Consumer credit apps down ‘substantially’ in March, CFPB says in report on COVID-19 effects

Substantial declines in consumer credit applications – specifically, related to auto loans, new mortgages, revolving credit cards, and unspecified or other credit – occurred between the first and last weeks of March, according to a consumer bureau report on the effects of the COVID-19 (coronavirus) pandemic.

The report by the Consumer Financial Protection Bureau (CFPB) measures applications by the number of credit pulls or “hard inquiries” that lenders perform when a consumer applies for new credit; it says these are among the first credit market measures to change in credit record data in response to changes in economic activity. It concluded that by the last week of March, when a good part of the country was under stay-at-home orders, auto loan inquiries dropped by 52.4%, new mortgage inquiries by 26.9%, revolving credit card inquiries by 39.7%, and unspecified and other inquiries by 34.6%.

Source: CFPB report; shows the percentage change in credit inquiries relative to the first week of March 2020 by week by inquiry category.

These declines, compared with usual patterns seen in earlier years, were “significantly” more pronounced among consumers with higher credit scores, the bureau noted, consistent with the possibility that those with higher scores have more flexibility in their credit needs or the timing of credit needs.

The report notes that for auto loan inquiries, consumers with deep subprime scores (those with a Vantage credit score below 500) experienced a 49% drop in inquiries while consumers with super prime scores (Vantage credit score above 780) experienced a 67% drop. The relative differences are even larger for revolving credit card inquiries (34% drop vs. 59% drop for the same two groups) and new mortgage inquiries (20% drop vs. 36% drop for the same two groups).

“The observed drop in inquiries could be due to a drop in underlying credit demand, a drop in credit supply affecting inquiries either directly or indirectly by heightening consumers’ expectation of being turned down for credit, or a lack of opportunity for car and home sales to take place due to physical restrictions on movement and economic activity,” the report states. “Regardless of the reason, the data indicate all types of inquiries dropped significantly and that consumers with higher credit scores have more flexibility in substituting away from applying for credit than consumers with lower credit scores.”

There was also significant geographic variation in the decline in inquiries, with states in the South and Mountain regions experiencing smaller drops and the Northeast and California experiencing the largest drops.

The report also relates the drop in inquiries to two variables measuring the effects of the pandemic at the state level: the COVID-19 case rate and the share of workers filing for unemployment insurance benefits in the last weeks of March. “The report found a strong correlation between the decline in inquiries and the COVID-19 case rate, as well as the decline in inquiries and the unemployment insurance claims share, for some categories of credit,” the CFPB said.

Breaking that down a bit, the report notes that states with a higher case rate saw a larger drop in auto loan and new mortgage inquiries; it found “not much” of a correlation, positive or negative, between revolving credit card inquiries and the case rate. As for unemployment insurance claims, states with a higher claims share saw a larger drop in auto loan inquiries; the report said the correlation was weaker for new mortgage or revolving credit card inquiries. “These results indicate that divergent forces may be driving the drop in inquiries for different credit products,” the report said.

Consumer Financial Protection Bureau Report Shows Substantial Decline in Credit Applications in March