Broker Check

Credit Standards Tighten

June 15, 2020

Interest rates have declined but lenders are making it more difficult for most borrowers to get a loan. According to the Federal Reserve Senior Loan Officer Survey, 40% of respondents reported tightening loan standards for consumer and mortgage loans. Approximately 20% of respondents reported an increase in mortgage standards and roughly 40% reported tighter consumer credit standards. This shows that banks and other lenders are becoming more cautious when extending credit and therefore may require higher credit scores, increased income-to-loan ratios, and less attractive loan terms. In fact, 20% of survey respondents reported a decreased willingness to make consumer loans.

The loan demand picture is quite different as household demand for loans are mixed. Demand for mortgage loans has increased except for demand for sub-prime loans. Meanwhile, demand for consumer loans has decreased sharply, led by a sharp decrease in auto loans.

Given the economic turmoil in the US it is understandable that banks and other lenders would be hesitant to make loans to consumers who may not be able to pay them back. However, should this restricted access to credit persist it could hamper the economy’s ability to recover once the economic restrictions are loosened.