For Americans Bethany and Derick Hingle, every dollar counts now.
In just a matter of weeks, the New Orleans couple – he’s a self-employed photographer, she works at a jewellery store – watched most of their income evaporate as the coronavirus pandemic shuttered businesses.
They began calling their banks, securing extensions for credit-card bills from Capital One Financial and a local credit union. They couldn’t catch a break on a $75 (Dh275) payment due on a Home Depot card issued by Citigroup.
“Everything came to a screeching halt,” says Bethany Hingle. “We’re just trying to hold on to whatever dollars we can right now. We don’t know when the next pay cheque is coming in.”
It’s a scenario reminiscent of the 2008 financial crisis, with the nation’s biggest credit-card lenders once again grappling with a surge in calls from waves of the suddenly unemployed pleading for relief. The banks, which are also adjusting to social distancing as most of their employees must work from home, warn customers that wait times will be longer than usual.
The jobless rate and Americans’ ability to pay off their cards are closely correlated. In 2009, when unemployment topped 10 per cent, the nation’s card lenders were forced to write off a record $89 billion of soured debt. Federal Reserve Bank of St Louis President James Bullard recently warned the pandemic could push the US unemployment rate to 30 per cent in the second quarter.
With the US Senate unanimously approving a $2 trillion rescue plan to help soften the impact of the coronavirus pandemic on the world's largest economy, and financial regulators, including the US Federal Reserve, giving banks more leeway to ease consumers’ debt burdens, lenders should work with borrowers more proactively, according to analysts at Keefe, Bruyette & Woods.
But the potential for millions of customers to default on credit cards, small business loans and mortgages means banks have to do something to protect borrowers, many of whom went from having a job or a business to nothing, sometimes in a matter of days.
Husband and wife team Shari and Larry Kaynen were forced to close their chain of six high-end clothing stores called Shari’s Place, based in New York. They are now working with their bank to rework their long-term debt into new terms with lower interest rates that will help their cash flow.
Larry Kaynen said that their bank is polling all of its retail industry clients to figure out how they are going to stay in business for a week with “zero” sales.
“This could mean a lot of ruin to a lot of small business” says Shari Kaynen. “I am not corporate America. I have millions of dollars worth of merchandise, but I still have to pay my landlord rent.”
The aid the bank provide varies in generosity depending on the bank, however. Some are just allowing customers to defer payments, meaning interest is still accumulating while in these programmes. Others have instituted forbearance programmes, where there will be no penalty for a customer who wants to hold off paying debts for 30 or 60 days.
Huntington Bancshares, a $100bn bank operating mostly in the Midwest, has instituted 30-day deferral programmes for any borrower who asks for help – no paperwork or questions asked – and is reaching out to customers asking if they need more time. They are extending the deferrals 30 days at a time, if necessary.
“There is a place for our industry, in this crisis, to do all we possibly can to mitigate the damage that is happening,” says Stephen Steinour, Huntington's chairman and chief executive.
The bank has even moved employees at its branches – which are operating under reduced or restricted hours to protect against virus transmission – into new roles like calling borrowers or potentially even helping customers refinance their mortgage.
The biggest banks are taking similar actions. Bank of America is allowing customers to defer payments across all of its products and is not reporting any negative activity like missed payments to the credit bureaus. So has JP Morgan Chase, Wells Fargo and Citigroup.
Smaller banks are also acting to help customers. Southern Bancorp, with roughly $1.5 billion in assets headquartered in Arkansas, is modifying loans as quickly as possible or charging only interests on loans where it can for small business borrowers or customers.
“We’re telling our folks, ‘Be safe. Be calm. We’re here to help however we can,’” says Darrin Williams, chief executive of Southern Bancorp.
Banks are putting these programmes in place partly because they would be facing a massive number of defaults and bad loans on their books without them – causing billions of dollars worth of paper losses to the banking sector.
Further, the credit reporting companies like Experian and Equifax would be swamped with negative credit reporting data, which would destroy the credit scores of millions of Americans who were paying their bills on time but suddenly find themselves out of a job. That would make giving loans in the future to these impacted borrowers more difficult.
Still, some executives worry that if customers take advantage of forbearance programmes it could just delay an inevitable default. Alliance Data Systems, which issues retail-brand credit cards, warned that if customers flock to a six-month hardship programme it would materially impact write-off rates.
“The issue is that banks still need to properly manage their loan portfolios while assisting customers,” says Wells Fargo analyst Mike Mayo. “Do you continue lending and supporting customers through a rough patch? Or do you pull back credit lines to protect the quality of the balance sheet?”
American Express has abandoned its profit forecasts for the year. The New York-based company, which gets more than half of its revenue from the fees merchants pay with each card swipe, has seen a steady drop in spending this month. Almost 30 per cent of spending on the company’s cards comes from travel and entertainment.
Many lenders have already begun to actively manage their loan portfolios and sell underperforming assets, according to a McKinsey & Co report which analyses how banks are responding to the pandemic.
“Lenders may want to become more proactive, too, anticipating instances in which increasing or decreasing lines can help customers,” McKinsey said in the report. “And initiating outreach campaigns that can demonstrate genuine concern for their financial well-being.”