Latest / Market Pulse / Financial Industry: Assessing Risk as Federal Student Loan Payments Resume
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- Equifax Market Pulse podcast Ep. 24 Dave Sojka: Welcome to the Market Pulse Podcast. I'm Dave Sojka filling in for Catherine Doe as your host. I appreciate her, appreciate her handing me the mic in today's first episode. From our Equifax Risk Advisory staff. I'm your host Dave Sojka filling in for Catherine Doe. I appreciate her handling me the hosting duties today and for welcoming all of you to our first episode from the Risk Advisory Group here at Equifax. Collectively, this team supports our US sales teams by providing insights and guidance on how Equifax can help our clients navigate economic uncertainty and uncover hidden opportunities. I support our FinTech and Inside Sales teams and my panel of experts today include Tom O'Neill, Rhea Turbe, Jesse Harden, and Thomas Aleph. Welcome everyone. How are we doing today? Tom: Thanks Dave. Jesse Hardin: Good. Have a good day. Tom: Well, thanks for having us, Dave. Dave Sojka: I think Maria Urtubey: Yeah. Dave Sojka: we all look great, we all look phenomenal. We'll see how this goes. Hopefully no technical glitches. So today we're talking about federal suit loan repayment and what it means for your business. But before we begin, let's kick things off with a quick economic update from David Fieldhouse, Director of Consumer Credit Analytics at Moody's Analytics. David. Thanks, David. As you know, federal student loans have been in accommodation status since March of 2020. Since then, we've seen government stimulus provide all consumers with additional income for savings and debt reduction. But that money has run out for many consumers. And with the rise of inflation over the last year and a half, much of that excess savings is gone. As a result, we're seeing delinquencies on the rise. However, many loan types are still well below historic highs, while other products like auto have surpassed those highs. So in this time of economic uncertainty, with federal student loan accommodations over and repayment starting back up on October 1st, what's next? Tom, as the risk advisor for our mid-fi and credit union clients, why is this important to them? Tom: Well, the primary reason is the obvious. I mean, we're in a very unique situation where there's an economic event where literally overnight, a vast number of consumers are going to have hundreds of dollars in monthly debt payments that they're gonna have to make that they haven't been making for years now. So that's obviously gonna create a lot of additional stress. in paying their other obligations. And I also want to point out that this is not dependent upon any actions that the administration is doing or the courts are ruling or anything like that. This is a cease of those accommodations. That debt that's been there for years, they now have to make payments on this. So regardless of what actions are or are not taken, this is a stress that's going to hit many consumers literally overnight. Dave Sojka: Maria, from a stratify perspective, why should your clients care? Maria Urtubey: Dave, you mentioned this affects over 40 million consumers that have a federal student loan. And so these consumers are in your books. In the case of the strategic finance vertical, it represents anywhere from 15 to 24% of the consumer base. So although they are not as evidently affected currently, they are facing these payments resuming in October. Some of these segments are already struggling with rising delinquencies. And so having the extra payment and extra commitments on average, they have three to four student loans, will stress them out. And it's a concern. Dave Sojka: Jesse, from an ICE perspective, why is this important to your customer? Jesse Hardin: Yeah, thanks, Dave. You know, for Telco and energy and insurance customers in general, when thinking about where customers are right now, the customers have had challenges with inflation. We all know what the inflation impact is, where customers have had to spend more of their disposable income on regular goods and services, just like Maria and Tom had mentioned. And so we're going to see that. Uh, you know, this problem specifically it's unique, I think in the broadness, um, of the, of the impact, it's not just a specific age group or a, a specific demographic or a specific type of a customer that holds a certain credit product. This is pervasive. And so I think we're going to see, you know, broad exposure, not just again, and you know, certain age groups, but it's, uh, it's going to hit, uh, lots of the. lots of the portfolio. The other thing I think to think about, which is somewhat interesting is, there's a whole subset of a customer base that has never made a student loan payment. So when you think of students that had started in the pandemic and post pandemic, they don't have that cadence of making the student loan payment. And so working that into their daily routine is gonna certainly be a challenge. And I think that's one of the things that we'll wanna. watch as we monitor these types of portfolios moving forward. Dave Sojka: Thomas as the risk advisor for the auto vertical. Why is this important to your- Tom: you Dave. Tom: Sorry, I had a lag for a second. Are Dave Sojka: Okay. Tom: we back? Can you hear me? Like, can you hear me? Okay. Dave Sojka: Yeah, I can hear Tom: Okay, Dave Sojka: you. Maria Urtubey: Yes. Tom: as we started off, what we're observing in the autospace, as we were describing earlier, is increases in the delinquency rates. Auto is fairly unique from an asset class in a lending perspective in that the... It is a fairly competitive market and oftentimes the deal structure is done in such a way where the dollar weighted balance delinquencies are oftentimes far lower than that of the incident. So it's a very risk savvy, risk based pricing approach that's often taken in this space. And given that we are seeing the rises in delinquencies, it does cause some potential concern in that space. And we know that the real disposable income is continuing to be. at risk and declining interest rates being on the rise where they are. There's not as much opportunity for refinancing the space. And so for all the reasons that we described, if a student loan ends up going into mispayment, we do expect many consumers that if they do end up missing those payments, that will impact from a downstream perspective Maria Urtubey: Thanks Tom: their Maria Urtubey: for watching. Tom: potential availability of credit and credit card, lowering some of the credit line assignments that could exist if those are driven by... score categories as well as DTI type of calculations from an ability to pay perspective. And so oftentimes what we're trying to think about in this space is if vehicle values are holding, disposable income comes down, and all of this peripheral risk continues to rise, will we expect the rise in delinquencies to occur at a broader base perspective in addition to the rise that we've already seen within Subbronk? Dave Sojka: Thanks. Yeah, I mean, from the FinTech perspective, or even from the inside sales teams, many of those consumers potentially have cash flows and the FinTechs are serving down market from a credit perspective. And so the stimulus and accommodations have really benefited those consumers, right? They've been paying down those debts. And much like we've heard across the spectrum of our customers is scores have been on the rise. And so, So while they were able to pay down their debts and raise their scores, unfortunately, many of them took on additional debt, I think, as we've all been discussing with our customers. And so what does that mean? And so as these consumers now face an additional payment, and I think Maria, you've been at the forefront of this in talking with the with your stratify teams about around an initial $244 on a monthly basis, that's going to be troublesome for some of our consumers. So and we think about it from a hierarchy perspective, how do we think this is going to play out? The consumer is going to have their checkbook. They're looking at which bills to pay. How is that going to impact? other portfolios delinquency. So Maria, I'll start with you. Do we think that restarting of the repayment with this additional $244 on average payment, do you think that'll contribute to rising delinquency in other portfolios? Maria Urtubey: Yeah, thank you, Dave. First, as you were mentioning, the $244 expected per consumer from our research from our study published last year, I'm hearing even higher amounts. I'm hearing 100 to 200 per student loan. And again, on average, we have anywhere from three to four. So even these amounts, of course, might be on the low side. And in terms of with this, have what type of impact would this have on the delinquency of other product, it will depend. There's a very small, of course, extreme 3.5% of consumers that had not been expected to make payments during these over three years and were still making payments, right? So they've been used to continuing with the typical balancing of their debt commitments. On the other extreme, and just to refer to this, the younger segments, the thinner files, that have been granted some breathing room over three years and have potentially extended their credit opportunities and acquired a credit card or even an auto loan, now will need to juggle additional payments. Again, our conservative amount per consumer is 244. We're hearing even higher amounts. So if they're already struggling meeting these payments, they're faced with higher consumer goods and household expenses. Having that additional amount coming into play will mean they're going to be stressed in trying to meet their payments. We know from our historic experience, the payment hierarchy of student loans is relegated to the bottom. Nevertheless, it is a concern that they will need to juggle all of these debts. And it might affect, of course, even their possibility going forward in terms of credit possibilities. Dave Sojka: Just see to you. Jesse Hardin: Yeah, I'm glad Maria mentioned the payment hierarchy. We've seen in data with Telco specifically, the Telco is fairly high up in the payment hierarchy. And I think that notion is pretty evident in the industry. I do think we will see delinquencies spike within certain segments of the population as a result of the student loan restart. And that's just natural. I think we were at about a 4 and 1 percent delinquency rate pre-pandemic, which is one of the higher groups when comparing to other verticals. So I do think that we're going to see a delinquency spike. I don't think it's anything that we necessarily have to panic on. And I know we'll talk about some of the ways to moderate moving forward. But one of the things to think about too, and I guess if I put my economic glass half full hat on, we were at 9 percent inflation last year. We're coming down from that both with core and core inflation and headline inflation. And so the good thing is that the consumer is going to get a reprieve on prices. However, I do think that, as Maria mentioned and everybody else has mentioned, there's a big challenge with a $200 to $300 a month more payment, especially in light of debt that's been taken on. There was a study by the University of Chicago in which they looked at what happened when consumers... we're in this payment moratorium and lo and behold, they took out more debt. And so we know that customers or consumers are specifically going to be in a situation where they have to start to figure out, okay, what do I make a payment on if I'm constrained? And so that's obviously a concern that I think will translate into higher delinquency rates and something that definitely I think every portfolio is going to need to watch. Dave Sojka: Thomas, what are your thoughts Tom: Yes, Dave Sojka: on that? Tom: yeah, so I think the big concern, I guess, that I've been, well, not concerned, but the question that I'd like to ask on this is, would you have underwritten that loan today, given the change in terms from origination to an account management perspective, to see, would you have changed that deal? And the deal structure will incorporate things like loan to value, credit score. the debt to income and payment to income is oftentimes the key drivers behind that. And so if we're looking at the, I guess the interaction of each of these terms, knowing that vehicle loans, we're up $3,000 on average. We know we're maximized 16% of the population has a thousand dollar payment, which is actually lower risk given the pricing structure that we do in auto. It's quite a, that's another myth that we've dispelled this year. But as you consider that overall impacts from like a loan to value, debt to income, payment to income, and potential score decrease, that's where I would, we would see where this could occur. And also it's great to size the population to know of those loans that consumers have from an auto perspective, how many have a student loan? And we know on average it's about 16-ish percent. But as you break that down, there's gonna be different populations that may have more or less. So sizing it is gonna be the most important aspect and then putting that up against how we did underwriting from an origination perspective. Dave Sojka: Awesome points. I like that thinking about would you make the same loan today? Would you make the same decision? And more times than not, you will. And so that's or it's I have a hundred of those and it's one problem. And so when I still underwrite the other 99, so a great, great point to think about. Tom, your thoughts on this. Tom: Well, I'm thinking since Jesse took the class half empty role, I'll do a bit of role reversal and be the downer on this. But he rightfully pointed out that we are seeing inflation cool. We're in a better spot from in certain circumstances to take that because of those falling prices and a little more breathing room from a consumer spending side. But I'd counter that by saying, we're also coming to this at a point where a lot of that savings that had been built up in the early years of the pandemic, they're gone for a lot of the consumer base. So these payments are coming up when a lot of folks don't have the savings and the bandwidth to really take this additional burden on. So that is something that... that could be an impact as we go into it. And one other piece that I find very interesting, and it's unfortunately something that we can't really put numbers to, is that there is an emotional aspect to this for many of these student loan holders. You know, for many of them, in their eyes, the debt was forgiven. Yeah, they were granted this reprieve and these payments went away. And to some, even though it's not a logical, rational reaction, for some, the resurfacing of these payments carries with it a very negative emotional aspect to it. And so when we talk about payment hierarchies and how this is going to impact prioritizing payments on my card or my auto loan or things like this, there is a random element to this, and that's the emotional aspect. A lot of people are going to be looking at it as, yeah, as they should, you know, in a financially, you know, fiscally responsible way. But others are going to, you know, carry with it some of that emotional attachment to, you know, to this thing, which rightly or wrongly, they thought, oh, I don't have to worry about this anymore. And now it's hitting them. So again, not something that we can really quantify until we actually see it and we experience it and we see how people are reacting. it adds a little static to the whole equation here. Jesse Hardin: Hey, Dave, if I might, I do want to call out, I think this may be the first time I've ever been called the glass half full guy. So Dave Sojka: Yeah. Jesse Hardin: I, you know, I do want to call that Tom: Well, Jesse Hardin: out. Tom: it's refreshing because I usually go through with rose-colored glasses. Dave Sojka: Hey, that was off script. You guys had, you guys screwed up the Jesse Hardin: Yeah. Dave Sojka: script. Jesse Hardin: Well, I did, Dave Sojka: Now Jesse Hardin: I Dave Sojka: we're Jesse Hardin: did Dave Sojka: in Jesse Hardin: want Dave Sojka: turmoil. Jesse Hardin: to say, well, one other thing I think, and it's, it's a good point that Tom made. Um, when we think about the payment programs and some of the things that are happening in, um, you know, in the political circles, you know, we don't know what that impact is going to be. And I think it's important that the point that Thomas made when we talked about how, um, you know, how you look at your decision and what that decision would have been, you know, kind of pre and post. Certainly thinking of when a consumer is faced with that noise, let's call it noise in the market, whether it's the political pundits talking or whether it's the courts talking, we don't really know how that's going to impact their decision-making process to make that payment. Maybe they decide, hey, there's all these forgiveness plans that are out there. I'm going to qualify for one of them, so let's not worry about this. That's I think an intangible that... I wouldn't necessarily put that as something we need to closely follow because it's, I mean, honestly, you could spend your whole career following that, knowing how the courts work. But certainly it's something that I think is good to understand because we're in a different situation now, talking about loan forgiveness. That typically has a consequence on a consumer. In this situation, there's a lot of discussion about... forgiveness of loans where there is no consequence. And so I think that could have a different impact on the way customers interact, or consumers interact. So that's just something to kind of think about as well. Dave Sojka: Yeah, you know, this kind of pulling that thread on the emotional piece, right? I mean, if you think about it, right, those consumers are sitting there and they've got a suit loan payment due and they think about, well, is it going to get me to work? Is it going to keep my internet working? Is it going to keep my cell phone on? Is it going to give me a roof over my head? The answer is no, right? So that, that knee jerk reaction from the consumer might be at the sunk cost. I have no value. today, it gave me, it got me my career, but I'm not, it doesn't give me value at this particular moment. So right, I think that emotional impact will be there, right? And that's, again, it doesn't impact our clients directly, because again, most of them are not federal student loan lenders, but what it's gonna impact is their scores, right? And their capacity to pay. So while they might choose to, students might choose to default, that's not gonna impact the card, it's not gonna impact the card, but it might be downstream when that credit line is up for increased decrease decision and their score has dropped 20 to 30 points because they've been missing payments. So I think that's the piece to think about, trying to rewrite your decisions from a year or two ago, it's not gonna accomplish anything from a lending perspective. It is, you've made the decision, you kind of have to live with it. And how do you... How do you mitigate that? How do you go forward with it? And that's kind of the next piece of this, right? Jesse is, I'll throw this to you. So we've talked about there's repayment restarting. We've talked about the, we've quantified the size of it and what the impact is. So how do our clients assess it, the impact, and how do they address it from a risk perspective on their books? Jesse Hardin: Yeah, so that's the million dollar question, right? And I would say that, you know, I'm from Texas, we have big storms, the saying is always, don't be scared, but be prepared. And I think that kind of applies here. It's not something that we have to be scared about. Fortunately, there is some time in the decision where payments are not gonna start to happen for at least another month or two. So I think the biggest thing that customers can start with is they can start with knowledge, you know, and so better understanding of my portfolio, you know, how many customers is this going to impact? What are the sizes of the balances that are, you know, that are on the, on the books for these student loans? And really just getting a better understanding of who these customers are going to impact, or I'm sorry, who these, you know, which ones of these consumers are going to be impacted. And then I would say, you know, from there, I think the, you know, the, the approach could be that idea of crawl, walk and run. So we know who's impacted. Uh, you know, now let's figure out how we get data on those who are impacted so that we can better understand, you know, the velocity. So, you know, are we seeing changes in payments? Are we seeing changes in debt to income that would lead to that pressure that we know those consumers are going to face? Um, and then I think you can get. more sophisticated as you have that knowledge in terms of understanding, real-time, who are those customers that are impacted? Can we see the real-time nature of those impacts? And then we're not just talking about a risk type approach. You could have, and I was thinking about this with my vertical as well, you could have customers that... maybe it's an opportunity to try and market a different type of product to them. If we know that there's, and again, I like hats, right? So I'm going to put on a different hat here, maybe put on my marketing hat. But if there is an opportunity perhaps to get a different type of product or a different type of utility of a product in for that customer knowing that they're going to have maybe more challenges in their life with the payment structure of the debt that they have. Maybe that's an opportunity to reach out, to reach out to that customer and say, Hey, here's a product that maybe fits closer to the situation that you're in. So I think that outreach, I think looking at the impact and who is it going to impact in my portfolio and then really building those plans of outreach. I think that's where I would start. Dave Sojka: That was a short video. Tom: Yeah, so we've talked a couple of times, you know, a few different perspectives, whether the glass is half full, whether it's half empty, it's always going to have on the other side some form of air, whether it's cold or hot. And what I'd like to propose as a part of this is really understand and assess the total market size it. You can't make a decision or remove uncertainty without data, and there's so much data available. And to have that data updated at the most frequent levels, We put out studies that movement from if there's no account review done, do account review. And once you start doing account review, move that as frequent as you can up into the status of quarterly to monthly. Monthly is what we highly recommend for pretty much every portfolio. And get all the key statistics that are associated with the underwriting. When we talked about what could be the potential rise in delinquencies, would you have underwritten that loan today? in the same way you did originally. Get those same stats, look at it from a month over month basis and look at the migration that the consumers would have and have access to that information as quickly as possible. So if you're not leveraging things like updates and employment and income, debt to income, payment income, loans of value, vehicle prices, and have quick access to that through things like some form of cloud delivery to be able to take that information and also action on it quickly. from delinquency reduction, collections, any form of behavioral strategies, and then ultimately being able to update your forecasts. Dave Sojka: Okay. Tom: Yeah, well, Jesse and Tom have both done a great job outlining the fundamental aspect of just knowing what's going on there. Who on your portfolio is susceptible and what's going on with them and how are they behaving outside of your purview. But there's always that next step. You have the knowledge. You can build up that awareness. You can do the... more frequent account review cadence as Thomas mentioned. But then what do you do with that knowledge? And I think a lot of people in situations like this where it's a risk event, it's something where the automatic reaction is sort of a knee jerk tightening up, do a line decrease or something to minimize exposure as an example. Those types of things are there, but I'd also point out that that it's an opportunity to work proactively with your clients. And this is particularly true with the credit union space and their memberships where the onus is on reaching out to them and saying, hey, we understand you're in this new situation. There is this additional financial stress. You've got less capacity. What can we do to work together, whether it's loan consolidation, payment plans, financial awareness, whatever the case may be, to help their membership or help their client base get through this period and this essential shock to the system. And so it's an opportunity from that standpoint and not just a risk entrenchment type activity. Maria Urtubey: Thank you. To recap exactly, the awareness component in the strategic finance vertical is critical. And I would add the speed. As we were talking about the neighbors, everyone is affected to some degree. So if you are going to be proactively assessing your portfolio at the overall level, you are frequently on a monthly basis, ideally, assessing the impact of the serial loan coming into play or other aspects, right? of the debt that your consumers hold and how they're juggling their commitments, being able to get their first proactively will be a big advantage. And on the other hand, I'm also in a way leveling with what Tom and Jesse mentioned, which is the having to do with the emotional aspect and potentially also the age groups. I've heard from my customers. Other type of perspectives in terms of being also careful as to how you approach these proactive campaigns in assessing whether it's educational financial programs or changes or potential new products as Jesse was mentioning. Depending on the age group having that information in your customers might be considered a bit intrusive. So you also have to assess in what ways knowing your customers and you should be very close to that type of Knowledge is the best way to discern and approach the different options that are most suitable depending on the segments that you are proactively pursuing. Dave Sojka: Yeah, I mean, I think that's before I get into the FinTech side of things. I mean, that's the key here, right? It's, you know, any, any kind of attribute identification is going to be close. We're pretty, you know, it's not going to be a hundred percent. And, and while being, but while having those guard rails from accuracy perspective on a positive perspective, it can have detrimental impact to your customer experience on a negative side. proactively decreasing a line because you think this person is a risk without ever talking to them or someone again And and it turns out that they don't have that exposure So there you know there could be the downside of that so really understanding the data and being loose enough with your with your strategies to account for minimizing that risk, but also Not shooting yourself in the foot if you will Maria Urtubey: Mm-hmm. Dave Sojka: By by going too far You know, in terms of the FinTech group, obviously there's some, I've heard from some customers, refi opportunities. There are customers who do student loans that have opportunities to refi those. Consolidations. Can you give out a personal loan for, you know, with the lines? I really mean the interest rate where it's at kind of constrains some of those opportunities, but knowing that, you know, you have those opportunities to potentially gain new customers that might be in trouble. depending on the balance size and what you allow for. A question was posed, might consumers tap in the equity in their homes with the HELOC to pay off their loans? That might be an opportunity as well. So those lenders that are looking for that, I mean, again, it really depends on the risk profile that you're serving. But again, these are other opportunities. And then on the downside, again, your collection strategies, right? Are you you know, downstream if they do go bad with you in terms of how you can mitigate your recovery on these consumers. And ultimately, it's, you know, all these things are great. But if your credit policy doesn't allow for you to take any kind of action, I think that's another piece that you need to think about. Now ties back to Thomas's comment about would you re underwrite this loan, right? The criteria, your guidance, what does your credit policy allow you to do from a re age perspective? Skip a payment. Line trees, whatever that is, make sure that you have all that setup before you go in and try to address these higher risk consumers. Or again, look for opportunities on the lower risk side. So I think that takes us to the end of our discussion. I want to thank you all for participating. And for you audience, thank you for joining us today. For our listeners that would like to learn more about this topic, please reach out to us at Equifax. For those for our listeners that would like to know more about this topic please reach out to us at risk advisors at Equifax.com or reach out to your Equifax sales contact for more information. Thank you.