Banks Are Wondering Who is Credit Worthy

Banks in the United States are being faced with a new challenge as the world’s financial crisis deepens … determining who is actually credit worthy. And the confusion is causing banks to pull back on lending.

Under the CARES Act, lenders who allow customers to defer payments are not allowed to report those payments as late to credit reporting companies. As a result, lenders have no way of knowing if someone with a good credit score is actually having difficulty paying their bills.

The Wall Street Journal reports that many banks have cut back on the number of loans that are approved due to the confusion. But they are also looking for new information channels that may give them some idea about which applicants are actually a good credit risk, and who is in financial trouble.

Some creditors are using a kind of a code when transmitting information to credit reporting agencies. For instance, boxes that would indicate whether a loan was current or late is being left blank. Others are using codes that are normally reserved for natural disasters. But lenders still don’t know if a borrower has actually fallen on hard times, or just taking advantage of relief options being offered by creditors.

Another tactic appears to be the use of cell phone records to see if a loan applicant has been in contact with an unemployment office. Some banks are also reviewing cash flow in deposit accounts.

The bottom line is that lenders in the U.S. approved some 79,000 personal loans in the week ending May 10. Compare that to the week ending March 22, in which 226,000 loans were approved.

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