Consumers Get Back Into Credit

A recent report released by the Federal Reserve Bank (“the Fed”) shows that U.S. banks are continuing to gain confidence in consumers’ spending habits. The April 2014 Senior Loan Officer Opinion Survey on Bank Lending Practices reported that nearly one-third of surveyed banks saw a slight increase in applications from borrowers they consider to be prime or sub-prime.

The Fed surveyed 74 domestic banks and 23 U.S. branches and agencies of foreign banks about changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months.

In terms of lending practices toward consumers, several domestic banks reported that they were more willing to make consumer installment loans as compared with the previous quarter. Additionally, a small amount of surveyed banks said that they eased standards on auto and consumer credit card loans.

Banks also reported positive growth in consumer credit card loans. For example, when asked how the total number of consumer credit card applications at their institution changed in 2013, 52.2 percent of banks said that there was little change, while 37 percent stated that applications slightly increased. No respondents reported a substantial decrease in applications, and just 6.5 percent said there was somewhat of a decrease.

“Several different provisions of the Credit Card Act were cited as important,” the report explained. “[This] include[ed] the prohibition on raising interest rates on existing balances, the restrictions on credit card fees, the requirement for card payments to be applied to debts with the highest interest rates, the requirement for borrowers under the age of 21 to have adult cosigners, and the required disclosures to consumers.”

Additionally, 21.6 percent of surveyed institutions considered consumers’ use of debit cards a somewhat important factor constraining growth, while the majority of banks – 73 percent – said it was not an important issue. Continuing off of that idea, 80.6 percent of those interviewed also considered consumers’ use of non-debit card payment mechanisms not an important factor in affecting growth.

Looking forward, the majority of banks were optimistic about their institutions’ annual credit card loan growth to stabilize. Specifically, 43.4 percent of surveyed institutions reported that they expect the growth rate to stabilize sometime between 2014 and 2016, while 28.3 percent of banks said that the credit card loan growth was already stabilized.

The report also explored banks’ practices in household and business loans, as well as the tightening and easing of standards on prime closed-end residential real estate loans and on home equity lines of credit. To read the report in its entirety, click here.