Fed survey finds banks tighten lending standards on all types of consumer, business loans

Many banks have made it harder for borrowers to obtain all kinds of loans over the last three months despite a $700 billion federal bailout program and a flurry of other bold moves to stem the worst financial crisis to hit the country since the 1930s.

The Federal Reserve in its quarterly survey of bank lending practices released Monday found large numbers of banks reporting tighter credit standards across a broad range of loan products -- from credit cards and home mortgages to business loans.

Nearly 60 percent of banks responding to the survey said they had tightened lending standards on credit card and other consumer loans, about the same share as in the previous survey released in early November. And about 80 percent of domestic banks said they tightened lending standards on commercial real-estate loans, slightly less than the roughly 85 percent that reported doing so in the previous survey.

All told, though, the proportion of banks that "reported having tightened their lending policies on all major loan categories over the previous three months stayed very elevated," the Fed concluded.

Greg McBride, senior financial analyst at Bankrate.com, predicted that banks -- whose lax lending standards for home mortgages contributed to the financial meltdown -- won't be in any rush to loosen lending standards.

"Even when lenders come back to the marketplace and become willing to lend again, who they lend to is not going to change," McBride said. "The tighter qualification standards that we've been seeing are here to stay for the foreseeable future regardless of whether or not there is stress in the credit markets and a deep recession. Lenders won't go back to giving out credit like candy anytime soon."

The Fed survey was based on the responses of 51 domestic banks and 23 U.S. offices of foreign banks.

The findings come as the government has taken a series of unprecedented actions to bust through a debilitating credit clog and spur banks to lend more freely again.

Under the $700 billion bailout program, enacted in early October, the government has pledged to inject $250 billion into banks in return for partial ownership. Treasury Secretary Timothy Geithner is exploring other ways to provide relief, including the possibility of buying rotten mortgages and other toxic assets now weighing down banks' balance sheets.

The Federal Reserve has slashed a key interest rate to record lows and rolled out radical programs to, among other things, provide cash loans to banks, buy mounds of short-term debt from companies, and purchase up to $500 billion in mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae.

In its survey, the Fed said roughly 45 percent of banks raised the minimum-required credit scores on credit card accounts and other consumer loans.

The survey also found that domestic banks had reduced the size of existing credit lines for all major types of business and consumer customers.

For business customers, roughly 60 percent of banks reported a decrease in the limits on commercial construction lines of credit, and about 50 percent indicated a decrease in the limits extended to financial firms.

For consumers, about 40 percent of banks reduced the size of existing home equity lines of credit, and roughly 35 percent trimmed credit card account limits.

The survey also showed that many banks continued to tighten lending standards on prime mortgages as well as nontraditional mortgages, such as adjustable-rate loans with multiple payment options.

When the credit and financial crisis erupted in the summer of 2007, it started with more risky "subprime" borrowers -- those with tarnished credit and low incomes -- defaulting or missing payments on their home mortgages. Problems subsequently spread to other types of loans and more creditworthy borrowers.