Restoring Credit

Banks looking to grow credit card receivables face the problem of wooing the right borrowers into their programs. Since the credit crisis, they have restricted new accounts to consumers with pristine credit, but these customers continue to pay down outstanding their outstanding balances while newer cardholders use the plastic like a debit card, paying it off each month.

Reaching a little further down the credit spectrum is one of the few ways to grow this business.
In doing so, banks are extending credit to consumers who have been shut out of the market since the credit crisis. Subprime borrowers, those with FICO scores below 660, back in the mid-2000s, represented roughly a third of issuance. 

A February analysis by investment bank Jefferies of publicly available data on credit card master trust filings spanning seven years concluded that since 2009, approximately $122 billion in credit availability to Americans with scores of below 660 has been removed from the market. 

At Bank of America, for example, the portion of the company’s securitized card portfolio that involved loans to people with credit scores below 660 fell to 15% in 2012 from 28% in 2007, according to Jefferies’ analysis.

Lenders however appear to be thawing standards beyond only the top-tier borrowers. In October, Moody Investor Service published data from Equifax showing that bank card lenders had increased originations to borrowers with FICO scores below 620, the lowest category reported by Equifax, as of August. These borrowers now account for 19% of total lending; still down from approximately 30% before the financial crisis, but creeping back up from 14% at the height of the crisis.

Rosemary Kelley, senior director in Kroll Bond Rating Agency’s consumer ABS group, said this trend reflects a turn in the credit cycle. “It’s not as surprising (that) pre-recession standards were looser and the banks tightened standards and now they are loosening up standards again — that is fully expected.”

Weaker Borrowers Getting Credit, but Not Running Up Balances

At the same time the amount of “available credit” — the difference between cardholders approved credit lines and their current balances — has widened for weaker credit quality cardholders from pre-crisis levels.

“In bank cards we are seeing plenty of issuance but we are not seeing any run up in balances; that is, consumers take out these cards and don’t use them,” said Equifax Chief Economist Amy Crews Cutts.

Eventually, as the economy improves, the logic is that these weaker credit quality consumers could leverage up and the accounts would make their way into the credit card securitization trusts. Moody’s is concerned that lending to borrowers with riskier credit profiles, even if they aren’t subprime, may lay the groundwork for a deterioration of performance in credit card securitizations if the U.S. economy falls into a recession again.

That is because “of the unused portion of credit lines on which lower-credit-quality cardholders can draw down if they come under financial stress,” said Luisa DeGaetano, vice president and senior credit officer at Moody’s. According to the rating agency’s report, credit card utilization for cardholders with the lowest FICO scores has dropped to approximately 52% currently compared with over 70% pre-crisis.

FICOs for these new originations are lower than for the accounts that were originated just after the crisis, but that is not to say that they are lower than the FICOs of accounts that are in the trusts today. In fact they are about the same, according to DeGaetano. “If lending standards are relaxed further, however, the credit quality and performance of the new accounts would worsen relative to the highly seasoned accounts that are in the trusts today,” she said.

Almost 100% of accounts in securitization trusts today were originated four years ago. So banks don’t have to immediately include these new accounts with lower FICOs in the securitization trust.

This wasn’t the case before the crisis, explains De Gaetano. “The banks would add new accounts to their securitization trusts all of the time,” she explained. “You would always see some portion of accounts originated in the past year, some portion in the past two years, and so forth.

“The amount of receivables in the securitization trust today is much larger than the amount of outstanding ABS in the trust, so the banks have a lot of room to issue more ABS before they need to contribute new accounts.”

Benefits Limited to 620-700 FICO Borrowers