Millions of Americans getting breaks on their loans are about to hear from their banks.

Nationwide, lenders are preparing to take a closer look at consumers who have arranged to delay payments, potentially pushing some out of the programs, as the industry tries to get a clearer picture of how many customers are truly unable to keep up during the coronavirus pandemic.

Forbearance programs from March are nearing expiration dates, when many banks are set to decide whether to continue letting people put off roughly $150 billion of debt including credit cards balances, personal loans and car payments. In interviews, executives said they’re concerned that at least some borrowers sought relief unnecessarily and that they should be coaxed into paying. A number of firms aim to whittle out such participants, or charge interest to continue.

“I would imagine we may have to go beyond 90 days” of forbearance, Southern Bancorp Inc. Chief Executive Officer Darrin Williams said in an interview, referring to the expiration date for many programs. “I feel pretty strongly that many of the folks who took advantage of the consumer payment holiday we provided probably didn’t have to. But if it’s offered, why not, right?”

The rapid rollout of forbearance programs in March averted financial ruin for millions of households, giving Congress time to bolster unemployment benefits and offer emergency aid to businesses. The goal was to avoid a tidal wave of defaults by borrowers who began losing income when states locked down commerce to slow infections. More than 30 million people have since filed jobless claims.

But many lenders offered to postpone bills with no proof of hardship, and many borrowers kept working. Some signed up for the programs as a precaution, taking a break from payments to shore up their savings. That’s made it impossible for banks to gauge the degree to which their loan portfolios are at risk of going bad.

Some mid-sized banks placed more than 15% of their loan books into forbearance by the end of March, Janney Montgomery Scott analysts wrote in a report last week. In regions like the U.S. Southeast, relatively high rates of borrower relief contrasted with low infection rates at the time. Many programs have remained open since then, continuing to take on borrowers who have fallen on hard times.

Frothy Forbearance
On average, banks had about 5% of their consumer loan portfolios on ice as of mid- to late-April, analysts at Keefe, Bruyette & Woods wrote in a report this month that compiled disclosures from about 80 large, regional and community banks. Based on Federal Reserve data, that would equate to roughly $150 billion in loans -- though the amount may have climbed since then.

Those figures don’t include U.S. mortgage forbearance programs that let borrowers with government-backed loans postpone payments for as long as 12 months while dealing with the pandemic.

The consumer-loan deferrals have left banks, shareholders and even regulators in the dark on how many people are truly in distress and what the ultimate cost to lenders may be. Some executives expect to get a clearer view of the situation in the second half of the year.

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