New York Fed finds low-income borrowers have improved repayment histories during pandemic

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The repayment history of borrowers in low- and middle-income areas has improved during the pandemic-era economy, albeit with a lot of help from Uncle Sam, according to the latest report from “The State of Low-Income America: Credit Access and Debt”. Payment” published by the Federal Reserve Bank of New York.

The new report acknowledges that the positive changes in reimbursement performance came with the help of policies put in place when Covid-19 shut down most of the US economy.

“Borrowers have largely benefited from federal tax transfers and debt-related payment moratoriums, and many have seen their credit ratings improve despite the recession,” the report said. “This was particularly the case for low-income borrowers, who were more likely to be in default before the pandemic. The fiscal transfers took the form of both extra money in the pockets of most Americans, while forbearance participants were able to suspend debt repayments.

The report observed that car and student loan balances were comparable between borrowers in low-income areas and those residing in wealthier areas. Greater disparity was measured in mortgage debt, with wealthier borrowers bearing a greater financial burden, if only because home loans were scarcer among lower-income borrowers. Credit card debt is the most common debt across all income groups, although only half of low-income households can claim to have access to a credit card.

Bankruptcies have fallen significantly since the start of the pandemic, the report notes, which is good news for low-income areas where bankruptcy filings have historically been more common.

Student loan debt continued to be a challenge, although the report observed that most student loans were eligible for emergency assistance under the Economic Aid, Relief and Security Act 2020. coronaviruses (CARES Act), which resulted in a suspension of loan repayments (including collection of defaulted loans) until May 1, 2022. Default rates on student loans have traditionally been negatively related to the income of region, with lower-income metropolitan areas seeing higher levels of student loan default.

“The share of borrowers in default declined during the pandemic due to the pause in student loan repayments, as some borrowers were able to emerge from default while payments were suspended,” the report said. “Default rates are more than three times higher among borrowers in low- and middle-income areas than in high-income areas. This is even the case in the pandemic era, when loan repayments have been easier during the payment break.

The report noted that all income groups saw an increase in median credit scores during the pandemic, while borrowers with student loans saw a steeper increase in their credit scores compared to borrowers without student loans – this can partly be attributed to the younger age profile of the students. borrowers.

“While student loan repayments are suspended, federal borrowers have been marked up-to-date on their credit reports,” the report continues. “This temporary removal of delinquencies has lifted the credit scores of previously distressed borrowers, particularly in low- and middle-income areas where delinquencies and defaults were higher before the pandemic.”

Still, the report notes that its data was concluded before the expiration of many federal programs designed to help Americans during the pandemic, and there is no guarantee that the positive data trends can continue without help from Washington. The report warned that “improvements in credit reports achieved through the relief could mask underlying vulnerabilities when all support programs have ended and consumers have exhausted the additional savings accumulated over the year. last”.

The report draws its data from the New York Fed’s Consumer Credit Panel, which is derived from Equifax’s anonymized credit data; credit report statistics are derived from the federal government’s American Community Survey income data. Definitions of low and moderate income levels are taken from the Federal Financial Institutions Examination Council, with a low-income neighborhood defined as a census tract in which the median family income is less than 80% of the median metropolitan area income.

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