Payment deferrals are complicating creditworthiness assessments for banks - Business Insider

accounts between March and May due to fallout from the pandemic — but that's not reflected in their credit scores. The federal government's coronavirus stimulus package indicated that banks that allow borrowers to defer their debt payments are prohibited from reporting those payments as late to credit agencies.

Consequently, the millions of US consumers who have deferred payments because they are out of work or otherwise in debt have not had deferrals reflected in their credit scores, making it harder for banks to assess a complete financial picture of prospective borrowers. Because lenders can't accurately discern credit risk, many have pulled back on lending. Some lenders have started to approve fewer borrowers for credit cards, auto loans, and other consumer debt. And loan originations have fallen: An estimated 79,000 personal loans were extended in the week ended May 10, compared with 226,000 in the week ended March 22, per Equifax data cited by the Journal.

The problem brought about by deferrals highlights the value of using data and technology beyond traditional credit scores when assessing borrower risk — something that many fintechs already do. Lenders have reportedly been looking for alternative data sources to determine which customers are safe and who's in financial trouble in an attempt to stem further losses. Many are considering using unemployment data or looking at cash flow into accounts. Meanwhile, credit reporting agencies have been in discussion with lenders about additional data sets to assess risk.

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