Lending lull as banks eschew credit reports

Banks have pulled back sharply on lending to US consumers during the coronavirus crisis. One reason: They can’t tell who is creditworthy anymore.

Millions of Americans are out of work and behind on their debts. But, in many cases, the missed payments aren’t reflected in their credit scores, nor are they uniformly recorded on borrowers’ credit reports.

The confusion stems from a provision in the government’s coronavirus stimulus package. The law says lenders that allow borrowers to defer their debt payments can’t report these payments as late to credit-reporting companies.

From March 1 through the end of May, Americans deferred debt payments on more than 100 million accounts, according to credit-reporting firm TransUnion, a sign of widespread financial distress.

The credit blind spot has further clouded the outlook for lenders. For years, strong consumer spending and borrowing helped propel them to record profits. Now the economy is in shambles, and they are trying to figure out what is going to happen to all of the debt Americans racked up in better times.

Lenders that are having a tough time spotting risky loan applicants are approving fewer borrowers for credit cards and auto loans.

“Without accurate information, their only option is to pull back on credit,” said Michael Abbott, head of banking for North America at Accenture. “Banks don’t know who is going to pay and who isn’t. It’s like flying blind into a credit storm.”