TransUnion spots 2 major developments with delinquency and ‘financial hardship’

TransUnion updated the industry on multiple fronts on Thursday, giving the latest reading not only on delinquencies but also the total percentage of accounts in “financial hardship.”

As auto-finance 60-day delinquencies made a notable upturn during the second quarter — especially among finance companies that might have subprime paper in their portfolio — TransUnion reported accounts with that “financial hardship” status dropped in July, marking the first such decrease since the start of the COVID-19 pandemic.

The report defines accounts in financial hardship by factors such as a deferred payment, forbearance program, frozen account or frozen past due payment.

TransUnion found that while fewer accounts are in financial hardship status as of late, analysts indicated overall credit performance has continued to hold steady and has not shown a material deterioration.

To gain greater insight into the performance and payment behaviors of consumers during the COVID-19 pandemic, TransUnion has supplemented its quarterly Q2 2020 Industry Insights Report with its Monthly Industry Snapshot Report, highlighting the consumer credit market for the month of July.

“Overall, the consumer credit market has been performing quite well despite the obvious challenges brought on by the COVID-19 pandemic,” TransUnion vice president of research and consulting Matt Komos said in a news release.

“It’s a reassuring sign that delinquency levels have remained relatively low — especially as the percentage of consumers in financial hardship status has started to decline,” Komos continued. “While we still expect to see future delinquencies rise based on macroeconomic factors, it is clear that government stimulus programs and accommodation programs provided by lenders are helping the market withstand these challenges in the near-term.”

* TransUnion’s financial hardship data includes all accommodations on file at month’s end, and includes any accounts that were in accommodation prior to the COVID-19 pandemic. Source: TransUnion.

More details about auto financing

Looking specifically at auto financing, TransUnion pointed out that providers began tightening their underwriting criteria as performance started to show initial signs of deterioration during the second quarter.

TransUnion found that consumer-level delinquencies — 60 days or more past due — reached 1.50% in Q2, an increase of 27 basis points from year-ago quarter and the largest such increase from the previous 11 quarters.

While overall delinquencies saw an uptick, analysts noticed that banks, captives and credit unions have experienced a downward monthly trend in delinquency since the pandemic began.

Conversely, independent finance companies — which oftentimes book subprime paper — have been experiencing a monthly increase in 60-day delinquency, according to TransUnion.

Analysts explained this recent deterioration in performance, along with economic stressors presented by the COVID-19 pandemic, has resulted in finance-company pullback across all risk tiers, but has been primarily driven by subprime and near prime.

TransUnion reported that overall originations declined 5.8% year-over-year for a total of 6.3 million new contracts.

“Traditionally auto loans have been a payment that consumers make even in times of economic distress as a vehicle is the main source of transportation and the lifeblood for many consumers in their daily lives,” said Satyan Merchant, senior vice president and automotive business leader at TransUnion.

“While there has been some recent deterioration in terms of auto performance, this may be the result of consumers having less cash flow as stimulus funds begin to run out,” Merchant continued in a news release. “Lenders are likely to continue monitoring delinquency levels — especially as accommodations expire or stimulus benefits run out — to determine future risk mitigation strategies across the portfolio.”

*Note: Originations are viewed one quarter in arrears to account for reporting lag. Source: TransUnion

Additional insights about financial hardship

TransUnion acknowledged the percentage of accounts in financial hardship appeared to hit their peak during the months of May and June, a time when many consumers were feeling the combined impacts of reduced work hours, shelter-in-place orders, unemployment and dwindling stimulus funds.

Analysts explained the recent reduction in account hardship levels may indicate that the number of consumers in financial distress has leveled off as performance for these products has maintained steady levels.

TransUnion reported serious delinquencies (60 to 90 days past due) showed a month-over-month improvement from June to July across most credit products. Credit card, mortgage and personal loans also showed a substantial year-over-year decline in delinquency compared to performance in July of last year.

“The presence of federal programs and those provided by lenders, however, may have alleviated some of the financial hardship borrowers are facing,” TransUnion said.

*Credit card delinquency rate reported as 90+ DPD per industry standard; all other products reported as 60+ DPD. Source: TransUnion.

TransUnion went on to mention that another positive sign from the report can be found via the 30-day delinquency metric, typically an early red flag that an account will default and potentially be charged off. These delinquency levels have shown signs of improvement in the month of July across auto, credit card, mortgage and personal loans compared to June as well as one year ago.

Despite this indication that consumers are not falling behind on payments, TransUnion noted that consumers are still expressing concern about their ability to pay bills.

TransUnion’s latest Financial Hardship Survey from late July found that 57% of Americans have been financially impacted by the COVID-19 pandemic. Of those consumers, 77% said they are concerned about their ability to pay bills and loans. They expect they will not be able to pay their bills or loans in about six weeks and anticipate an average budget shortfall of around $875.

The level of concern is now at its highest level since TransUnion began tracking this variable in late March.

“As more accounts come out of financial hardship status, lenders will be actively monitoring payment behaviors to gauge whether consumers can withstand these economic pressures and do so without government assistance or lender support. How consumers are able to manage debt levels and access to credit will be a key indication of economic recovery in the coming months,” Komos said.

TransUnion’s Q2 2020 Industry Insights Report and Monthly Industry Snapshot Report features insights on consumer credit trends around personal loans, auto financing, credit cards and mortgage loans.

For more information, managers can register for the TransUnion Q2 2020 IIR Webinar on this website. Additional resources for consumers looking to protect their credit during the COVID-19 pandemic can be found at transunion.com/covid-19.