Research and Statistics

Fed report: Banks tighten lending standards even more

Banks have become even more squeamish about lending to both consumers and  businesses, according to a quarterly survey of loan officers issued Monday by the Federal Reserve.

The survey showed that a large number of issuers “reported having continued to tighten their lending standards and terms on all major loan categories over the previous three months,” the report concludes. These new actions cutting back on credit card lending come atop the sharp tightening reported in the prior survey, released in July.

“Nearly 60 percent of respondents indicated that they had tightened lending standards on credit card loans, while nearly 65 percent of respondents indicated that they had tightened lending standards on other consumer loans over the past three months,” the report states.

Impact of tightening is widespread
It’s not just risky, subprime borrowers who are having increased difficulty getting credit card loans.

“Domestic banks reported reducing credit limits on existing credit card accounts both to prime and to nonprime borrowers,” the report states, “citing a less favorable or more uncertain economic outlook, reduced tolerance for risk and declines in customer credit scores as important reasons for the decreases.”

One practice that limits credit card issuers’ risk is becoming widespread: lowering credit limits on existing customers, a practice that damages the credit scores of consumers. Three in 10 large banks reported they were taking that action, one in 10 small banks.

What “tightening” looks like
Credit-card issuing banks tighten lending standards in one or more of the following ways:

  • Increasing interest rates.
  • Cutting credit limits.
  • Requiring higher minimum credit scores.
  • Tightening terms and conditions on new or existing customers.

All the actions have become commonplace, the loan officers reported. For example, six out of 10 banks have in some way tightened terms and conditions on new or existing customers. That’s up from 47 percent in the prior survey.

Tellingly, not a single credit card issuing bank in any category that said it was getting looser with its lending standards.

Other findings of the survey include:

  • Almost all banks reported they had increased their “spreads” — the difference between the rate they charge for money and what they pay for it — on business loans.
  • Three of four banks say they have tightened standards for home equity lines of credit (HELOCs) over the past three months. In part because that equity has either been spent or evaporated in the housing crash, there also was less demand for such loans. One in four banks saw demand for HELOCs fall, twice as many as in the prior report.
  • There were just a few modest signs of credit loosening. In the report released in July, 75 percent of mortgage lenders surveyed said they had tightened lending standards on prime customers. That fell in the latest report — to 70 percent.

The Fed’s senior loan officer’s survey is a quarterly assessment of senior loan officers’ standards toward lending. This survey was developed from the responses given by officers from 55 domestic banks and 21 U.S. branches and agencies of foreign banks.

See earlier story:Credit card lending standards sharpen tightly.

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Published: October 31, 2008

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