TransUnion: Fears of Post-Hardship Defaults Overblown

After COVID-19 was declared a pandemic in March 2020, banks and credit unions began offering borrowers hardship accommodations so the trauma of layoffs or furloughs wouldn’t be compounded by defaults.

The NCUA and the FDIC encouraged such programs, and the CARES Act in March 2020 expanded eligibility criteria. Borrowers took up the offers in numbers that peaked in May 2020, with many then beginning to slowly exit the programs.

Accommodations caused delinquency and charge-off rates to plummet.

But by early fall, credit agencies and economists worried that many of those remaining in accommodation programs might represent defaults that were merely deferred, rather than avoided.

Increasingly this year economists have said the worst has seemed to have been avoided as Americans have weathered the crisis with help both from accommodations and federal assistance through relief checks, extended unemployment benefits and the Paycheck Protection Program.

And a report released Wednesday by TransUnion also found last year’s worries were largely overblown.

“Lenders, banks and various financial institutions across the financial services landscape extended accommodations to consumers to help them withstand the challenges brought on by the pandemic,” Matt Komos, TransUnion’s vice president of research and consulting, said.

“The consumers who enrolled in hardship programs and exited early or continued to make payments on accounts overwhelmingly used the programs for their intended purpose,” Komos said. “Not only were these consumers much less likely to go delinquent, they were able to get a leg up during a difficult situation.”

The Chicago credit reporting agency found about 70% of non-prime borrowers (Vantage scores of 660 or less) and 80% of prime borrowers (661 or more) kept up their payments even while enrolled in hardship programs that would have allowed them to skip payments without penalties. Also, more than 40% of borrowers exited a hardship program within three months.

Jason Laky, EVP of financial services at TransUnion, said enrollment in a financial hardship program traditionally signified heightened consumer risk.

“In the era of COVID-19, however, the consumer makeup of those accessing hardship programs has been much more diverse in terms of credit profiles,” Laky said. “As situations have stabilized, we’ve found that consumers who exhibited key credit behaviors within the first three months of accessing an accommodation program performed well over the long-term.”

Credit agencies like TransUnion are in the business of understanding how the past and present might predict future outcomes. The pandemic spun off a flurry of outliers, but TransUnion has picked through the data looking for patterns.

Among those entering hardship programs, TransUnion tried to identify behaviors that tended to predict better future credit risk performance. TransUnion found the key signifier of risk level was the length of time borrowers remained in a hardship program.

In particular, borrowers who exited all their hardship accounts within three months were lower risks than those who stayed longer. These early exiters were also less likely to experience continued struggles and leverage financial accommodations again.

About 80% of early exiters stayed out of hardship programs nine months later.

The report confirmed Komos’ observation in late September that people who exited accommodation programs in the summer of 2020 had tended to use them as precautions to protect their cash in uncertain times. Komos said at the time that borrowers remaining in hardship programs were more likely to have real income losses that made exiting difficult.

In Wednesday’s report, TransUnion found auto loans classified as in financial hardship went from 0.64% in March 2020 to 7.04% in May 2020 to 2.09% in May 2021.

Financial hardship for credit cards, which was nearly non-existent in March 2020, reached 3.73% in May 2020, but has subsided to 2.16% in May 2021.

Unsecured personal loan hardships rose four-fold to 6.15% in May 2020, but have fallen back to 2.35% as of May 2021.

Another sign came Tuesday as the Mortgage Bankers Association reported that the number of mortgages in forbearances fell to 3.93% as of June 13, a drop of 11 basis points from a week earlier.

MBA Chief Economist Mike Fratantoni said the drop marked the 16th straight week of decline and new requests remained at an extremely low level.

“As more homeowners reach the end of their forbearance term, we should continue to see the share in forbearance decline,” Fratantoni said. “The improving job market and strong housing market are providing support for those who do exit.”