How Lenders Can Navigate This Credit Tightening Environment

 

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.”

Listen to our Market Pulse podcast here or on your favorite podcast app. Keep reading for a portion of the Q&A.

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:

1. The organization’s risk tolerance

2. The organization’s goals for growth

3. The risk profile for both new and existing prospects

4.  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 Market Pulse podcast is available wherever you listen to podcasts. 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.