hardship payments

By Jeff Domansky

The pandemic imposed terrible health and financial hardships on consumers everywhere, with an estimated 7.48% of US mortgage accounts in “hardship status” by May 2020. Just two months earlier, in March 2020, before the full impact of Covid-19, mortgage accounts in trouble were only 0.48%.

Similarly, car loans in trouble jumped from 0.64% in March 2020 to 7.04% in May 2021, while credit card accounts in hardship increased from 0.01% to 3.73%, along with unsecured personal loans from 1.56% to 6.15%.

As a return to the “new normal” looms on the horizon, a new study shows most consumers diligently made payments despite their hardships, an encouraging sign for the future.

Majority continued payments despite hardships

financial hardship

New research from TransUnion shows seven in 10 non-prime consumers and eight in 10 prime-and-above consumers made payments on hardship accounts while enrolled in these programs. Additionally, more than 40% of consumers in these programs exited within the first three months of entering.

“Traditionally, enrollment in a financial hardship program signified heightened consumer risk,” said Jason Laky, executive vice president of financial services at TransUnion. “In the era of COVID-19, however, the consumer makeup of those accessing hardship programs has been much more diverse in terms of credit profiles. As situations have stabilized, we’ve found that consumers who exhibited key credit behaviors within the first three months of accessing an accommodation program performed well over the long-term.”

Accounts in financial hardship – defined by factors such as a deferred payment, forbearance program, frozen account, or frozen past due payment –provided consumers with much-needed financial relief. Expanded eligibility criteria under the CARES Act in March 2020 increased the reach of consumers who accessed hardship assistance.

Where are hardship payments today?

The TransUnion study shows a substantial decrease in hardship accounts a year later, in May 2021. The number of hardship mortgage accounts dropped to 4.07%, followed by unsecured personal loans (2.35%), credit cards (2.13%), and car loans (2.09%).

financial challenges

Researchers found that consumers deemed “early exiters” (those who exited on all of their hardship accounts by month three) were at lower risk than those enrolled in the programs for a longer period. Those who exited early were also less likely to experience continued struggles and leverage financial accommodations again.

An estimated 80% of early exiters stayed out of hardship programs nine months later. This trend was consistent across all risk tiers. Still, prime-and-above hardship consumers performed exceptionally well, showing a significantly lower delinquency rate if they exited the hardship program early – especially compared to non-prime early exiters where the future performance difference was less pronounced.

“Lenders, banks, and various financial institutions across the financial services landscape extended accommodations to consumers to help them withstand the challenges brought on by the pandemic,” said Matt Komos, vice president of research and consulting at TransUnion.

“The consumers who enrolled in hardship programs and exited early or continued to make payments on accounts overwhelmingly used the programs for their intended purpose. Not only were these consumers much less likely to go delinquent, they were able to get a leg up during a difficult situation,” Komos noted.

Consumers can find additional resources to protect their credit during the pandemic at TransUnion. A webinar for industry professionals is scheduled for June 30 to review Credit Behavior Shifts of Consumers in Hardship Programs.

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