Fed survey reveals banks are tightening their underwriting practices on a number of loan types, including those for businesses and consumers.
11/28/2022 3:00 P.M.
3 minute read
More U.S. banks are tightening terms on loans for businesses, commercial real estate and households, according to a new Federal Reserve System survey of lending officers.
“The tightening in standards by senior loan officers goes part-and-parcel with significantly higher rates and a shrinking balance sheet by the Fed,” Joseph Lavorgna, chief U.S. economist for SMBC Nikko Securities America Inc., told Bloomberg. “They’re basically self-reinforcing.”
Banks reported wider interest rate spreads on credit card loans and said they are increasing their focus on applicants meeting certain credit scoring thresholds. Specifically, the surveyed banks said that in the third quarter of 2022, they were less likely to approve credit card and auto loan applications for borrowers with FICO scores of 620 and 680 compared to the beginning of the year.
While banks may be clamping down on credit, consumers continue to clamor for it—at least when it comes to credit cards. The application rate for credit cards increased to 27.1% in October 2022, according to the New York Federal Reserve, up from 26.5% last year.
“Looking ahead over the next 12 months, households anticipate they will be less likely to apply for an auto loan, mortgage, or mortgage refinance loan, but report a higher average likelihood of applying for a credit card or credit card limit increase,” New York Fed researchers said in a press release.
The Fed reported that banks felt there is a 40% chance that a mild to moderate recession will occur within the next 12 months.
“If the U.S. economy falls into a recession, more than 80% of banks said they would ‘somewhat’ or ‘substantially’ tighten lending standards for credit cards and loans backed by commercial real estate,” American Banker reports. “More than 70% of banks said they would do the same for auto, commercial and industrial and residential real estate loans.”
ACA’s Take
Debt collection plays a critical role in the credit cycle. Research has shown that reasonable debt collection regulations combined with an efficient accounts receivable management industry can contribute to an expanded supply of consumer credit and lower interest rates. This is essential for higher-risk borrowers who would not otherwise qualify for credit or for whom credit would be prohibitively expensive. It gives borrowers access to affordable credit when lenders can mitigate losses through post-default collection.
“People understand when creditors reduce credit limits during tough economic times,” said ACA CEO Scott Purcell. “This is a great analogy of what happens as well when decisions are made to limit collection activity—you just won’t see it in a press release. That is the value ACA members bring to the credit-based economy.”
For more economic news and analysis, don’t miss the new ACA Hot Topic seminar “Confessions of a Dismal Scientist: Where Are We in 2023?” on Dec. 20 at 2 p.m. CST.
Led by economist Dr. Chris Kuehl, this webinar will answer questions like: What leads to a recession and what allows us to escape one? Where is inflation heading and how do we deal with issues like supply chain breakdown, worker shortages and high energy prices? Is next year going to be a “normal” year or another year of crisis and unpredictability (or is that normal now)?
This 90-minute webinar is free for ACA members and Training Zone Subscribers. Learn more about this webinar in our events calendar.
If you have executive leadership updates or other member news to share with ACA, contact our communications department at [email protected]. View our publications page for more information and our news submission guidelines here.