Banks relax lending standards as lending slows
A number of major banks are eager to lend again after the credit crunch at the start of the pandemic. The world’s leading financial institutions are reducing their credit rating requirements and offering more generous loan terms.
According to Federal Reserve data, 27% of banks lowered their credit standards to get credit cards, and 17% relaxed auto loan requirements. The news comes on the heels of reports that JP Morgan and other industry giants were planning to grant loans to applicants who do not have a credit score.
The easing of requirements marks a significant departure from the previous year when banks tightened credit, and many people with good credit scores were denied loans. Banks expected and braced for a flood of defaults, which never happened. Instead, people used their stimulus checks and unemployment benefits to pay off their credit card debt.
Banks are now offering more attractive options, with mortgages being a notable exception as they are still difficult to obtain for many homebuyers. The current housing market is still hot and banks are reluctant to grant mortgages to people with below average credit scores. A large down payment is still required, and banks remain strict with mortgage rules.
However, thanks to the responsible use of government assistance, consumers today are on average better off than before the pandemic. According to Warren Kornfeld, Analyst at Moody’s Investors, “The fact that consumers today are stronger than they were on average before COVID, as well as the hope that the economy will improve, is very supportive of lenders who are starting to to relax.”
Although consumers are doing better than before the pandemic, general credit standards remain stricter. Though there is great loan options for people with bad creditGetting approved for a loan is still no easy task. This paradox brings another set of problems for the banks: the demand for credit has fallen.
This is probably another issue that affects the decision to drop the credit score requirement when considering loan applications. JPMorgan is taking the lead, but Wells Fargo and US Bancorp are also on board.
Instead of a FICO score, these banks announced that they would look at other metrics to decide whether or not to approve a person for a loan, mortgage or credit card.