Credit Standards Ease…Consumers Still Shy

A few weeks ago the Federal Reserve Board released the data from its regular survey of senior loan officers. The survey is effectively an analysis of supply and demand for commercial, mortgage, and consumer loans. We regularly utilize this data as a lending trends discussion catalyst during credit union strategy sessions, and frequently share it via our website as we are now.

For this post we will focus on the state of supply and demand for consumer loans, meaning new and used auto loans, credit cards, and other consumer loans such as unsecured consumer credit lines. We have had a chance to look at the latest results and it suggests that while supply of credit continues to grow, consumer demand remains mostly muted.

Supply

Supply is illustrated by determining both the willingness of survey participants to make loans as well as the restrictiveness of their underwriting standards. To make this determination, the Fed asks participants whether the institution’s willingness to make consumer loans has changed over the three months that have passed since the prior survey effort, and also whether the institution’s underwriting policies have tightened or eased over that same period. We will focus on the underwriting policy question.

The chart below showcases the net percentage of participant responses to the question of tightening standards. Net percentage equals the percentage of participants that reported having tightened standards minus the percentage of banks that reported having eased standards. A negative number means the bulk of survey respondents are making it easier to obtain loans by loosening underwriting standards. A positive number means the bulk of survey respondents are making it harder to obtain loans. Note that you can enlarge the chart by clicking on the image.

Loan Officer Standards Chart - October 2011
Loan Officer Standards Chart - October 2011

The chart indicates that for every type of consumer credit included in the analysis, the abundance of participants are easing underwriting standards from where they stood three months ago. As you can tell from the data points, the days of easy credit have certainly not returned, but the tap is open for qualifying consumers.

Demand

Demand is illustrated by determining the level of consumer requests for the same selection of consumer loans included in the supply question. To make this determination, the Fed asks participants to indicate how demand from individuals or households for consumer loans has changed over the prior three months. Response options range from Substantially Stronger to Substantially Weaker.

The chart below showcases the net percentage of participant responses to the question of demand. Net percentage equals the percentage of participants that reported experiencing stronger demand minus the percentage of participants that reported weaker demand. A positive number means that the bulk of survey respondents are experiencing increases in demand. A negative number means the bulk of survey respondents are experiencing declines in demand. Note that you can enlarge the chart by clicking on the image.

Loan Officer Demand Chart - October 2011
Loan Officer Demand Chart - October 2011

The chart indicates continued, improved demand for credit cards and autos, but other consumer loans still remain of marginal interest to consumers.

What This Means for Credit Unions

Though there has been a lot of talk in past years regarding frozen credit markets, perhaps we should note that consumer borrowers have been almost as equally frozen. Yes, segments of the consumer population have been in dire need of credit and have had little luck in finding it, but as this data – not to mention the actual experiences of credit unions over the past few years – attests, consumers have not been applying for loans in droves.

Perhaps this is the beginning of a greater thaw in the broader consumer loan market. Growth in basic consumer auto and credit card loans would be a nice counterbalance to some of the accelerated mortgage growth seen in credit union portfolios since the start of the economic downturn.

If we are looking at even a low level of sustained improvement in consumer demand, credit unions will be wise to review their own underwriting standards as a 2011 wrap-up activity. A review, and responsible easing if warranted, will help ensure that newly-minted “bank transfer day” members are not disenfranchised by standards more in line with 2009-2010 than 2012 and beyond. It would be a shame if such members come to find it easier to take care of their loan needs at the banks they just left behind.

Additional Resources

Download the full Federal Reserve survey report

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