The Fed should tailor its business loan programs for consumers

While most Americans have done their part by staying at home to prevent the spread of coronavirus, the Federal Reserve must do more to meet consumer credit needs as they emerge from the crisis.

The Fed has projected an even worse second quarter as it holds short-term interest rates near zero to help ease the economic downward spiral. But investor concern about the uncertain future economy has severely tightened consumer credit funding, and the one-time payments of up to $1,200 included in the coronavirus relief aid, while necessary, likely won’t be sufficient to bolster consumers’ financial well-being into the summer, much less the fall.

New loans for creditworthy consumers — even those who have steady jobs and a demonstrable an ability to repay — are scarce. While the demand for loans at comparison sites like CreditKarma has remained relatively steady, new loan production from the most affordable online lenders April is down by as much as 90% in the second quarter.

April data from LendingTree suggests that with lower-cost lenders forced to pull back, consumer borrowers are either unable to access credit or are being served only by high-cost lenders, at higher interest rates. Credit card lending to households is also being cut back, a development that many economists see as a dangerous sign.

Here is where the Fed, together with the Treasury Department, can step in to make sure credit is available to consumers at reasonable rates as the economy gradually reopens. The most immediate opportunity is for the Fed to include investment grade unsecured personal loans in the Term Asset-Backed Securities Loan Facility (TALF) program.

In this scenario, the underlying loan collateral that the TALF would lend against falls below the 36% annual percentage rate cap under the Military Lending Act, a standard that marketplace lenders support nationwide. Loans can be accessed by consumers online, without the need to risk an unnecessary visit to a physical location. The Woodstock Institute, a consumer advocacy group, has identified these loans as a responsible option for consumers in a pandemic.

Fortunately, it appears that the Fed is considering another round of TALF expansions that could include personal loan asset-backed securities. Any support from the Fed will immediately start helping bring down interest rates for installment-loan borrowers. If Treasury even assigned less than 1% of the $454 billion coronavirus relief aid to consumer credit, that would support the Fed's expanding the TALF program to include all investment-grade personal loan collateral, reopening the market.

A second key action could be to set aside a portion of the Fed’s Main Street Lending Program, with modified terms, that would support nonbank lenders to help keep credit flowing.

Finally, Congress could design a consumer loan forgiveness fund to provide a backstop for lenders that give the neediest borrowers full debt forgiveness.

Keeping credit flowing through lenders to consumers isn’t inviting any moral hazard. In fact, it’s quite the opposite. One reason new loan production is so disrupted now is that online personal lenders have been doing exactly what Washington policymakers have asked: offering forbearance to their customers. But flexibility for existing borrowers does not also extend to helping someone get a new loan who needs it.

In fact, it often does the opposite. The forbearance can lead to concerns about declining performance within existing bank warehouse lines, consumer loan portfolios and consumer loan asset-backed securities. This, in turn, leads bank and nonbank investors who provide the critical fuel for new consumer loans to pull back from providing such funding.

Support measures are needed now. The Paycheck Protection Program can temporarily sustain the payroll of a business, but it likely won’t help the self-employed workers or microbusiness owners restock their entire inventory for a food truck as the economy reopens.

Likewise, expansions of unemployment benefits won’t pay for the costs of an unexpected funeral, or a long-anticipated wedding when Americans can safely gather once again.

Once the economic bleeding has stopped, an expansion of consumer spending is critical to a strong recovery. The Fed and Treasury can step in to help so that affordable consumer credit doesn’t go missing at the exact time when Americans need it the most.