Category: Credit Risk

Update on student loan borrowers during payment suspension

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Updating a previous CFPB report, this blog documents increasing signs of financial strain through September 2022 among student loan borrowers who are expected to face monthly payments when federal forbearances end. It also tracks changes in other risk factors for which consumers are most likely to experience financial difficulties when the relief ends, depending on implementation of new debt cancellation proposals.

Thomas Conkling and Christa Gibbs, Office of Research Blog, Consumer Financial Protection Bureau

Let the rich be flooded: The distribution of financial aid and distress after hurricane harvey

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Comparing areas with and without flood insurance after Hurricane Harvey, this study finds evidence that mandatory flood insurance programs mitigated financial shocks where applicable. However, despite lender forbearances, federal disaster grants, and small business disaster loans, credit-constrained homeowners who lived in areas not subject to flood insurance mandates experienced a 20% increase in bankruptcies and a 13% increase in the share of debt in severe delinquency in flooded blocks relative to non-flooded areas.

Stephen B. Billings et al., Journal of Financial Economics

Wage Garnishment in the United States: New Facts from Administrative Payroll Records

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In the first comprehensive academic analysis of court-ordered wage garnishment, this study finds that garnishment rates nearly doubled from 2014 to 2019 due largely to increases in student loan collections. On average, 11 percent of gross earnings were remitted to creditors, raising concerns about whether unexpected garnishments may perpetuate a cycle of debt. Garnishments are most frequent in neighborhoods with higher percentages of Black residents and fewer college-educated workers, even controlling for income.

Anthony A. DeFusco, Brandon M. Enriquez, & Margaret B. Yellen

Credit Counseling and Long-Term Credit Outcomes: Evidence from the National Foundation for Credit Counseling’s Sharpen Your Financial Focus Program

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This study analyzes five-year credit outcomes for consumers who participate in credit counseling and in some cases enroll in debt management plans (DMPs) using data from a national initiative by the National Foundation for Credit Counseling.

Adrienne DiTommaso and Stephanie Moulton, The Ohio State University

Credit Scores Since the COVID-19 Outbreak

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This paper analyzes the effect of forbearance programs and related credit reporting practices on consumers’ credit scores during early stages of the pandemic, using data from March through September 2020. Focusing mainly on mortgage forbearances, it finds evidence of a positive effect on consumers’ credit scores but concludes that broader improvements in credit card utilization rates particularly among consumers with low credit scores contributed more to general credit score improvements during the downturn.

Michal Kowalik, Lily Y. Liu, and Xiyu Wang; Federal Reserve Bank of Boston Supervisory Research and Analysis Working Papers 21-4

Racial Differences in Mortgage Refinancing, Distress, and Housing Wealth Accumulation During COVID-19

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This paper finds that mortgage refinancing benefits from lower interest rates during the pandemic have not been shared equally among racial and ethnic groups. Based on a sample of 5 million mortgages, the authors estimate that only 6% of Black borrowers and 9% of Hispanic borrowers refinanced between January and October 2020, compared with almost 12% of White borrowers. Among those who experienced distress during the peak months of May and June 2020, the percent who were still behind on their mortgage payments as of February 2021 was 9 percentage points higher among Black borrowers and 2.2 percentage points higher among Hispanic borrowers as compared to White borrowers.

Kristopher Gerardi et al., Policy Hub, Federal Reserve Bank of Atlanta

What’s Next for Forborne Borrowers?

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This post examines consumers who remained in forbearance one year after the pandemic lockdowns started. The authors found that 13% of all mortgage borrowers were in forbearance for at least one month during the past year and that 35% of those participants were still in forbearance as of March 2021. More than 70% of consumers still in forbearance were not making any payments in March, suggesting that they are relatively vulnerable to serious delinquency as forbearance programs end.

Andrew Haughwout et al., Liberty Street Economics, Federal Reserve Bank of New York

Trading Equity for Liquidity: Bank Data on the Relationship Between Liquidity and Mortgage Default

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This report analyzes mortgage default using information taken from the JPMorgan Chase Institute housing finance research to evaluate the relationship between liquidity, equity, income level, and payment burden and default. Across all four groups, the report finds that liquidity may be more predictive for determining the likelihood of mortgage default particularly among borrowers with little post-closing liquidity and little liquidity but high equity. Overall, the report determines that alternative underwriting standards incorporating a minimum amount of post-closing liquidity may be a more effective way to prevent mortgage default compared to using DTI thresholds at origination.

Diana Farrell, Kanav Bhagat, and Chen Zhao

FinTech in Financial Inclusion: Machine Learning Applications in Assessing Credit Risk

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This paper provides a nontechnical overview of common machine learning algorithms used in underwriting credit. It provides a review – including strengths and weakness – of common machine learning techniques in credit underwriting, including tree-based models, support vector machines, and neural networks. The paper also considers the financial inclusion implications of machine learning, nontraditional data, and fintech.

Majid Bazarbash, International Monetary Fund (IMF)

Winners and Losers of Marketplace Lending: Evidence From Borrower Credit Dynamics

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This paper studies outcomes for borrowers who take out credit card consolidation loans from marketplace lenders, finding evidence some borrowers are left worse off.

Sudheer Chava, Nikhil Paradkar

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