by Julia Guardione

From the Desk of Roger Douville

Delinquency and Decisioning

Last week’s employment numbers continue to shore up confidence in our economy, and with unemployment at 3.8% you would expect that delinquency rates would fall in kind. In some cases,  rateGenius’ weekly calls with financial institutions paint a different picture. We still see delinquency percentages stubbornly holding steady at historically “prime” lending institutions. A deeper look in the lending practices of these lenders revealed some “usual suspects”.

Well-educated consumers understand that if revolving debt balances are paid down and limits are left untouched, credit scores generally increase. Many consumers have turned to FinTech lenders to consolidate credit card debt, which is an admirable practice and shows that individuals are doing the right thing by taking charge of their finances.

In many cases lenders have been seduced by the higher credit scores and lower revolving balances created after consolidation without making the connection of how those lower revolving balances came about. They have ignored the new installment debt and the fact that there remains a significant number of revolving accounts with a significant amount of available credit still well within reach of the borrower.

Old habits die hard for many of us and we are seeing far too many instances where borrowers re-advance this revolving debt to finance lifestyles after refinance, causing pressure on household budgets. Certainly consolidation benefits many borrowers and may be the right thing to do. However, lenders must be better at identifying which consumers will ultimately succeed in doing so.

Lenders must still pay attention to where the revolving debt went. Was it truly paid off by the borrower? How many credit cards remain open after the consolidation has taken place? Will the borrower be able to sustain on time payments if they re-advance those credit limits? What is the borrower’s disposable income after all debts are paid and are capacity ratios (Debt to Income, Payment to Income, Revolving and Unsecured) well below MAX tolerance levels at the time of the approval?   

The ability to repay is paramount in any credit decision. Be sure your decision makers can identify any potential trouble spots that may lie ahead.

Sincerely,

Roger Douville


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