It’s tougher to get a credit card, car loan
Banks tightening standards despite thriving economy
More banks are tightening consumer credit standards and more Americans are getting worried about defaulting on loans as lenders target less creditworthy borrowers to grow revenue and delinquencies edge higher, surveys show.
The data is surprising in light of an economy and labor market that have been rolling along. Consumers are benefiting from solid job growth, faster pay increases and low debt levels. And the stock market is at record highs.
Yet 11.7% of banks tightened standards for auto loans in the first quarter, up from 3.3% late last year and the highest level on records dating to 2011, ac- cording to the senior loan officer survey released by the Federal Reserve last week and Deutsche Bank.
Credit card standards were toughened by 8.3% of banks, compared to none in the fourth quarter. And criteria for consumer loans excluding credit cards were tightened by 7.3% of banks, up from 2.4%.
The results don’t reflect a sud- denly shaky economy or an imminent pullback on lending by banks and other lenders for prime loans, says Matthew Mish, head of global credit strategy for UBS. Instead, he says, with the economic recovery in its eighth year, lenders are extending their reach to borrowers at low- and middle-income levels to increase revenue.
“You are lending increasingly to the type of person that has cash-flow pressures,” Mish says.
Joe LaVorgna, Deutsche Bank’s chief economist, says banks are being more cautious with credit cards in part because of low interest rates that have crimped profit margins. He expects standards to ease as rates rise.
The number of subprime auto loans (those requiring a FICO score of 600 or lower) that were at least 90 days late on payments hit the highest level since 2010 in the third quarter at 6 million, according to the New York Fed. The bulk of the bad loans were by auto finance companies rather than
Banks are being cautious because low interest rates have crimped their profits, says Joe LaVorgna of Deutsche Bank.
banks, the regional bank said.
The share of delinquent personal loans and credit card debts also edged up in the third quarter to 3.53% and 1.33% respectively, according to TransUnion and UBS. Mish says non-bank lenders are taking bigger risks by making offers to less-stable borrowers.
Also worrisome: 18% of consumers surveyed by UBS in December expected to default on a loan payment in the next 12 months, up from 12% in September. Much of the pain is being felt by lower-income Americans. Two-thirds of households who earn less than $40,000 say income is falling short of, or just barely covering, expenses, and 36% of that group say their financial conditions worsened over the past six months.
Although wages have been rising and annual inflation is measured at about 2%, the incomes of many low- to moderate-income workers are not keeping up with costs such as higher health insur- ance deductibles that are not fully captured in monthly inflation data, Mish says.
He says the latest reports show the expanding economy and market optimism about President Trump’s fiscal stimulus are not extending to less wealthy Americans who have not benefited from rising home and stock prices.
So far, housing has been insulated from the troubles. The portion of non-performing mortgages is low and has been falling. But Mish says non-bank lenders have been approving mortgages for risky borrowers that are backed by the Federal Housing Administration.
A new study by Trinity University economist David Macpherson for Emergency Warning System, a research firm, shows that 29 states have seen home prices rise more rapidly than rents since 2012, up from 14 states two years ago. Such data typically augurs a housing bubble and a significant increase in delinquencies in three to four years, Macpherson says.