How are consumer lenders responding to the coronavirus pandemic?
11:FS' Amy Gavin reviews how institutions across the world are responding to the crisis so far.
As coronavirus wreaks havoc on the global economy, banks and credit providers are announcing plans to help borrowers. Here’s a quick snapshot.
The UK
RBS and First Direct were the first major lenders to introduce relief measures in the UK, offering loan repayment holidays and temporary increases to overdraft and credit card limits to customers financially impacted by the outbreak. Others have since followed suit, with Lloyds Banking Group waiving fees for missed credit card payments and Nationwide agreeing to remove interest charges on overdrafts for those in financial difficulty.
A vital element of lenders’ relief plans covers mortgages, which represent the main financial commitment for a huge number of consumers. Mortgage repayment holidays of up to 3 months are now available from all UK providers, in agreement with the government.
The response from customers has overwhelmed many lenders, including Santander UK whose customers are experiencing lengthy wait times and complaining of a lack of essential information.
The response from customers has overwhelmed many [UK] lenders
The US
Lenders in the US appear to have been slower to respond to the crisis than those in the UK. They’ve also been less specific about how they plan to support affected customers. Many of the major banks, including Wells Fargo and Bank of America, have announced assistance packages but with little detail about what type of relief they are willing to provide.
Customers are also restricted by providers’ lack of digital servicing capabilities. That means support is largely being given over the phone or in branches - many of which are being closed as the virus spreads. Chase is expected to close up to 20% of branches, for example, and Capital One is closing 120 locations indefinitely, leaving some customers vulnerable.
That said, other US lenders have been more open in their communications with customers. Fifth Third has introduced a comprehensive series of measures including deferrals for mortgage and residential loans of up to 3 payments, with no late charges. Goldman Sachs has granted its Marcus and Apple Card users with an additional month to make payments, with no penalty fines or interest charges.
Customers are also restricted by [US] providers’ lack of digital servicing capabilities
Capital One has also specified measures including deferred loan assistance, minimum payment assistance and fee suppression for those in need. For customers looking for a loan to ease their financial situation, U.S. Bank has temporarily reduced the pricing of its Simple and Personal Loan products.
Auto lenders including Ford and Nissan are offering deals to allow borrowers to defer their payments on new vehicles for up to 90 days. Hyundai has gone a step further to give 6 months of payment relief to any customer who has lost their job as a result of the coronavirus.
Australia
Bank of Queensland and CommBank are offering mortgage, loan and credit card repayment relief for customers on a case-by-case basis. ANZ has prioritised its relief efforts for small business, whilst committing to ensuring retail customers can access all their accounts digitally to support social distancing.
Elsewhere in the World
The Italian government has mandated that all lenders suspended mortgage, tax and interest repayments for every household across the country during the outbreak.
In Japan, the government has passed a huge aid package that includes provisions for offering freelancers and non-regular workers interest-free loans of up to 100,000 yen. It has also agreed to consider waiving personal debts for customers whose annual income declines by 20% or more.
although helpful for those in immediate financial difficulty, repayment holidays are not a long-term solution
A plan is also being rolled out by the Brazilian government, where its five biggest lenders will be required to comply with requests from individuals to extend loan payments for 60 days.
How suitable are these measures?
It should be noted that although helpful for those in immediate financial difficulty, repayment holidays are not a long-term solution. Interest that would otherwise have been paid still racks up, whilst the lump sum of the loan remains - merely delaying the inevitability of having to make payment further down the line.
That suggests this is not a viable solution for those customers expecting a more permanent income reduction as a result of the pandemic. Alternative options that might be more suitable for some include applying to extend the remaining term of their mortgage, switching rates or switching part or all to an interest-only arrangement. These measures are part of the full suite of mortgage forbearance options that are ordinarily offered by providers for customers who are struggling to keep up with payments.
What’s next?
The coronavirus has put millions in an incredibly vulnerable financial situation, which is worsening at pace. Lenders need to respond quickly with measures that can provide relief, both immediately and longer term, for those customers who are facing financial difficulties as a result of the outbreak.
A key worry for many consumers will be whether their credit score will be adversely affected if they apply for a payment holiday. Firms have agreed to make efforts to suspend registering late or missing payments on customers’ credit reports during this time, according to UK Finance, but the responsibility ultimately lies with the individual lender and customers cannot currently guarantee their credit score will not suffer in the future.
It also highlights the necessity for the provision of digital, instant and transparent customer communication channels
There’s scope for the coronavirus crisis to drive fundamental change in the way that lending works. It calls into question the future stability of certain core products, from UK mortgages to US auto loans, where people are borrowing huge amounts of money that they cannot afford to repay as soon as they run into financial difficulty. It also highlights the necessity for the provision of digital, instant and transparent customer communication channels - a topic likely to attract much future discussion.
So far, the initial response from the financial services sector has been driven by the incumbents. It will be interesting to see how fintech lenders globally respond to the crisis with their own plans and innovations that have the potential to change the future shape of the lending market.