Consumers may be watching their spending, but lenders are watching their lending.
Credit card lenders tightened their underwriting standards to a record high level, as the Federal Reserve indicated for Q3 2020. In fact, with 71.7% of loan officers stating that their standards tightened, the previous record of 66.7%, set during 3Q 2008, was displaced by 400 basis points.
There are three critical factors to consider, none of which should be a surprise:
- Tightening standards means less new credit available, and implicitly means that current credit lines will be scrutinized. Credit card issuers need to right-size open credit. With high unemployment, anticipated small business failures, and an uncertain end to COVID-19, this only makes sense. Americans still have almost $4 trillion open credit lines, so there is plenty of room to tighten up the risk.
- Yesterday’s comments on a decrease in revolving debt is not a surprise. Discretionary spending is down, entertainment spending on credit cards fell 55.4%, travel spending plummeted 60.2%, and restaurant spending with credit cards dropped 27.8%. The decrease in revolving debt is of no surprise, as PSCU, a top credit union service organization, reported.
- Federal unemployment checks are still in limbo, and as the NYTimes reports, “roughly one in five workers are collecting unemployment.”
Experience in the Great Recession was that there would be approximately a 15% drop in revolving debt, and from the looks of it, U.S. consumers are near that point. Mercator Advisory Group’s view is that the metric will drop even further as two events occur: sluggish resolution to bailing out consumers with needed government funds and the increase in charge-off rates, which will come as unemployment continues and payment holidays age off lender books.
In the interim, consider the Loan Officer’s view of lending for the current economy. With a new record set, loan officers seem at least uncomfortable than consumers about the economy. The economy will rebound but expect a disrupted business model well into 2Q21.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group