During the height of the COVID-19 pandemic and the subsequent recession, households, businesses, and entire nations struggled to determine where to find capital. A massive shock wave hit the public, and sustaining regular operations often seemed bleak. As a result, the United States saw GDP fall 32.9% in Q2 of 2020.
Though the recession in the wake of the novel coronavirus was the shortest on record since 1857, it also meant the lending industry would feel the effects. A disruption in the money supply draws down what is available for borrowing. Many factors steer consumer confidence and subsequently the ability that an organization, or an entire county, to produce.
Borrowing from Banks in the Age of SBA Loans
As the U.S. Small Business administration saw a historic year of lending in 2020 at the outset of the COVID-19 pandemic, businesses saw an opportunity that wasn’t present at their local lender. As part of the CARES act, businesses received aid with totals over $28 billion. Companies needed to address open balances with vendors, maintain costs for equipment and assess other operations costs.
When an organization has to sustain operations, it does not happen for free. Businesses often need to invest in their business but must find a way to keep enough money in the industry to support operations costs. This need to invest is where lending comes in. According to the U.S. Bureau of Labor Statistics, 29% of businesses face going under because they run out of capital to sustain them and to sustain growth.
When service is interrupted by major global events like the COVID-19 pandemic, consumers stop reaching for the phone to call some businesses. This drop-in consumption means the cost of operations is not relatively as high. A decrease in operations costs relates to a reduction of reasons to seek a loan to sustain operations. As a result, not only did business take a tumble, but the lending institutions that supported them felt a blow as well.
High-Risk Loans – Alternatives to Payday Lending
North of the U.S. border, consumers in Canada, are also forced to take leaves of absence bringing in a new wave of financial hurdles. When options for childcare become limited for professionals, time away from the office is the only path forward for many. In addition, the payday loan business has not increased due to the pandemic. This lack of increase is likely due to a lack of consumer spending.
If consumers have needed to borrow, some lenders tightened their standards for lending. Prospective borrowers then still turn to high-interest (and high-risk) loans. These tools often carry a much higher APR than a bank would for borrowing the same level of capital. Installment loan companies are still supplying the surge of money that many homeowners need, though not to their degree before COVID-19. The California Department of Financial Protection and Innovation even found that payday lenders saw a 40 percent decline in loans made from 2019. Lenders made fewer than 6.1 million loans during the COVID-19 pandemic.
Mortgage Lending Changes Due to COVID-19
Many borrowers who held federally backed mortgages had to decide if forbearance was the right choice for them. These loans include VA, USDA, HUD/FHA, Freddie Mac, and Fannie Mae loans. Forbearance is a significant decision both on borrowers and lenders. Those whose loans enter forbearance due to COVID before six payments go into Early Payment Default (EPD).
2.2 million borrowers, or about 35% who signed up for forbearance, remained in the programs as of Q2 2021. The borrowers who stay in the programs have a more profound financial hardship, lower credit scores, and are particularly vulnerable. About 70% of those still in forbearance are not making any payments. The rate of payment delay has naturally been a concern of lending institutions. We could see serious delinquency jump from .9% to 3.8% if predictions hold.
At the EPD stage of a loan, a lender will lose any of the profits on that loan. The loss even includes the processing and closing expenses. As a result, lenders needed to put prospective borrowers under a more stringent microscope to help ensure their time is of use, qualifying borrowers who would likely work out for a loan.
A forbearance is a viable option for borrowers, and it’s something that the lending industry can handle, though not as a result of events like a global pandemic. Depending on the lender, you would be allowed up to 18 months of total forbearance. That window means many borrowers are coming out of that period. While forbearance does not erase payments, it has provided temporary relief for many who face pandemic-related financial difficulties.
High-interest lending businesses and traditional banking institutions are all feeling an impact due to COVID-19. The possibility of stopped payments due to a drop in income could shatter an installment or payday loan business as their operations costs creep higher.
Turn times for loans are higher, and operational costs match that shift. Therefore, having qualified and capable loan managers on staff are to the advantage of lenders and borrowers.
When lenders are evaluated prospective borrowers for income, assets, credit, and collateral, that process requires operations costs to climb. With fewer repayments and some continuing hardships, the industry is not out of the woods yet. However, jumbo loans and qualified mortgage (QM) loans are slowly reentering the market, which is a sign of some return to normalcy. Still, hiring as a lender when the talent pool may be too shallow is a challenge that extends beyond available capital.
Need for Capital
Home remodeling, debt consolidation, moving costs, emergency expenses are all the types of reasons that consumers reach for an infusion of capital into their households. Businesses face many of the same considerations to keep growing while also having money on hand. Buying new equipment to satisfy the workload is essential, so lending is a considerable tool for businesses when cash is low, and expenses are high. The lending industry is navigating an unfamiliar space with demands that stretch far and wide. Still, it remains a tool to help better manage the volatility that the marketplace can carry.
Home remodeling, debt consolidation, moving costs, emergency expenses are all the types of reasons that consumers reach for an infusion of capital into their households. Businesses face many of the same considerations to keep growing while also having money on hand. Buying new equipment to satisfy the workload is essential, so when cash is low and expenses are high, lending is a considerable tool for businesses. The lending industry is navigating unfamiliar space with demands that stretch far and wide but it remains a tool to help better manage the volatility that the marketplace can carry.
