Does debt, like fine wine, get better with age?

February 24, 2016 at 8:52 am 2 comments

This is the question I am pondering this morning after reading this recent piece of provocative analysis from the New York Fed about the graying of American debt and its implications for lending.  You should all take some time to read it.

The researchers conclude that “[y]ounger borrowers hold lower per capita balances in every debt category save student loans, and older borrowers hold higher per capita balances in every debt category save credit card debt. Setting aside the influence of an aging population, it remains the case that in 2015, on average, younger borrowers held less nonstudent debt and older borrowers held substantially more debt of nearly all types, than comparably aged borrowers held in 2003.”

What are the causes of this dichotomy?  One possibility posited by the researchers is that tougher lending standards in a post-2008 world favor loan applicants with higher credit scores.  High credit scores tend to be closely related to age.  Another possibility to consider is simply that older people have more stable sources of income and are therefore better credit risks. 

In my ever so humble opinion, we have to allow for the possibility that younger people came of age in an economy where there were reminders of the negative consequences of debt on an almost daily basis. They are simply not going to be as quick to take out the credit card or take on the big mortgage as their parents were.  Another obvious reason is that millennials have taken on a record amount of student debt. 

No matter what its causes, if this trend continues, it has implications for anyone in the lending business.  For instance, the researchers point out that the ready supply of baby boomers ready to take on loans will result in safer loan portfolios.  The bad news is that with approximately 70% of the U.S. economy dependent of U.S. consumer spending, the fact that younger consumers aren’t as ready, willing and able to prime the economic pump is yet another sign that the economic doldrums that we are in are the new normal. 

You also may want to start brushing up on your legal rights with regard to older loan applicants.  For example, on the one hand, federal law makes it illegal to discriminate on the basis of an applicant’s age.  On the other hand, if your credit union uses a judgment-based lending system, it may consider the adequacy of security offered when the term of the credit exceeds the life expectancy of the applicant and the cost of realizing the collateral.  In one of my favorite lines of regulatory understatement, the official guidance to Regulation B explains that “an elderly applicant may not qualify for a 5% down, 30 year mortgage loan, but may qualify with a larger down payment or a shorter loan maturity.”  (Staff interpretation Section 202.6(b)(2)(3)).

Two generations have been infatuated with themselves as the Baby Boomer Generation.  Personally, I find it a little more than disturbing that an increasing number of aging Americans are willing to take on even more debt in their golden years.  But, the fact that they are raises both challenges and opportunities for your credit union.

Entry filed under: Compliance, Economy, General, Regulatory. Tags: , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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