Credit 'Blind Spot' Can Affect Consumers' Ability to Borrow

Summary

---

Podcast Summary

WSJ Your Money Briefing

Episode: Credit 'Blind Spot' Can Affect Consumers' Ability to Borrow
Date: June 29, 2020
Host: J.R. Whalen
Guest: AnnaMaria Andriotis, WSJ Reporter

---

Episode Overview

This episode examines how the pandemic-induced pause on loan payments has created a 'blind spot' in Americans’ credit histories, posing new challenges for both borrowers and lenders. As millions are taking advantage of payment deferrals, credit scores no longer paint a full picture of financial risk. The episode explores how lenders are responding to this confusion and what it means for consumers seeking loans during the pandemic.

---

Key Discussion Points and Insights

1. The Pandemic’s Effect on Credit Reporting

• Temporary Relief Programs:

  • Programs allow consumers to defer payments on loans such as credit cards, auto loans, and mortgages without penalty to their credit scores.
  • As J.R. Whalen summarizes:

    “Millions of Americans are taking advantage of programs that let them put loan payments on hold during the pandemic. Good news for struggling consumers, not so good for the credit industry...” (00:22)

• Credit ‘Blind Spot’:

  • Lenders are left in the dark about borrowers' true financial behavior, since missed or deferred payments are not reflected in credit scores.
  • AnnaMaria Andriotis explains,

    “Somebody may come in with a 750, a very high credit score, for example... But right now that 750 might not be as strong of a borrower because that individual could have deferred their existing loan payments.” (01:40)

2. The Cycle of Confusion and Inconsistency

• Origin of the Problem:
  • Lenders enabled payment deferments to accommodate borrowers facing pandemic-related hardships, under encouragement from the federal stimulus package.
  • The law prohibits lenders from reporting these deferments as negative marks on credit reports. (02:40)
• Credit Report Complications:
  • Credit bureaus are using a patchwork of codes and notes — such as “deferment,” “forbearance,” or even “natural disaster” references — making reports inconsistent and hard to interpret.
  • In many cases, boxes used to indicate on-time payments are being left blank. (03:40)
• Scope of the Issue:
  • Over 100 million consumer loan accounts are now in some form of deferment or forbearance, an unprecedented situation. (04:00)
  • Andriotis emphasizes,

    “…the numbers are too high, the notes on credit reports are kind of confusing, and the credit scores for many people are not reflecting the reality of what’s going on in their own financial situation.” (04:35)

3. Impact on Consumers Seeking New Credit

• Tightened Credit Availability:
  • Lenders have pulled back on issuing new loans and have raised credit score requirements. This is affecting applications for credit cards, auto loans, and personal loans more than mortgages. (04:55)
  • Mortgages typically require additional income and asset documentation, so issues with blind spots in credit scores are less severe for homebuyers.
• Expectation Gap:
  • Consumers expect quick decisions for non-mortgage loans, but lenders’ uncertainty is causing delays or denials.
  • Andriotis notes,

    “…really where this is the biggest issue is for non-mortgage debt, things like cards and autos and personal loans… Many banks’ algorithms have been programmed for that and in some cases do place a heavy emphasis on credit scores.” (05:50)

4. How Lenders Are Adapting

• Looking Beyond Credit Scores:
  • Lenders are now seeking new sources of data to assess risk, such as:
    • Alternative payment histories: Utility bills and non-traditional loan repayments. (06:50)
    • Cash flow analysis: Reviewing bank accounts to assess if depositors are still getting paychecks or relying on unemployment benefits, and to analyze overall account balances. (07:30)
    • Unemployment metrics: Using local and regional unemployment data to forecast potential risk in their lending portfolios. (08:40)
  • Andriotis explains,

    “The credit reporting firms are most well known for credit reports, but they also have data on other type of payment information… This is one set of data that credit reporting firms are saying lenders are placing more of an emphasis on.” (07:05)

5. Uncertainty for the Future

• Lenders remain uncertain about which borrowers are truly at risk, especially as deferment periods end.
• This uncertainty fuels conservative lending practices, limits credit availability, and could set the stage for future loan losses if economic conditions worsen.

---

Notable Quotes and Memorable Moments

• On the paradox created by pandemic relief:

  “The last thing that a lender wants to do at this point is approve somebody for credit when they’re not paying their existing loans with their existing creditors.”
  — AnnaMaria Andriotis (02:20)

• Highlighting the scale of the issue:

  “We’re kind of in an unprecedented situation where the numbers are too high, the notes on credit reports are kind of confusing, and the credit scores for many people are not reflecting the reality of what’s going on.”
  — AnnaMaria Andriotis (04:32)

• On lenders’ new risk indicators:

  “Are they still getting paid by their employer or is it unemployment checks that are coming in instead?...Are they left with some type of balance at the end of the month or have they overdrawn?”
  — AnnaMaria Andriotis (07:44)

---

Timestamps for Important Segments

• 00:20 – Introduction to the credit confusion caused by payment deferments
• 01:40 – How credit scores are failing to reflect financial reality
• 02:40 – Why credit reports have become inconsistent and difficult to interpret
• 04:55 – The effect on consumers applying for mortgages, credit cards, and auto loans
• 06:39 – What alternative data sources lenders are using to judge risk
• 08:40 – Discussion of local economic impacts and ongoing lender uncertainty

---

Conclusion

This episode spotlights a critical ‘blind spot’ in the credit system resulting from pandemic relief efforts. While programs help consumers in the short term, they introduce longer-term challenges for both lenders and borrowers. The lack of reliable credit data is leading to tighter lending, reliance on alternative data, and great uncertainty about the future stability of the credit market.

---

Transcript

[A]

Deal replaces fragmented payroll vendors with one global system. No third parties hire, manage and pay teams in 150 countries. Operate like a local everywhere. Visit d eel.com WSJ.

[B]

Here's your money briefing for Monday, June 29th. I'm J.R. whalen for the Wall Street Journal. Millions of Americans are taking advantage of programs that let them put loan payments on hold during the pandemic. Good news for struggling consumers, not so good for the credit industry because those missed payments aren't showing up on credit scores.

[C]

The question is the banks don't know who's going to pay and who isn't. And they're trying to all figure out what's the best data that we can turn to at this point to gain more certainty over the likelihood of the loan applicant we're looking at repaying or not repaying their loan before we extend them credit.

[B]

What does that confusion mean for consumers? Our reporter Anna Maria Andreotis will have that part of the story after the break. If you miss a credit card or a car payment that's typically counted on your credit score, lenders use your score to decide if you're a safe bet. But as part of the federal government's response to the pandemic, credit scores don't reflect payments that consumers are allowed to miss. Our reporter Anna Maria Andrew Andreotis is here to explain the confusion that's created among lenders. So, Ana Maria, how do consumers missed payments not getting factored into their credit scores, create a cloudy picture for lenders?

[C]

Lenders are having a difficult time determining who to lend to and who not to lend to. And that's because people when people apply for loans and lenders look at their credit scores, the credit scores don't reflect, or at least they're not supposed to reflect, that people are in deferments, forbearance or some other type of hardship status tied to the pandemic. So somebody may come in with a 750, a very high credit score, for example, and in normal times, that person would be approved with few questions asked for something like a credit card or a personal loan. But right now that 750 might not be as strong of a borrower because that individual could have deferred their existing loan payments. And the last thing that a lender wants to do at this point is approve somebody for credit when they're not paying their existing existing loans with their existing creditors.

[B]

But lenders played a significant role in giving people opportunities to defer payments.

[C]

In many ways, this is this has kind of become a Cyclical problem, meaning that around the middle of March, it was very obvious that many people had been impacted by the pandemic and were losing their jobs and would not be able to make their debt payments. So many lenders, the biggest banks and others decided that they were going to allow consumers to delay making payments payments and not penalize them for that. The economic stimulus package that was signed into law in late March, basically what that said was if a lender decides to help a borrower out and allow them to miss their payments, they can't penalize them with negative information that would get reflected into their credit score. And so what that's resulted in is this kind of confusing environment where there's all these different types of notes and codes and other marks on people's credit reports that are either saying, this person's in deferment, this person's in forbearance, this person, in some cases are using notes that are tied to natural disasters. On credit reports, there are boxes that indicate whether people have paid on time or not. And in some cases now those boxes are being left blank. So when a lender is reviewing loan applications and they're looking at credit reports, there isn't one uniform standard to look at to easily identify all the people who are in some type of deferment program. So there's a bit of guesswork that's involved there. And in an environment where there are more than 100 million consumer loan accounts, including student loans, auto loans, credit cards, mortgages, et cetera, more than a hundred million of these accounts are in some type of deferment status. We're kind of in an unprecedented situation where the numbers are too high, the notes on credit reports are kind of confusing, and the credit scores for many people are not reflecting the reality of what's going on in their own financial situation.

[B]

But even with the economic crisis that we're in, there are still lots of people buying homes and cars. What does this confusion mean for them?

[C]

So for people trying to buy a home, they're still dealing with a poor pullback of credit. Because essentially what's occurred here is that with all of this confusion surrounding credit reports and credit scores, that has contributed to lenders pulling back on credit. So essentially there are fewer auto loans, fewer credit cards and so on being originated in recent weeks than there were prior to the pandemic. So there has been a pullback in credit and credit score requirements as well. In many cases, lenders have raised them. Now, in the mortgage world, things are a little bit different in that mortgages do require income documentation and other paperwork that proves the assets and other types of wealth that a borrower, a loan applicant has. But really where this is the biggest issue is for non mortgage debt, things like cards and autos and personal loans. Where those types of loan applications generally do not require documentation of income. They are expected by consumers to be done very quickly in terms of, you know, you apply for something online, you're expecting an almost instantaneous response. Many banks algorithms have been programmed for that and in some cases do place a heavy emphasis on credit scores. So where we see this becoming more of an issue on a comparative basis at least, is with this type of non mortgage debt.

[B]

So if missed payments aren't factored into credit scores, what are lenders doing to figure out who might be a credit risk and who might be safe?

[C]

Well, that's the big discussion right now and it's playing out with the largest banks in the country. The question is the banks don't know who's going to pay and who isn't. And they're trying to all figure out what's the best data that we can turn to at this point to gain more certainty over the likelihood of the loan applicant we're looking at repaying or not repaying their loan before we extend them credit. So several things are happening in terms of the data that they're looking at in addition to the credit report and credit reports and scores. The credit reporting firms are most well known for credit reports, but they also have data on other type of payment information associated with consumers. Things like whether they're paying their utility bills on time or other loan payments that might not be included in credit reports. So this is one set of data that credit reporting firms are saying lenders are placing more of an emphasis on. And in addition, the lenders themselves are looking at cash flow consumers bank accounts, if they have access to them, to see are they still getting paid by their employer or is it unemployment checks that are coming in instead? Are they left with some type of balance at the end of the month or have they overdrawn? And all of this type of data is being looked at for different reasons. So some data is being looked at for the purposes of making a decision about whether to approve people. That would be things like some of the additional data pertaining to if they're paying their utility accounts. So this is one set of data that credit reporting firms are saying that lenders are placing more of an emphasis on in terms of looking at whether to approve applicants. Then some of the other data like the unemployment data, for example, is being used to get a better sense of what's the overall health, the financial health of the accounts, the debt accounts that banks have right now, meaning they don't really know are their current customers, are they going to pay or are they not when the deferment period is over, if they can get more information about unemployment in the area that they live in, if they have a lot of customers in high unemployment metro areas, for example, if they have a lot of customers who, who are getting those unemployment checks deposited into their account, that could give them a better understanding of whether they need to put aside more money for loan losses in the future or whether they can afford to not do that.

[B]

All right, that's Wall Street Journal reporter Ana Maria Andreotis. Anamaria, thanks for coming on the show.

[C]

Thank you.

[B]

And that's your Money briefing. I'm J.R. whalen for the Wall Street Journal.

[A]

Deal replaces fragmented payroll vendors with one Global system. No third parties. Hire, manage and pay teams in 150 plus countries. Operate like a local everywhere. Visit d e l.com WSJ.