Fed: Credit Pull-Back Eases, But Loan Demand Weak

By Eva Norlyk Smith, Ph.D.

According to a recent report from the Federal Reserve, the two-year long credit pull-back may be slowing, but there is still a long way to go before the banks’ lending practices are back to normal. While fewer banks are making it harder to get loans, they aren’t exactly making it easier to get loans either. The standards for most types of loans remain higher than normal, and consumer loan demand continues to weaken.

These are some of the main findings of the Fed’s recently released January 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices. The quarterly Fed survey seeks to take the pulse of the economy by reviewing the supply and demand for loans to businesses and households. The survey included 55 U.S. banks and 23 branches of foreign banks in the U.S.

For the past two years, banks have reined in lending standards in numerous ways: by giving out loans or credit cards with lower credit limits, by cutting back on credit card lines, raising the credit scores required for credit card and loan approval, increasing interest rates and fees, requiring higher minimum payments, and for general consumer loans, issuing loans with shorter terms or requiring greater collateral.

According to the survey, while the terms for consumer loans other than credit cards remained largely unchanged over the past three months, banks continued to pull back on lending standards for credit cards.

• 40 percent of card issuers had scaled back credit limits;
• 22.9 percent had increased credit card interest rates;
• 17.1 percent had increased the credit score required to get approved for a credit card.

Encouragingly, only 2.9 percent of card issuers had increased the minimum required payment on credit cards each month; 97.1 percent had left them unchanged.

For people with bad credit, card issuers continued to pull back lending standards more aggressively than for other types of cards. 28.6 percent of card issuers said that they were less likely to grant loans to people with poor credit, while 68.6 percent said they hadn’t changed their policy from last quarter.

While banks may have eased the rate at which they are pulling back on credit, the rate at which consumers and businesses are applying for new loans continues to weaken. 41 percent of the banks surveyed said that demand for consumer loans had gone down over the past three months, and only 8 percent reported that it had increased.

The numbers are in line with recent numbers showing that U.S. consumer credit dropped by a record $17.5 billion in November, a 10th straight monthly decline in a row. Consumers have particularly been pulling back on revolving credit, which is largely a measure of credit card usage, which dropped by 18.5 percent or $13.7 billion in November. The large declines in consumer credit usage come follow in the wake of record unemployment numbers, with unemployment hovering close to a 26-year high. Low demand for consumer loans is a sign that the prolonged economic downturn continues to take its toll on consumer confidence, and it bodes ill for an imminent economic turnaround; consumer spending is viewed as an important requirement for an economic rebound.

Most banks anticipate that credit card losses will begin to stabilize this year; however, loan defaults are expected to increase in other types of loans, including prime residential mortgages, home equity lines of credit, and commercial real estate loans. Not surprisingly, while the lending environment was improving in other areas, banks continued to tighten credit for commercial real estate loans and for loans to small businesses.

Published: February 4, 2010