INSIGHT-From 'haves' to 'have-nots': how COVID-19 is swelling UK's subprime ranks

* Credit scores tumbling as amnesty expires on COVID-19
support

* Some creditworthy borrowers now seen as higher risk, or
subprime

* Regulators say debt relief must be recorded to protect
lending

By Sinead Cruise and Iain Withers

LONDON, Nov 18 (Reuters) - One morning, after years of
financial prudence and solid creditworthiness, you wake up and
it's all gone. You're no longer worthy. You're a risk. In fact,
you're sub-prime.

That is the fate facing thousands of Britons who, often for
no fault of their own, could begin 2021 as "subprime" borrowers
if they have had more than six months' of relief from COVID-19
debt woes.

This could have dire consequences for people who have
historically struggled to access credit, especially those on low
incomes.

The situation also illustrates the unenviable dilemmas
facing authorities around the world who have taken unprecedented
steps to keep societies intact during the pandemic, including
requiring lenders to offer customers payment holidays.

Yet fearing people will spiral ever-deeper into debt,
leaving banks with deep losses, regulators are paring back those
financial lifelines, even as COVID-19 rages anew and some
vulnerable citizens despair how they will stay afloat.

Britain's first lockdown began in March and authorities
allowed borrowers to suspend payments on mortgages and loans
from April 9, without their credit rating being affected, to
help ease the distress caused by tumbling wages and job cuts.

Policymakers have put a six-month cap on the credit amnesty,
just as a second lockdown in England poses many of the same
problems for businesses and households.

Individuals can apply for a loan payment holiday until March
31, but those requiring additional breathing space or more
bespoke debt relief could see themselves rated subprime, making
accessing credit tougher or even impossible, according to about
half a dozen industry players interviewed by Reuters.

"People who need continued help could find themselves in a
precarious financial situation," said Justin Basini, CEO of
credit marketplace ClearScore, who estimates tens of thousands
of borrowers could be affected from the new year onwards.

The number of people in severe problem debt has risen to 1.2
million due to the pandemic, with a further 3 million at risk,
charity StepChange warned last week.

Around 12 million people, meanwhile, have "low financial
resilience" and may struggle with bills or loan repayments, the
Financial Conduct Authority (FCA) said last month, with 2
million having entered this category since February.

RAIDING RETIREMENT POT

While those already in financial trouble before the pandemic
are likely to be worst affected, the squeeze is also hitting
people formerly viewed as highly creditworthy.

Take Julia McPherson, a 55-year-old entrepreneur from
Suffolk, eastern England.

She had always counted herself "one of the lucky ones".

Her successful ventures helped her buy a family home with a
small mortgage, which she later used as collateral to fund
renovations.

She poured 100,000 pounds ($132,250) of savings into plans
to launch a glamping business, Yology, in spring but the
mother-of-four ran into difficulty shortly before the
loan-payment freeze and credit-rating amnesty were launched.

With her income so uncertain, she felt she had no option but
to cancel March and April payments on a 70,000-pound second
mortgage loan and a 20,000-pound car loan.

Despite raiding retirement savings to pay the arrears in
May, McPherson's credit score tumbled from a near-perfect 997 in
January to a "very poor" 296 in July on a scale devised by
Experian, a leading scoring agency.

She is slowly rebuilding her score but the hit means she can
no longer borrow at rates she considers fair or affordable.

"Unless you are extremely wealthy, you're only ever one or
two months away from debt," said McPherson, who criticised
lenders for denying customers access to low-interest rate loans
as the pandemic continues.

"This is now true of a very large number of people who have
been badly hit by an unexpected external crisis they had no way
of preparing for."

SUBPRIME LOANS DRY UP

The FCA referred queries to previous statements where it
said limiting the credit amnesty was aimed at protecting
consumers.

Borrowers can still ask lenders to restructure mortgage
payments beyond six months but such requests may impact credit
files, the regulator warned, with a return to accurate reporting
viewed as necessary to prevent over-indebtedness and ensure
lenders remain confident to lend.

The FCA did not formally consult on the plan to limit the
amnesty, but a call for feedback in September drew support from
most companies and trade bodies who were in favour of restoring
normal credit file reporting.

According to ClearScore though, consumers' credit scores
with Equifax - another credit-reporting agency - could drop by
up to 124 points if they find themselves unable to repay debt
for three consecutive months outside an agreed payment holiday.

A drop like this would likely trigger a credit file "black
mark", making accessing credit almost impossible, Basini said.

The average UK Equifax credit score is 380 points, and
considered "fair" but a drop of just one point would put
borrowers in the "poor" range of 379 to 280.

A drop to poor often means borrowers must turn to subprime
lenders, which typically charge higher interest rates to offset
a perceived higher default risk - but even that's drying up.

Subprime lenders like Provident Financial, Morses
Club, Non-Standard Finance and Amigo
either tightened lending criteria or shut the doors to new
business early in the pandemic. Amigo has said it will not
resume new lending until next year.

"I expect the number of non-prime customers in the UK to
grow from 10 million to 12 to 13 million next year," Morses Club
Chief Executive Paul Smith said. "There's a lack of supply to
meet the growing demand, and I think it will get worse."

An Equifax spokeswoman said they worked closely with all
organisations that supply data to ensure it is accurate and fit
for purpose, adding banks made lending decisions on a range of
information gathered and not just credit scores from agencies.

A spokesman for Experian said it expected lenders to report
assistance offered where relevant, after six-month payment
holidays expired.

"It's a return to business-as-usual credit reporting and
scoring," he added.

THE SHARKS CIRCLE

Debt campaigners say the amnesty ended too soon.

With banks likely to refuse or price out poorer borrowers
who fall outside risk appetites, there are few alternatives,
particularly since a no-interest loan scheme proposed by the
government in 2018 is still pending.

Fears of a loan-sharking, or illegal-lending, boom prompted
the government's England Illegal Money Lending Team to launch a
smartphone app in September to help people report predators who
demand extortionate interest or threaten borrowers.

Lenders also expect secured and unsecured consumer loan
default rates to rise in the final quarter, Bank of England data
on Oct. 15 showed.

"We have concerns for those whose payment holidays have
ended and are unable to resume repayments, as their only option
will be whatever their lender offers," said StepChange public
policy manager Adam Butler.

And while ending the amnesty is aimed at shoring up the
economy, it could have an opposite, unintended, effect.

"With fewer people able to take out credit, buy homes, and
switch credit products to pay down debt, this will have a direct
impact, not only on consumers, but on the credit industry and
the economy as a whole," ClearScore's Basini said.

($1 = 0.7561 pounds)
(Reporting by Sinead Cruise and Iain Withers; Editing by Pravin
Char)