Reality Check: U.S. Subprime Credit Grows but From a Low Base
Jon Hurdle/Marketing News International

3 September 2015

-- Credit Counselors Report More Payday Loans, Internet Finance
-- But Stable Delinquencies Suggest Most Consumers Still Disciplined

PHILADELPHIA (MNI) - U.S. consumers are taking on more debt from sources such as payday lenders and Internet-based finance companies that charge high interest rates to people with low or non-existent credit scores, according to credit counselors and an executive from a leading source of lending data.

Although the counselors said there is no evidence of a return to the reckless mortgage lending that preceded the 2008/09 housing bust, credit is available from an increasing number of non-traditional sources that are taking advantage of continuing post-recession restrictions by mainstream lenders.

Although the overall consumer debt level is little changed this year, lenders are originating more loans to subprime borrowers, albeit from low levels, for mortgages, credit cards and car purchases, according to data from Equifax.

The consumer credit information company reported in mid-August that the number of first mortgages issued to borrowers with credit scores under 620 is 30.5% higher in 2015 to date compared with the same period of 2014. The value of those loans rose 52.7% from the year-ago period.

The number of credit cards issued by banks to subprime borrowers also rose 30.5% from a year earlier, while the number of auto loans to those with low credit scores rose by 8.9% to 2.64 million.

Dennis Carlson, deputy chief economist at Equifax, said the rise in different types of lending to subprime borrowers should be watched but is not an immediate cause for concern because the increases are from the very low levels that resulted from a sharp contraction of credit availability since the last recession.

Although the share of new bank cards issued to subprime borrowers rose to 17.9% from 15.2% over the same period, the increase doesn't represent an explosion of credit to low-score borrowers because the spending limits on those cards are often very low, Carlson said.

"More people are getting credit cards, but oftentimes, the limits are $500-600," Carlson said.

A better indication of the availability and use of credit, Carlson argued, is the delinquency and write-off data, which shows declining rates for mortgages, bank cards and auto loans as most consumers continue the post-recession pattern of frugality and discipline in their personal finances.

The pattern is also seen in use of credit cards, where a rise in originations is not being matched by balances, indicating that people are making sure they don't become overextended.

"People are taking out cards but they are not using them as a form of a loan, more for the convenience," he said. "We're not seeing rises in balances commensurate with the number of cards that are being issued."

Total consumer debt was $12 trillion in July, 1.7% higher than a year earlier, Equifax said.

The minimal change in overall debt levels appears to be confirmed by anecdotal evidence of financially disciplined consumers, said Sean McQuay, a credit card associate at Nerdwallet, a San Francisco-based financial information company.

Consumers are not excited to take on more debt, he said, and although they are opening up more credit card accounts, they are paying them off every month, and not running balances, even though credit is becoming more available.

"Since the financial crisis, people have been very cognizant of the need to maintain as low a debt as possible," McQuay said.

Meanwhile, some credit counselors said they are seeing evidence of increasingly available credit from non-traditional sources, resulting in more borrowers becoming over-extended and seeking guidance on debt reduction.

Argelis Sanchez, a counselor with GreenPath, a national consumer credit counseling service, said some clients are falling prey to payday lenders and other financial companies that may charge interest rates as high as 25-30% to people who have low credit scores or no credit history of any kind.

"There's the opportunity there for a lot of predatory lending," he said.

While subprime borrowers may still be unable to get credit cards, they are increasingly able to get loans from small lenders that often charge high rates, he said. The same applies to conventional mortgages which may be unavailable to subprime borrowers who then turn to alternative lenders.

Although credit-card debt generally has not reached the levels that it did before the recession, it is creeping up, and that has led to an increase in the debt-management programs operated by Sanchez's offices.

Sanchez, who has clients in New York, New Hampshire, Georgia and south Texas, argued that such lending practices are part of a general return toward lax credit standards that characterized the pre-recession period of the mid-2000s.

"We're taking some steps to where we were before the credit crunch," he said. "We are getting to the stage where credit-card companies are more than willing to extend credit."

In the Detroit office of GreenPath, Katie Bossler, a financial counselor, said she is seeing more clients with debt problems because of the increased availability of credit.

"It seems like credit is becoming more available than it was in the recent past," she said.

Although credit is not being abused to the extent that it was before the recession, Bossler said it is again resulting in more customers seeking debt-reduction programs than a year ago.

"For a while in counseling you did not see large credit card balances, you did not see high interest rates," she said. "Now, that's starting to come back." Bossler said she saw a "handful" of such cases just in a week at the end of August.

She cited one couple who came to her with $57,000 in credit card balances and debt of $10,000 to the Internal Revenue Service, both of which had been incurred because layoffs had forced them to borrow to pay bills despite a previous joint income of $120,000.

Such cases are exacerbated by the increased availability of credit, she said. "If costs are going up or someone is making less than they used to do, and credit is there, they are using it."

Consumers with decent credit scores can get loans from conventional sources while those with weaker scores are increasingly lured by non-traditional sources of finance, she said.

"What I am seeing a lot of is these really yucky subprime loans, particularly Internet loans and payday loans with very high interest rates," she said. "They are particularly targeting people with bad credit."

Bossler said the use of such loans is growing "much more sharply" than that for credit cards which have increased moderately in recent months.

The Federal Reserve is scheduled to release July data on consumer credit at 3 p.m. eastern time on Sept. 8.

Editors' note: Reality Check stories survey sentiment among business people and trade associations. They are intended to complement and anticipate economic data and to provide a view into specific sectors of the economy.