Garnet Capital Advisors Blog

EXCERPT:

Consumer credit has been on the rise over the past six months, pointing to heightened consumer confidence and a healthy economy. Yet despite such confidence in spending, lenders need to be extremely diligent and cautious with their lending practices in order to avoid another situation like the one that led to the previous economic crisis in 2008.


Consumer confidence has sparked increased spending and credit extension among lenders.

According to the Federal Reserve's consume credit report, US household credit jumped by $19.3 billion in September. The month before, it jumped a whopping near-record $26.8 billion, the largest jump in percentage since April 2014. In July, outstanding consumer credit increased by $17.7 billion.

These increases were all above expected increases, though the components of overall credit remained in line with expectations. Revolving credit increased at an annual rate of 5.25 percent, or $4.2 billion, and non-revolving credit rose at an annual rate of 7.5 percent, or $15 billion.

The Fed also released its quarterly report on auto and student loans, both of which have hit records: car loans reached an all-time high of $1.098 trillion, while student loans reached a record $1.396 trillion. However, the pace for car loans has tapered off in recent months, despite overall auto sales continuing to remain quite high.

US household spending has continued to be a positive force on overall economic growth amidst decreasing government and business spending, putting American consumers in a position to increasingly fuel growth. Consumer spending encompasses approximately two-thirds of economic output, and has increasingly shown the ability for the US economy to adapt. The US Labor Department reported that employers added 271,000 jobs in October, which could continue to support continued borrowing and spending.

Credit Card Issuances on the Rise

In addition to an increase in student and auto loans, the extension of new credit cards to consumers - including to lower credit score borrowers - has increased to heights that haven't been seen since pre-crisis times.


An increase in auto loans, student loans, and credit cards requires lenders to continue to remain diligent in their underwriting practices.

Bank of America Merrill Lynch issued 1.3 million credit cards during the third quarter with total credit card loans during this period reaching $97.9 billion. Citigroup's credit card loans reached $147.8 billion in Q3, and JPMorgan's credit card balance spiked to $133.4 billion, up 5 percent from the same time last year.

The case to grow credit card balances on the balance sheet is obvious, as banks look to boost profits with such increases in loan assets. But of course, there are inherent risks involved at the same time, prompting lenders to proceed with caution.

Lenders Need to Proceed With Caution Amidst Increased Consumer Spending

As positive as these numbers may be for the overall economy, there is also fear that consumers are borrowing more and saving less to keep up with their spending. An increased willingness for consumers to borrow shows the relatively high level of consumer confidence to spend, especially amidst extended low interest rates.

Along with a jump in consumer credit and spending comes an increased need for lenders to remain stringent with their underwriting standards. Increased consumer credit might be an indication of a stronger economy, but it must still be met with caution.

Problems start to arise when loose underwriting requirements creep up, and lenders need to be careful to avoid that practice.

Addressing Due Diligence Made Easy With the Assistance of an Experience Loan Sale Advisor

With consumer credit on the rise, lenders need to be extremely careful and cautious when it comes to what they buy and sell. Remming in compliance with regulations, and addressing due diligence can be a complicated and delicate process, but with the help and proper guidance of a seasoned loan sale advisor like Garnet Capital, such a process can be simplified.

Register for our online portfolio auction system to find out more about the loan sale advisory services at Garnet Capital.