Consumers Face a Massive Credit Crunch. Lenders Are Still Figuring Out What To Do.

By AnnaMaria Andriotis and Ben Eisen 

U.S. consumers are facing what could become the biggest credit crunch since the Great Depression. Lenders and credit-reporting firms aren't sure what to do about it.

As coronavirus spreads, thousands of wait staff, bartenders and airline employees are out of work and could be on the brink of missing payments on mortgages, credit cards and other loans.

Lenders have yet to report a spike in missed payments, but the impact could be considerable. If borrowers start defaulting, they could lose homes and cars. In the longer term, those delinquencies could get factored into their credit reports, hurting their ability to borrow for many years.

Some lenders already have announced programs meant to help. Citigroup Inc., for example, is increasing spending limits for certain cardholders on a case-by-case basis, including those with rising out-of-pocket medical expenses. JPMorgan Chase & Co. is delaying due dates for some borrowers on cards, auto loans and mortgages. Goldman Sachs Group Inc. is allowing borrowers who have personal loans from its consumer bank, Marcus, to sign up to delay their payments for a month.

Still, the expected economic slowdown could devastate many U.S. consumers, who already were overstretched before the coronavirus pandemic. Americans have been falling deeper into debt over the past decade as costs have climbed but incomes have largely failed to keep pace. Consumer debt balances, including credit cards, auto loans and student loans, are around record levels.

Lenders and credit-reporting firms are still reviewing what they might do for consumers. Some think relief should be offered to all borrowers, or all who ask for it. Another option, requiring people to prove they were directly affected by the coronavirus, could be impractical given the virus's far-reaching economic effects. That also would become logistically harder if companies have to move customer-service representatives from call centers to work from home.

Lawmakers and others have asked the main U.S. credit-reporting firms, Equifax Inc., Experian PLC and TransUnion, what they can do to limit the damage to consumers' credit standing if they miss loan payments. Representatives from the White House National Economic Council have been in touch with credit-reporting firms, according to people familiar with the matter. So have staffers representing Sen. Mike Crapo (R., Idaho), Rep. Maxine Waters (D., Calif.) and Sen. Mitt Romney (R., Utah).

Generally, lenders submit information about their borrowers, including missed payments, to the credit-reporting firms. Those firms in turn compile and sell that information back to lenders to help them decide whom to lend to. That information also is used to help calculate people's credit scores.

Most lenders haven't said if they will avoid reporting missed payments to the credit-reporting firms as the pandemic spreads. And the credit-reporting firms as of now plan to continue including missed payment information they receive on credit reports.

An exception is Discover Financial Services, which said it won't report missed payments to credit-reporting firms for some borrowers for at least two months. That will cover loans including credit cards, personal loans and private student loans, and will mainly apply to consumers who have previously been on time with payments.

The Consumer Data Industry Association, which represents credit-reporting firms, says it is evaluating ways to serve consumers and the economy. Consumers who have concerns should contact their lenders, it says.

Government officials also have been in talks with mortgage companies about how they can help consumers, according to people familiar with the matter. In response, the industry has been working on plans tailored to the current crisis that could be enacted quickly.

Mortgage companies already offer so-called forbearance plans in certain situations, in which borrowers can temporarily stop making mortgage payments and make them up later.

Federal regulators can require mortgage companies to consider this option for consumers who can show they are facing some sort of hardship, such as a lost job, if the loan is backed by the government. The Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, and the Federal Housing Administration highlighted this option to servicers last week.

Regulators also can require mortgage companies to consider letting borrowers pause payments when a natural disaster hits. The policy typically applies within a defined geographic area.

Fannie and Freddie said Wednesday they would expand forbearance options so that borrowers affected by the coronavirus can request to pause payments. The two mortgage giants and the FHA will also suspend foreclosures for 60 days.

Many housing experts say the current set of tools to help struggling homeowners is ill equipped for the coronavirus. For example, some homeowners say that accepting pause-payment plans after a natural disaster left them worse off, The Wall Street Journal has reported.

Mortgage industry players say they want a plan that would streamline approval for offering relief to borrowers hurt by the pandemic, and in a way that doesn't hurt borrowers' credit scores.

"This shouldn't be involving a credit hit for people," said Ed DeMarco, president of the Housing Policy Council and the former head of the FHFA. "Everyone was living their lives and doing their jobs and this is a health emergency."

The industry is also suggesting a liquidity facility that would allow servicers to bridge the gap between borrowers who aren't making payments and mortgage investors who still expect to be paid, according to Bob Broeksmit, president and chief executive of the Mortgage Bankers Association.

Write to AnnaMaria Andriotis at [e-mail] and Ben Eisen at [e-mail]

(END) Dow Jones Newswires

March 19, 2020 05:44 ET (09:44 GMT)

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