Is Consumer Credit Underwriting Looser?

Last month I wrote about growing optimism of US bank risk managers. A large majority of those polled expect consumers over the next six months will be applying for more new credit, asking for higher credit limits and carrying larger balances. Is their optimism well-founded? We all know that it takes two to tango. Are lenders ready to dance? Or are some still playing hard to get?

To get some perspective, my analytics team compared changes in the recently-opened credit populations of three US markets: bankcard, auto and mortgage.

Bankcards—The bankcard market has come back. Card lenders approved 52% more new accounts during August-October 2012 than they had 30 months earlier. They also are slowly regaining confidence in the subprime market. The proportion of new cardholders with FICO® Scores below 620 has edged upward from 9.1% of all new cardholders in 2010 to 13.0% in 2012. Card issuers appear ready to dance with new partners.

Auto—In this market lenders appear satisfied with the dates they brought to the dance. While loan volumes have increased, the underwriting of auto loans has remained largely consistent since October 2006. That is shown by the consistent proportion over time of new borrowers with FICO® Scores below 620 compared to the total population of new borrowers. Such stable risk tolerance by auto lenders isn’t too surprising. Borrowers need their autos to get to work, so lenders can rely more on borrowers staying current with their payments and providing a decent financial return. And when borrowers do default their vehicles are still the easiest asset to repossess.

Mortgage—This credit sector is still the choosiest as lenders continue to tighten their underwriting. Only about 4% of loans were opened during August-October 2012 by borrowers with FICO® Scores under 620, compared to roughly 18% during a comparable period in pre-recession 2006. The overall volume of new mortgages did pick up between 2010 and 2012, a good sign. But the recent boom in mortgage refinance probably masked any evidence that the volume growth was due to looser underwriting.