Rising Default Rates v. Fair Lending

The rising default rates on consumer loans, while not yet at a level to trigger a serious response, has generated discussion of the impact of creative underwriting practices on credit quality. As this happens, there are several important things to keep in mind. First, we are in a testing phase. The underwriting criteria and the loan programs offered, are experimental. There is still much to be learned about creative underwriting, but it is clear that much of what is now being done does in fact work.

Second, although loans made through special fair lending and CRA loan programs do report, as a group, a higher default rate than loans that were made under standard underwriting practices, the default rate is low relative to the fears and dire predictions of lenders a decade ago. Then, it was thought that the type of underwriting now being tested would lead to immediate disaster.

In fact, we are finding that there is much room for relaxed, new, and different underwriting techniques. The ones that succeed in identifying good credit risks will increase lending opportunities for banks and broaden their markets.

Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 14, 9/96