Banks Easing Lending Standards As Loans Slow Down

A number of major banks are eager to lend again after tightening credit at the start of the pandemic. The world’s leading financial institutions are reducing their credit score requirements and offering more generous loan terms. 

According to Federal Reserve data, 27% of banks lowered their lending standards for getting credit cards, and 17% eased requirements for auto loans. The news comes following reports that JP Morgan and other industry giants were planning to extend loans to applicants who don’t have a credit score.

The loosening of the 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 prepared for a flood of defaults, which never happened. Instead, people used their stimulus checks and unemployment benefits to pay off credit card debt. 

The banks are now offering more attractive options, with mortgages being a notable exception, as these are still hard to get for many home buyers. The current housing market is still hot, and banks hesitate to extend mortgages to people with less than stellar credit scores. A significant down payment is still mandatory, and the banks remain strict with mortgage rules. 

However, thanks to the responsible use of government help, consumers today are better off on average than before the pandemic. According to Moody’s Investors analyst Warren Kornfeld, “the fact that consumers today are stronger than they were on average pre-COVID, as well as the expectation that the economy is going to improve, is very supportive of lenders beginning to loosen.”

While consumers stand better than they did before the pandemic, the overall standards for lending remain tighter. While there are excellent loan options for people with bad credit, getting approved for a loan is still no easy feat. This paradox is bringing another set of problems from the banks’ side: loan demand has plummeted.

It’s probably another issue affecting the decision to drop the credit score requirement when reviewing loan applications. JPMorgan is taking the lead, but Wells Fargo and US Bancorp are also onboard.

Instead of a FICO score, these banks announced that they would be looking into other metrics when deciding whether or not to approve someone for a loan, mortgage, or credit card.