The credit score is THE key attribute lenders use to determine if they will offer credit to a borrower and if so at what rate. It is also key in analyzing loan portfolio risk as credit scores change from loan origination. It is vital that the credit reports of consumers reflect risk of default. The impacts of the COVID-19 pandemic have been wide and varied resulting in historic unemployment, waning consumer confidence and GDP contraction. Yet during this period, credit scores actually improved. According to Experian ,the average VantageScore increased by 5 points during the period from January 2020 to May 2020. Let’s look at some of the reasons why.
One reason FICO scores have yet to see a decline could be the relief programs and consumer protections enacted by the Federal government. Through the CARES Act, the Federal Government instituted COVID-19 relief programs to consumers including Economic Impact Payments, Paycheck Protection Programs for small businesses, and $600 in Federal Pandemic Unemployment Compensation. Financial institutions also offered consumers ways to help those affected with a variety of programs including deferment of payments, emergency loans and PPP loans to small businesses. These relief efforts bridged the gap for borrowers adversely affected by COVID and contribute to why we are not seeing drops in credit scores
To protect consumers credit, the CARES Act included language as it relates to those borrowers who participate in a relief program. The CARES act requires lenders to report to credit bureaus any account that has an accommodation applied to it as current, if it was current prior to the accommodation. An accommodation refers to payment assistance or relief given to a borrower who is affected by the COVID-19 pandemic. The Consumer Data Industry Association issued a reminder to lenders about the specific guidance during a natural disaster. The Consumer Financial Protection Bureau specifically addresses using comment codes for borrowers who receive an accommodation as a result of COVID-19 which was declared a natural disaster on March 13, 2020 by President Trump. There are two comment codes that may be used in reporting.
AW – designates that the loans current status is affected by a natural or declared disaster.
CP – designates an account that is in forbearance
These special comment codes have no effect on the consumer’s credit score and may be another reason why credit scores have not declined as a result of the COVID 19 pandemic.
Changing Spending Habits
As businesses shut down and stay in place orders enacted, Americans’ spending habits changed. With less things to spend money on and fears over the future economic environment, Americans hunkered down on spending and paid down their debt.
The Federal Reserve Bank of NY reported record decline in credit card balances for the second quarter of 2020 of $76 billion. With less outstanding debt, consumer credit scores rose.
While it seems as though Americans are weathering the pandemic storm, the question remains what will happen as relief efforts expire. Unemployment numbers are improving, but uncertainties remain. As a lender, the key to weathering the storm is in monitoring those borrowers who have elected deferment, as they may pose an increased risk that is not reflected in their credit score. As more borrowers come out of deferment periods, are they able to pay the loan amount or do they become delinquent?
2020 Analytics can help you identify and monitor these borrowers. We provide additional reporting and data analytics on accounts that are in deferment to help you asses your portfolio risk. Contact us today to learn how we can help you.