According to the latest economic reports, consumer borrowing is growing at the fastest rate we’ve seen in over a decade. At the same time, mortgage rates continue to remain low, and more consumers are looking to take advantage of the current rate climate to borrow or refinance. This presents new opportunities and new challenges for the banking community.
Consumer borrowing was up 10 percent in March, mostly due to an increase in credit card debt. Non-real estate debt rose $29.67 billion in March, far exceeding analyst expectations. This is the biggest increase in the use of revolving credit since 2001, and financial experts say that following the holidays more consumers are spending on household goods and travel. At the same time, nonrevolving credit, such as auto loans and student loans, increased at a rate of 5.50 percent in March, compared to 5.17 percent in February.
Despite the increase in revolving debt, consumers are less confident in the U.S. economy. The University of Michigan’s consumer-sentiment index fell in April to the lowest point seen in the last seven month, dropping to 89.0 percent in April from 91.0 in March. The Conference Board also reports that the consumer-confidence index fell in April from 96.1 in March to 94.2 in April, with fewer people reporting on planning a trip or a major purchase within the next six months.
So what do these seemingly contradictory indicators mean for the banking industry? It seems that consumers are tiring of bad economic news and are looking for reassurance that spending, or more specifically, borrowing to spend, can fit within their household budget. This could mean a resurgence in loans and borrowing in addition to extending credit card debt. It also means that banks and credit unions have opportunities to offer new financial products and new criteria for loan approvals.
In a separate report from FactorTrust, which maintains the Underbanked Index, new lending criteria imposed by the Consumer Financial Protection Bureau (CFPB) will make it harder for some borrowers to qualify for credit or loans. According to FactorTrust, “deserving consumers will be more likely to obtain loans when alternative data is taken into consideration.”
The CFPB is expected to require lenders to apply stricter criteria for consumers who want to borrow,specifically qualifiers designed to ensure that consumers can repay short-term loans, deposit advance products, installment loans, and open-end loans. Lenders now will have to take into account income, financial obligations, borrower history, and other factors while considering a 60-day “cooling off period” between loans. According to FactorTrust, these new rules do not take into consideration the underbanked who may need those loans, and should qualify without waiting.
The market climate seems ripe for banks and credit unions to come up with new loan products and lending criteria to help consumers borrow and manage revolving and short-term debt. Rules and regulations for borrowing are going to become stricter based on ability to pay, but with creative repayment terms, new types of loan products, and different qualification criteria, financial institutions can make it easier to borrow without breaking the rules.
This is not to suggest that the financial industry start embracing high-risk lending policies or offering junk loans. However, lenders can work with consumers to help them borrow when they need it, and help them better manage their debt and reduce risk of default. Relationship banking is the best way for banks and credit unions to compete with direct banks and online lenders, and many consumers will come looking for a better deal on loans before thinking about deposit rates. Those institutions that can make borrowing simpler and safer have a better chance of attracting new customers looking for a better way to manage their money.