The pandemic attacks the economy severely and recession is in sight. This places a financial distress for many individuals and businesses, since their operations and profits cannot be maintained like usual, and many of them cannot make enough to cover their expenses. Those who are strained from the pandemic resorts to financial assistance. However, where can they look for a loan or a debt, when lenders and banks are also concerned about the current situation?
For banks and lenders, it is riskier for them to issue any loan right now regarding the high chances of defaults from the borrowers. According to the Mortgage Banks Association, in May, 7.5 percent of all mortgages were in forbearance. This was a significant number compared to 0.25 percent in March. As a result, lenders have raised their standards and tightened the requirements regarding credit score, down payment, etc. Some lenders also require to verify borrowers’ employment status before closing the deal to make sure they are able to pay back the loan. In addition, recently, a new credit score has been used by lenders to evaluate the qualification of borrowers: resilience score. The index is published by FICO, and it determines the ability of borrowers to go through economic downturns by looking at their long-term credit history.
However, this is not the end for lending. The government and the Fed have carried out multiple programs to financially support individuals and small businesses. One of them is the Paycheck Protection Program (PPP), which is part of the CARES Act, that is used for payroll costs, health benefits, insurance premiums, and rent and utility payments. This program assists in small businesses’ operations, as well as make sure that employees are not laid off. The Small Business Administration (SBA) also offers multiple loan programs, such as the Economic Injury Disaster Loan that gives $10,000 advances for agricultural-related businesses that do not need to be paid back, or the Bridge Loans for small businesses that need urgent cash while waiting for their EIDL. Some large banks have also waived fees and allowed for payments deferral. U.S. Bank is offering loans to individuals and small businesses affected by the pandemic, with a maximum of $1,000 for individuals and $4,999 for small businesses.
To encourage lending, the Fed has lowered their discount rate, from 1.75% to 0.25%, which is even lower than the rate during the 2008 Great Recession. They have also extended the lending term from usually overnight to 90 days. It also changes the total loss-absorbing capacity requirement and reserve requirement, thus banks can use more of their capital buffers and reserves to stimulate lending.
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