars and this blog are pulled directly from these reports.

In today’s dynamic economic landscape, forward motion is not just a strategy. It's a commitment to your customers. Challenging financial times require proactive planning, goal setting, and relentless momentum. To stay on top of all our insights and updates, make sure to follow the Equifax for Business LinkedIn[2]  page, and don’t miss our Market Pulse podcasts, available wherever you listen to podcasts, where we will continue with more in-depth conversations on topics we have discussed here.

 

* The opinions, estimates and forecasts presented herein are for general information use only. This material is based upon information that we consider to be reliable, but we do not represent that it is accurate or complete. No person should consider distribution of this material as making any representation or warranty with respect to such material and should not rely upon it as such. Equifax does not assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice. The opinions, estimates, forecasts, and other views published herein represent the views of the presenters as of the date indicated and do not necessarily represent the views of Equifax or its management.