‘Personal’ Vs ‘Home Equity’ on Fringes in 2020 Lending Forecast

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The U.S. marketplace share of consumer loans extended by credit unions to borrowers in the foreseeable future compared to banks, fintechs and other lenders will fluctuate as the economy slows, interest rates remain “low,” and all types of creditors strategically prepare for the next two years (2020 – 2021).

What stands out the most is the unsecured personal-loan category, which is made up of small consumer balances but continues driving overall lending growth and hitting new records. On the flipside, home equity lending will continue its long-term descent.

That was the sentiment expressed during TransUnion’s recent “Q3 2019 Financial Services Industry Insights Report” and forecast webinar, followed up by a question-and-answer session (click here for presentation slides). This mid-December credit overview of U.S. consumers was hosted by Chris Huszar, senior manager of FS Research and Consulting, and Matt Komos, vice president of FS Research and Consulting.

“Although the dynamics can always change, we’re expecting consumer credit to look favorable through the end of 2020 — all due to employment, spending, and the health of today’s consumer,” said Komos. He noted that total U.S. consumer credit hit a record $13.8 trillion by third-quarter 2019, driven by new entrants within the Generation Z cohort. “Low interest rates mean access to spend, which is a means to finance purchases.”

The following are highlights:

  • Total balances for nearly all types of loans by U.S. lenders will continue growing over the next 12 months, but at a noticeably slower pace than the 2017 – 2019 period (and with the exception of home-equity credit). In general, aggregate consumer demand for first mortgages, unsecured personal loans, auto loans, traditional credit cards, and private-label credit cards will keep rising (but not the combined category of HELOCs/second mortgages) for most credit unions, banks, fintechs and other types of lenders.

  • Unsecured personal loans will expand the most in 2020 out of all lending buckets, hitting a record $180 billion. Due to fast, convenient mobile technology, this type of lending has somewhat been the “replacement” for home equity lending since the Great Recession of 2007 – 2009. “Lenders have been willing to meet all types of borrowers where they want to be met — online, mobile and lap top — for a seamless and frictionless experience,” Komos said. “By the end of 2020, we’ll see even more sustainable and manageable growth in this area, although it will be down from the double-digit growth we’ve been experiencing for several years. Both the supply and demand sides are driving this growth.”

  • More partnerships between credit unions and fintechs (and banks with fintechs) will materialize going forward. In the current financial services marketplace, many large banks have already partnered with fintechs over the past few years to become the source of deposits for lending money to borrowers. “Fintechs have a significant technology edge compared to all other lenders since they tend to have newer underwriting platforms that offer nearly real-time decisions, with the use of more alternative (underwriting) data in their decisioning process,” Huszar said. “Many credit unions and (smaller) banks generally aren’t as agile or have the resources to build something similar. I think we will start to see a lot of partnerships, or even purchases, of fintech firms moving forward.”

  • Unlike many credit unions and banks, fintechs’ increasing use of “alternative data” for credit underwriting is helping them fine-tune lending decisions. “Fintech consumers generally have higher aggregate excess payments — the amount of payment over the minimum payment due — when compared with the total unsecured (loan) population,” Huszar said. “The additional factors that fintechs are using in the underwriting process is going beyond traditional credit score cut-offs that allow them to make better decisions.”

  • While credit unions’ unsecured personal loan balances doubled from June 2012 – June 2019 (from $14 billion to $28 billion), their share of this product in the marketplace declined from 30 percent to 19 percent. Meanwhile, banks’ share has dropped over this period as well (39 percent to 29 percent), and traditional finance companies’ share dropped too (30 percent to 13 percent). Fintechs’ share of unsecured personal loans, on the other hand, increased dramatically (from 1 percent to 39 percent). For context, all lenders’ total unsecured personal lending (combined) rose from $47 billion in 2012 to $147 billion in 2019 (and is expected to hit $180 billion in 2020).

  • While many credit unions and banks have been through economic recessions and borrower pullback by consumers in the past, many fintechs (if not most) have no experience in this area. “The age of fintechs will be something to watch through the economic cycle,” Huszar said. “Many of these firms may not have the account management and (loan default) collection capabilities needed to service their portfolios. These fintechs are relatively young and haven’t experienced an economic downturn or lending downturn yet. Some may start looking to deleverage and make their portfolios a little more conservative in the coming years. Their personal unsecured loan underwriting is very similar to credit unions, but not quite as conservative as banks.”

  • Click here to view all slides in the presentation for the 2020 forecast and past trends on first mortgages, unsecured personal loans, auto loans, traditional credit cards, private-label credit cards, and home-equity lending (HELOCs and second mortgages) for credit unions, banks, fintechs and other lenders.

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