Personal Loans, Credit Cards Shine as HELOCs and Retail Cards Lag

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As U.S. lenders closed the book on first-quarter 2019, personal loans and credit cards were driving the most recent borrower growth trends; auto loans perked up a little; mortgages were flatlined; and private-label credit lines (retail issued cards) and home-equity credit lagged.

(Don’t miss “Impact of Regulations and CECL in a Late-Cycle Economy,” “Investments, Loans, Deposits and Direction,” and “2020: Growth, Recession, or Slowdown?” — all at the league’s Your Economy—Your Credit Union conference on June 13!)

The fastest-expanding originations were mostly found at the opposite ends of the risk spectrum: within “super prime” and “subprime” borrowers, according to the latest year-over-year U.S. consumer credit trends highlighted in TransUnion’s update webinar last week. Meanwhile, middle-tier borrowers (near-prime, prime, and prime-plus) were holding steady for the most part.

A growing economy—which is forecasted to slightly slow down this year and next—has kept upward pressure on consumer spending growth. It’s also kept loan delinquency rates in check due to a robust job market and risk management by lenders:

According to Kristen Bataillon, senior manager of financial services research and consulting at TransUnion, the following credit trends are impacting lenders (view presentation slides here for results as of March 31, 2019):

Credit Cards (Banks and Credit Unions)

  • There is now a record number of “general purpose” bank and credit union credit cards issued to consumers (433 million). This number continues to grow. About 80 percent of credit cards have a balance (carrying a collective total of $772 billion), with increasing balances being held by a growing number of cardholders.
  • Growth in sub-prime borrowers is mostly due to an uptick in new card issuers, not existing issuers (and sub and near-prime cards now make up 36 percent of all credit cards issued). “There’s questions and concern here, but we have to understand the lender controls that are in place within new originations,” Bataillon said. “Sub-prime borrowers are receiving smaller-account credit lines. Issuers are originating higher volume of growth, but at lower originating credit lines—a way to control risk exposure at the outstanding balance level.”
  • Although sub-prime growth is significant, middle-tier borrowers are driving growth in new-account credit lines that are increasingly higher utilization lines. “This is a lender response to an increasingly competitive marketplace, with some realization that there needs to be control on risk,” Bataillon said.
  • Total delinquency was 1.9 percent and forecasted to rise to 2.1 percent by early 2020. “We are seeing delinquency growth, but it’s moderate and expected” within the context of economic growth and new cards issued based on consumer demand, Bataillon said.

Private-Label Credit Cards (Retailers)

  • Private-label retailer cards are increasingly out-competed by point-of-sale loans, as well as bank/credit union credit cards—a trend that’s expected to continue. Consumers are leveraging their options. Additionally, many retailers have shuttered store locations or their actual business establishments over the past few years due to e-commerce growth (online shopping).
  • Retail cards (private label) are still a growing business, but on a much lower scale today than in the past. There are fewer cards on the marketplace with more total overall debt. The exception to the trend is private-label cards within the “prime plus” category, which has shot up the last two consecutive quarters for the first time in several years.
  • “Serious delinquency” on private-label cards remains at a pre-Great Recession level—about 40 percent lower today than in 2009 across all risk-tiers. “Consumers are acting differently, not just because the last recession but because of the recent retail environment,” Bataillon said. “Stores have shuttered and lenders are actively managing risk.”

Autos/Vehicles (New and Used)

  • Total auto loan balances continue to reach new heights, but at a declining growth rate. A number of pressures have contributed to this, including issues from global trade tariffs, new vehicle prices, and rising interest rates.
  • Total auto originations have grown year-over-year during the past four quarters coming off the heels of a noticeable “pullback” between late 2016 – late 2017. “This pullback was predominantly in sub-prime, but it was also when interest rates started rising,” Bataillon said. “We are now seeing a new start to originations in subprime, which is why we’re starting to experience a rise in total auto loan growth.”
  • Meanwhile, lenders continue to focus on “prime plus” and “super prime” originations as well. Nearly 45 percent of total originations came from these borrowers. Nonetheless, near-prime and prime originations haven’t been growing at the same rates and are still experiencing some intermittent declines over the past few years.
  • “Credit unions have still been gaining market share during this time,” Bataillon said. “A number of other lenders started pulling back in 2016 and 2017, but credit unions continued to grow and capture more market share, originations, and total balances on the books.”
  • The average loan balance on a vehicle continued to rise. However, as new car prices continue rising, consumers are increasingly questioning whether they should shift to used vehicles, thinking about how used car prices will shift in the future, and what financing options are available on used versus new vehicles.
  • Delinquency rates were increasing in 2015 and 2016 but have stopped since then. Ever since 2017, depending on the borrower risk tier, delinquency has held steady.

Mortgages and Home Equity

  • Total mortgage balances have experienced their seventh consecutive quarter of dropping. Much of this is refinance activity falling due to higher mortgage interest rates, but some is purchase-related because of increasing home prices. A flat rate of originations is expected for 2019 and 2020 (no contraction or growth).
  • Although it’s small, mortgage originations in non-prime tiers have started ticking up. However, sub-prime still only comprises less than 4 percent of all originations.
  • There’s a continuing decline in average originating mortgage balance despite increasing home prices. This is probably due to: 1) “refinances” are for smaller dollar amounts; 2) larger borrower down payments due to rising interest rates; and 3) fewer originations in high-priced metropolitan areas versus more originations in lower-priced areas.
  • Fewer borrowers have mortgages today, but they are higher in dollar value compared to 2008. Still, the total outstanding mortgage balance collectively at all lenders is 2 percent lower today than the high in 2008. However, today it’s spread across 20 percent fewer mortgage borrowers. Those with mortgages own more expensive homes (mostly prime-plus and super prime consumers).
  • With home equity growing even faster than home prices, consumers are sitting on a lot of “cheap money” and not accessing it as anticipated. But why? “There’s a lot of equity out there, more so than in pre-recession times—and these products aren’t growing,” Bataillon said. “It could be due to the rise in unsecured personal loans, even though these come at a higher interest rate. Perhaps the ‘consumer experience’ with these products makes them OK with consumers even with that higher rate. Or perhaps it’s a lack of awareness about home equity loans post-recession. It’s also somewhat due to the impact on some areas of the 2017 congressional tax law.”
  • Mortgage delinquencies continue trending downward toward a historic low. This is probably due to the risk appetite of lenders.

Personal Loans (Unsecured)

  • A record 19.3 million consumers now have unsecured personal loans. Over the past four years, the total balance has nearly doubled from $72 billion in 2015 to $143 billion by early 2019—and this is across all borrower risk tiers. Lenders have seen 5 million originations as of fourth-quarter 2018, “a lot of rapid growth.” Bataillon said.
  • Fintech lenders are competing heavy in this area, but credit unions and banks are still holding their own. The “general marketplace” of this lending product is contributing to its overall growth—not just one type of lender’s competitiveness over another.
  • Growth is being experienced in both origination volume and total balances. And it’s happening across the borrower risk spectrum by all types of lenders (but especially fintech lenders). “Lenders, overall, are extending larger loan amounts to borrowers,” Bataillon said.
  • Only 7 percent of consumers have a personal loan. “There still appears to be runway for growth relative to other credit products,” Bataillon said. “As we see increasing competition and substitution in the wallet (credit cards), there is more growth potential. It’s definitely starting to make its way into every consumer’s wallet.”
  • Unsecured personal loan delinquency has increased almost every year since 2013, but it still isn’t a concern. “What’s interesting is, super-prime personal loans specifically from 2017 showed a noticeable increase in ‘serious delinquency’,” Bataillon said. “But overall, performance is quite well over the past five years.”

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