Banks tighten sub-prime lending

Banks are keeping a tight hold on credit criteria, and starting to look more critically at funding offers to the automotive sectors, according to the 2016 Senior Loan Officer Opinion Survey on Bank Lending Practices, released by the Federal Reserve.

Based on data for the prior quarter, 82% of banks surveyed said that credit standards for approving applications for auto loans have “remained basically unchanged” over the past three months, while 92.5% of respondents said that neither the minimum required down payment, nor the minimum credit score has changed either.

Demand for auto loans was also steady, with nearly 20% of respondents reporting moderately stronger demand, while only 4.8% reported moderately weaker demand. Three quarters (74%) said demand had remained the same.

The survey looked at how banks are thinking about lending to different groups of consumers now, as compared to previous years, by reference to the midpoint of their range over a 10-year period.

Sub-prime scrutiny

The findings suggest that while banks remain happy to lend to prime borrowers, they are subjecting sub-prime borrowers to closer scrutiny. Half of the survey respondents said that lending standards for auto loan prime borrowers were near the midpoint range and a quarter (26.2%) said that standards were somewhat easier.

At the other end of the spectrum, a quarter of respondents (26%) said standards for sub-prime borrowers had got tighter, and for 14% “significantly tighter”. In the sub-prime category, only 33.3% said standards were near the midpoint range.

Compared to activity on consumer instalment loans and credit cards, where banks indicated they were more willing to make offers and were easing lending standards, more banks reported tightening lending standards for auto loans, whereas standards on other consumer loans remained basically unchanged.

The proportion of banks reporting that standards are easier than the midpoints of the respective ranges increased for all consumer loan types, except for sub-prime credit card loans and sub-prime auto loans, compared with the July 2015 report.

Banks generally reported that demand for consumer loans had strengthened in the second quarter.