With job losses mounting and businesses hurting with the Coronavirus pandemic, lenders and credit reporting agencies are reexamining the process they’ve been following for years to report credit information for businesses and consumers. Lawmakers are also considering proposals and urging credit bureaus to take steps to protect consumers and this may have significant effects for loan underwriting in the very near future. Commercial loan underwriting will have more uncertainty as underwriters examine both business and personal credit when making loan decisions. A recent podcast by American Banker illustrates the issues banks and lenders and contending with during the pandemic how lending may be impacted.
American Banker released the podcast: The Coronavirus Could Force a Full-Blown Crisis in Credit Scoring examining many aspects of traditional credit scoring and the impact that the pandemic is having. Top highlights are below along with the original podcast. Worth a listen!
Ways Credit Reporting is Being Affected by the Pandemic:
1 – As consumers and businesses are economically affected more deeply by the pandemic through no fault of their own, many are unable to make payments on their obligations. Lenders have the choice to not report nonpayments to credit bureaus. Of course, this varies by lender but each bank, financial institution, credit union, and alternative lender has the ability to not report certain accounts at their discretion.
2 – FICO scores can ignore certain accounts in their model so as to not negatively impact scores. Lenders have codes available to them in the event of a disaster to note an account impacted by the disaster during reporting that tells FICO not to consider the account under their model, treating that account neutral and not negatively affecting the score. This may affect loan underwriting and due diligence but may be a way to more realistically view a request for funding.
3 – CDIA issued guidance and training to lenders as a result of the pandemic on the different versions of FICO scores. There are ways lenders can use different versions of the FICO scores to more fairly assess business and consumer credit scores and reports. Newer versions of the FICO score may take a more balanced approach and lenders have the option to use different versions when evaluation a business loan or consumer loan.
4 – Lawmakers are considering various proposals to force banks and financial institutions not to negatively affect credit reporting under various scenarios to protect consumers. There are many proposals already in the works but nothing is set in stone at the moment. This may affect loan underwriting and due diligence going forward.
Possible Impacts to Credit Reporting:
- Lenders not reporting delinquencies on certain types of accounts to protect credit scores.
- Lenders using the most recent FICO score versions to view consumer credit and business credit in a more balanced light given the economic fallout of the pandemic.
- Lawmakers and credit bureaus changing how long a negative account can impact a credit report and/or score to help consumers and businesses have the ability to restore their credit faster than is currently allowed.
- Lawmakers requiring lenders to enter into forbearance agreements under certain parameters.
These are some of the ways consumer and business credit reporting are being impacted by the economic effects of the pandemic, per American Banker. There is a lot for commercial underwriters to think about when assessing businesses and business owners when lending. Looking at other factors might help as well, such as bank account transactions and bank account verification with open banking being much more mainstream along with other metrics and criteria that may be helpful. Inquire how you can connect directly to business bank accounts through Decipher’s loan origination and underwriting software and other ways to make better credit decisions.
Listen to the original podcast here: