Research and Statistics

Lending standards show signs of easing, Fed report says


Having spent much of 2009 making it tougher for consumers to get credit, banks largely stood pat in the final three months of the year, according to data released Monday by the Federal Reserve.

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Having spent much of 2009 making it tougher for consumers to get credit, banks largely stood pat in the final three months of the year, according to data released Monday by the Federal Reserve.

They’ve spent the last few years making it as hard as possible to get credit. However, in the fourth quarter of 2009, banks stopped their race to tighten credit. Only 3 percent more banks said they were tightening lending standards than said they were easing them, the smallest number since 2007. The graph below charts out the change in that percentage since 1996.

Quarterly loan officer survey from the Federal Reserve

The Fed’s quarterly survey of senior loan officers released on Monday said that only 6 percent of banks tightened their credit card lending standards in the fourth quarter, while about half that number actually eased them. The vast majority of banks — more than 90 percent — left their lending standards unchanged. That’s a sharp slowdown from the previous several reports that indicated dramatically tightened lending standards.

The survey of banking executives asked them about changes in the supply of and demand for loans to businesses and households over the prior three months. In terms of credit cards, the Fed’s report showed that as the enactment of Credit CARD Act restrictions on lenders draw closer, banks continue to limit lending — although not anywhere near as sharply as they did earlier in 2009.

Experts say that is a good thing. “Consumers will begin to use credit once they have more renewed confidence in a sustained recovery.  That is slowly happening, and this survey also found that banks’ willingness to lend to consumers has improved dramatically — a good sign for the future,” says Michael P. Niemira, chief economist with the International Council of Shopping Centers.

Banks loosen their grip, but don’t let go
As the economy floundered and increased industry regulation — whose major reforms take effect Feb. 22, 2010 — drew nearer, credit cards became more costly and difficult for the average borrower to use. The latest Fed survey marks the 10th straight quarter of tightening standards, even as the latest survey includes the smallest numbers of banks reporting restricting standards over that time frame.

Lenders have had good reason to be stingy. Bankers say a combination of challenges — such as high joblessness, government regulation and consumers’ newfound distaste for debt — mean they are forced to find new sources of income. The result is higher interest rates and fees for cardholders. Many of those moves were evident in the survey, which included responses from 55 domestic banks and 23 U.S. branches and agencies of foreign banks.

When asked about changes to terms and conditions for new or existing cardholders over the past three months:

  • 40 percent of banks reduced credit card limits.
  • 23 percent raised interest rates.
  • 17 percent raised the minimum credit scores required for a credit card.

While those numbers may still seem high, they’re a far cry from those seen during arguably the peak of the credit crunch — the second quarter of 2008, during which 66 percent of banks said they had tightened lending standards. For example, back then, 57 percent of banks said they had raised the minimum credit score required to get a card. That’s more than three times the number seen in the most recent survey.

Consumers stashing their plastic

The combination of tight credit and cardholders’ increasing distaste for debt has sent balances plunging.  From Sept. 2008 to Nov. 2009, U.S. cardholders eliminated $101.2 billion in credit card debt. That means the average U.S. household with outstanding payments on their plastic — of which there are roughly 54 million, according to government data — has shed around $1,874 in credit card debt during that period.

What’s behind that massive drop in debt? According to the Federal Reserve Open Market Committee, unemployment and borrowing challenges have been limiting consumers’ enthusiasm for new purchases. “Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth and tight credit,” the committee said.

Analysts say the weak housing market will continue to weigh on cardholder spending. “Although there are ‘whiffs’ of improvement on the consumer side, the use of credit cards will remain sluggish as consumers continue to wrestle with mortgage debt burdens,” ISCS’s Niemira says.

The chart below shows the percentages of banks that tightened specific lending standards in the fourth quarter of 2009 and in the second quarter of 2008, when credit tightening was at its peak. Eighteen months ago, senior loan officers surveyed by the Fed said that 66 percent of banks at that point said that they had tightened lending standards in the previous three months. In the fourth quarter of 2009, only 3 percent reported tightening.
ActionQ4 2009Q2 2008
Lowering credit limits40%47%
Raising minimum payments3%10%
Raising credit score requirements17%57%
Refusing to lend to those who don’t meet all lending standards28%50%

See related: A comprehensive guide to the Credit CARD Act of 2009, Consumers continue to shed debt, Consumers gain new right to opt out of rate increases

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