Brian Hughes is a financial services and payments business leader with over 25 years of experience. He previously served as Executive Vice President and Chief Risk Officer for Discover Financial Services, where he led the risk function for one of the largest credit card and loan providers in the U.S. He also served as CEO and Senior Executive Vice President, Card and Retail Services for HSBC.
Lenders across industries are concerned about the end of federal student loan forbearance. The CARES Act paused student loan payments for approximately 37 million borrowers when it went into effect in March 2020 (Source). After several deadline extensions, forbearance was extended until the end of 2022, along with the forgiveness of up to $20,000 in debt for some borrowers.
These borrowers will soon have to start or resume making monthly payments on their student loans starting January 1, 2023. Understandably, lenders are concerned because many don’t know whether an applicant or current customer who holds student loan debt will have the capability to make payments for all of their debt responsibilities come January 2023. A big reason for the concern is how they assess consumer creditworthiness.
Underwriting strategies generally look at a consumer’s past propensity to pay by analyzing a traditional credit report. This does not assess the consumer’s future ability to pay, which is a gap in understanding a consumer’s entire financial situation. Cash flow underwriting, used in combination with credit data, or in lieu of it entirely, is being adopted more often because it can help fill these gaps and provide critical insight into whether customers can absorb an additional financial responsibility.
Cash flow underwriting provides a lens into affordability, which is important because of the lagging nature of credit default reporting. Warning signs that a consumer might be in financial distress can take two months or more to be reported to credit bureaus due to payment grace periods and delinquency cycles. Bank transaction data, however, shows cash flow and signs of distress in real-time.
Solutions like Nova Credit’s Cash Atlas® helps lenders make sense of cash flow data through an FCRA consumer report. Cash Atlas® converts raw bank transaction data into actionable insights so lenders can effectively understand a consumer’s holistic financial health.
For example, Cash Atlas® can accurately determine a consumer’s real income by filtering out non-income deposits, like money movement or cash transfers. The lender can use this information along with insights related to recurrent expenses, one time transfers, and big ticket purchases. This combined view of both income and expenses can uncover if a consumer has sufficient free cash flow to start making those deferred student loan repayments.
The end of student loan forbearance is an understandably unsettling time. Consumers who have student loans will need to figure out how to start making payments, in addition to grappling with inflation and a slowing job market. Lenders will need to figure out which of their current consumers may need assistance and which of their applicants have the ability to afford the payments. By Leveraging solutions like Cash Atlas® lenders can increase transparency, protect their consumers, and minimize risk.
Learn more about how Nova Credit can help you better understand the impact of student loan forbearance ending for your consumers. Email us at firstname.lastname@example.org.