Lending Standards Got Tougher in Third Quarter: Fed Survey

An increasing number of banks tightened their lending standards for consumer and commercial loans during the third quarter, according to the Federal Reserve’s October 2007 Senior Loan Officer Opinion Survey on Bank Lending Practices release yesterday.

Domestic banks reported tighter lending standards and terms on consumer loans other than credit card loans, as well as tighter lending standards on prime, nontraditional, and subprime residential mortgages during the third quarter. Lending standards on credit card loans were, by contrast, little changed. Demand for residential mortgages and consumer loans of all types had reportedly weakened, the survey said.

About 40 percent of respondents indicated that they had tightened their lending standards on prime mortgages, compared with only about 15 percent that reported having done so in the July survey. Of the 40 banks that originated nontraditional residential loans, 60 percent — up from around 40 percent in the July survey — reported a tightening of their lending standards on such loans. More than half of the banks that originated subprime mortgage loans noted that they had tightened their lending standards on such loans — a proportion about as large as in the July survey, according to the Fed.

Similarly, the Federal Reserve said that about half of the domestic respondents indicated that demand for prime, nontraditional, and subprime residential mortgages had weakened during the quarter.

Domestic banks reported that demand for commercial and industrial loans had weakened over the survey period, whereas foreign institutions reported that demand for these loans was little changed. Both domestic and foreign institutions noted weaker demand for commercial real estate loans in the quarter.