TransUnion: Patterns of Loan Growth Fraying

Credit unions and other lenders have been riding a good wave for the past two years, but rising interest rates and lower demand might finally be showing up in loan production.

A study released Thursday by TransUnion showed credit cards and unsecured loans have grown rapidly since mid-2021. The Chicago credit reporting agency also found slowing consumer loan growth and delinquencies returning to pre-pandemic levels.

Signs of tightening credit and lower demand have appeared recently in a variety of other sources: The Fed’s quarterly survey of bankers, Cox Automotive’s index of credit availability and first-quarter originations from CU Times’ sample of credit unions that generated more than a third of the movement’s residential loans last year.

Fed data showed year-over-year growth rates for credit cards began slowing down in February, and TransUnion found they began slowing in the fourth quarter for unsecured loans, which TransUnion said might be “a sign that lenders are showing more scrutiny in making underwriting decisions.”

Available data from CUNA and the Fed showed credit unions continued to gain share for auto loan balances through March, but a Cox Automotive report Wednesday showed tightening of credit for all types of automotive lenders in April, with credit unions tightening significantly more than banks and others.

Another worrying sign was a significant drop in first-quarter loan originations among CU Times’ sample of 29 credit unions that are at or near the movement’s top residential lenders.

NCUA data for the “Big 29” showed a drop in production for the basket of consumer loan types that includes auto loans, personal unsecured loans, credit cards and anything else that isn’t secured by real estate. The Big 29 generated $27.3 billion in other loans, down 14% from a year ago and down 11% from the fourth quarter.

Comparing balance data from CUNA and TransUnion, credit unions have also had strong growth in unsecured loans and credit cards — but the growth rates have been slightly slower for credit unions.

At credit unions, the balance of unsecured consumer term loans grew 21% to $66.2 billion from a year earlier and fell 0.5% from February, compared with an average February-to-March drop of 0.2% over the previous seven years. Among all lenders, TransUnion found the growth rate to be 26% over the past 12 months.

Credit card balances at credit unions grew 14% to $74.2 billion from a year earlier and fell 0.1% from February, a rate typical for the past seven years. Among all lenders, TransUnion found the growth rate to be 19% over the past 12 months.

Charlie Wise, TransUnion’s SVP of research and consulting, said credit cards and unsecured loans have grown rapidly since mid-2021, drawing in many subprime borrowers.

The Fed ramped up interest rates sharply in 2022, and by fall lenders were tightening credit and originations had begun to fall. Much of it has been a “flight to quality” as loans to subprime borrowers have diminished.

Most of the 84 banks responding to a Fed quarterly survey released Monday said they tightened lending standards for credit card, auto and other consumer loans in the first quarter, and they widely reported that they expect to continue tightening for the rest of the year.

TransUnion found delinquencies rose last year to levels like those prevailing before the pandemic. Back then those levels were not a great concern, and Wise said he doesn’t see a reason to worry – for now.

“Overall I don’t see consumers overleveraged,” Wise said. “If there’s a healthy jobs market, everything is fine. If not, we’ll have to re-evaluate.”

TransUnion data showed delinquency rates remain much lower for credit unions than other types of lenders, which Wise attributed to credit unions lending to lower-risk borrowers. It also showed declines from Dec. 31 to March 31, which are typical because many households pay down holiday debt with tax refunds.

TransUnion’s measures of delinquency rates by the number of accounts showed:

• At credit unions, 1.6% of credit card accounts were 60 days or more delinquent on March 31, up from 1.1% a year earlier and down from 1.7% on Dec. 31.
• For all issuers, 3.4% of credit cards were 60 days or more delinquent on March 31, up from 2.9% a year earlier and down from 3.7% Dec. 31.
• For credit union auto loans, 0.63% of loans were delinquent on March 31, up from 0.44% a year earlier and up slightly from 0.62% on Dec. 31.
• Among all lenders, 1.61% of auto loans were delinquent on March 31, up from 1.35% a year earlier and down from 1.69% on Dec. 31.

A big difference between now and 2007, when the Great Recession began, is that many households are sitting on mortgages refinanced during the pandemic at historically low rates. The 2007 financial crisis was set off in large part by the collapse of securities backed by mortgages originated to lower income households at high rates with terms that left many unable to repay.

Wise said that households that refinanced their mortgages during the pandemic often freed up hundreds of dollars per month in cash flow that they can use to maintain payments on cars and other loans.

In fact, he said, the big increase in home equity loans over the past year is because “consumers are sitting on trillions of dollars of home equity.”