Banks Tightening Underwriting Standards, Making it More Difficult for Consumers and Businesses to Access Credit
The Federal Reserve recently released a survey of banks’ senior loan officers which found that lenders made it more difficult for consumers and businesses to access credit during the third quarter. If the U.S. economy experiences a recession, as some economists think is likely, more than 80 percent of banks said they would substantially tighten lending standards for both credit cards and loans backed by real estate, and more than 70 percent said they would tighten their standards for auto, commercial, industrial, and residential real estate loans.
Lenders have been more reluctant to approve new lines of credit because of their concerns that an economic recession could increase the number of bad loans on their records. While no banks reported that they expect a “severe” downturn, most banks said that the probability of a “moderate” recession was between 40 percent and 80 percent, according to American Banker.
“One of the times in which loans are at their riskiest is when they’re unseasoned,” said Megan Fox, a senior analyst at Moody’s Investors Service. “The tightening of underwriting standards really reflects those concerns [of a recession].”
In 2021, many banks eased requirements on auto loans and credit cards, making it easier for consumers to get approved for credit. However, during the third quarter of this year, credit cards saw the most material tightening in underwriting standards, including raised requirements for both income and minimum credit score.
Borrowers with FICO scores between 620 and 680 were less likely to be approved for credit card and other loan applications during the third quarter than at the beginning of 2022, while consumers with higher credit scores saw little impact on credit availability.
“Generally, prime homeowners are in good financial standing, and we’re seeing the opposite on the lower-income or renter population, where there’s perhaps more stress and less flexibility to absorb inflation,” said Fox.
Credit card demand rose in the third quarter largely due to inflation, while increased prices and interest rates caused decreased demand for mortgages and auto loans. When determining whether or not to extend credit to consumers, lenders now rely more on economic forecasts than customer demand.