As a potential recession lurks, FinTechs, traditional banks and other financial institutions (FIs) are tightening the reins on loans to small businesses and households with shaky credit, The Wall Street Journal reported Saturday (March 28).
Access to credit is being tightened as the coronavirus forces mass shutdowns nationwide and around the world. Tens of thousands of households are in dire financial straits, sending more people turning to unsecured personal loans and credit cards for a quick bailout.
Bigger lenders — JPMorgan Chase, Bank of America, Capital One and Santander — are pouring over various borrowing rules and making revisions, informed sources told the WSJ. New loan requirements are being put into place, such as boosting income verification, lowering available credit on new cards and going after consumers with higher credit limits.
American Express has already started reeling in credit offers to smaller firms, according to the sources. Square and On Deck Capital are among the FinTechs planning to follow suit in the coming days.
Emails advertising personal and small business loans have dropped off, according to the market research firm Competiscan, the WSJ reported. It has been over a week since new email campaigns were sent by AmEx, Bank of America and JPMorgan.
Online small business loan broker Fundera has seen about a half-dozen lenders that use the service stop offering credit to potential new customers, said Fundera CEO Jared Hecht.
“Lenders have zero ideas how to assess risk in this environment,” Hecht told the WSJ. “There is no model that can predict today if I lend $1, will I get paid back?”
In the wake of the coronavirus, numerous FIs have indicated a willingness to help their own customers with loans and credit cards, such as deferring due dates or even upping spending limits.
But lenders are hesitant to extend credit to new people who might pose risks. Between pandemic-related job losses and the possibility of a recession looming, banks are worried the default rate on unsecured loans could skyrocket.
“Even people who applied [for credit] in the last two weeks are more vulnerable [now] than when they applied,” said Brian Riley, director of credit advisory services at Mercator Advisory Group.
In response to the coronavirus pandemic, five federal financial regulatory agencies — the Federal Reserve’s Board of Governors, Consumer Financial Protection Bureau, Federal Deposit Insurance Corp., National Credit Union Administration and Office of the Comptroller of the Currency — have asked lenders to extend loans to individuals and small businesses.