Don't Believe the Hype: Millions of [Non-White] People Need Loans as Coronavirus Spreads but [Elite White] Lenders Are Making Them Tougher to Get

According to the [Wall Street Journal] Banks and financial-technology firms are starting to toughen their approval standards for new loans to consumers and small businesses. That means many people could find it hard to get credit just when they most need it, as the novel coronavirus pandemic puts thousands out of work.

Large U.S. lenders including JPMorgan Chase JPM -7.12% & Co., Bank of America BAC -4.93% Corp., Capital One Financial Corp. COF -4.44% and Santander Consumer USA Holdings SC -7.58% Inc. are among the companies reviewing and revising certain lending criteria, according to people familiar with the matter. Planned moves include approving fewer consumers with lower credit scores, asking for more income documentation and placing lower spending limits on new credit cards.

American Express Co. AXP -4.89% has scaled back financing offers to small businesses, according to people familiar with the matter. Fintech lenders Square SQ -4.80% Inc. andOn Deck Capital ONDK 1.82% Inc. said this week they would do the same.

About half a dozen lenders that have found borrowers through Fundera Inc., an online marketplace for small-business loans, have paused new extensions of credit, said Fundera CEO Jared Hecht. “Lenders have zero idea how to assess risk in this environment,” Mr. Hecht said. “There is no model that can predict today if I lend $1, will I get paid back?”

Lenders are concerned that rising unemployment and a potential recession will send loan defaults soaring. The moves suggest at best a pause and at worst an end to six-plus years of a bull run in credit, where financial firms have been eager to lend and underwriting standards for credit cards, auto loans and personal loans have been relatively loose.

Lenders are scrutinizing applications for credit cards and personal loans in particular because consumers often turn to them when they are in a bind. They are usually unsecured, which means lenders have little recourse if a borrower defaults, and they can be the first loans people stop paying when money is tight.

Many lenders have said they would work with existing borrowers who ask for help. Some lenders, for example, are increasing card spending limits or delaying due dates on loans.

But lenders are reluctant to take on additional risk from new customers.

“Even people who applied [for credit] in the last two weeks are more vulnerable [now] than when they applied,” said Brian Riley, director of credit advisory services at Mercator Advisory Group. [MORE]