With an economy still putting increased pressure on many consumers, responsible lenders are seeking ways to manage risk and avoid financial loss.
In addition to everyday strain, a number of emerging influences are testing consumer durability. For example, according to the 2024 Global Economic Intelligence report from McKinsey, while inflation is slowly dropping for some key categories, the consumer price index keeps upward pressure on debt levels. Similarly, many consumers feel a financial pinch from the recommencement of student loan payments.
Some forecasters predict that 90% of the funds borrowers allocated toward repayment will come from reducing consumption. To add even more pressure for some consumers, the end of federal funds for childcare will result in more than 3 million children without care, leaving at least one part in many households to either quit their full-time jobs or scramble to make up for the loss of those funds.
These conditions are increasing the need for lenders at banks and credit unions to have a comprehensive understanding of their borrowers’ financial situations to continue to deliver the right products and services while mitigating risks.
A closer look at consumer debt
The effects of the rising cost of living, combined with stagnant wages, and a bounce back in spending after caution shown during the pandemic are illustrated by increasing consumer debt. This should prompt lenders to review their portfolios. In Q1 of 2024, household debt rose to $17.7 trillion, led by mortgage, auto and student loan balances, while credit card balances fell somewhat though had risen in earlier quarters. “An increasing number of borrowers missed credit card payments, revealing worsening financial distress among some households,” the New York Fed said in the report.
Aggregate delinquency rates increased in Q1 2024, with 3.2% of outstanding debt in some stage of delinquency at the end of March. Delinquency transition rates increased for all debt types. Annualized, approximately 8.9% of credit card balances and 7.9% of auto loans transitioned into delinquency. Delinquency transition rates for mortgages increased by 0.3 percentage points yet remain low by historic standards.
These outcomes directly impact lenders, making it more important than ever to accurately review their portfolios and risk profiles, which is an essential step in ensuring they can support their customers’ needs.
The responsibilities of a lender
Lenders have multiple responsibilities — they need to deliver outstanding customer service, connect customers with the right products and mitigate risks. Part of the risk mitigation process involves evaluating credit risk, which can arise from a borrower defaulting on a loan. With the economic pressures currently facing many consumers, the risk of sudden and substantial financial change may be significant. In fact, a December 2023 report from the Consumer Financial Protection Bureau (CFPB) found that nearly 40% of U.S. households could only cover expenses for a month or less if their primary source of income was lost.
The good news is that lenders don’t need to wait for customers to apply for new or increased credit. Being proactive by closely monitoring portfolios can help lenders understand and navigate changes in a borrower’s income or employment, therefore allowing lenders to stay ahead of potential risks.
Data solutions can mitigate risk and expand borrower pool
If regular, proactive portfolio reviews sound time-consuming and expensive, data-driven technology can alleviate the drain on resources and deliver a more detailed perspective than manual processes.
Alternative data goes above a traditional credit score review and provides a more in-depth picture of a borrower. By looking at a broader range of borrower data, including employment history, utility payment history, and rental payment history, lenders can more accurately assess the risk associated with each borrower.
Data-driven technology does more than assess risk; it can also allow lenders to tap into a larger pool of potential borrowers. For example, individuals with a prohibitively limited credit history can become appealing customers if the data confirms an otherwise strong financial profile, further expanding the lender’s business. A data-driven portfolio review may also equip lenders to offer larger loans and/or more favorable terms, which can positively affect consumer loyalty and, ultimately, lifetime value.
Furthermore, frequent portfolio reviews can also create borrower loyalty regardless of the economic environment. Lenders should, therefore, consider changes in a borrower’s income or employment status throughout the lifecycle of a loan. By connecting with customers during times of financial duress, such as job loss, and helping them navigate difficult times, lenders help ensure customers will keep them top of mind when they’re back on stable ground and in need of their services. With early identification, lenders can implement proactive treatment strategies, thereby helping to limit potential losses.
Leveling up risk assessment for lenders
The current economic landscape poses significant challenges for responsible lenders. Escalating consumer debt levels and increasing delinquency rates across various debt categories underscore the critical importance of proactive portfolio management and risk mitigation strategies.
By implementing data-driven technologies and conducting routine portfolio reviews, lenders can gain deeper insights into borrowers’ financial profiles beyond traditional credit scores. This comprehensive approach enables more accurate risk assessment and offers additional benefits to lenders.
In an environment marked by economic uncertainty, proactive portfolio management – supported by data-driven technologies – is a crucial strategy for responsible lenders to navigate risks effectively, support their customers and elevate their reputation in the market.
Carly Peroutka is Consumer Finance Sales Leader for Verification Services at Equifax Workforce Solutions.
