Banks Tighten Lending Standards As Demand Wanes

Consumer and business loans are becoming harder to get.

Four progressively taller stacks of coins with a small home sitting on the tallest stack.
(Image credit: Getty Images)

Consumers and businesses may find it more difficult to get loans as banks tightened their lending standards terms over the last three months, according to the Federal Reserve’s recently issued July 2023 Senior Loan Officer Opinion Survey (SLOOS).

There were tighter standards in every loan category when compared to the July 2022 survey, the Fed reported.

For loans to households, banks reported that lending standards tightened and demand weekend across all categories of residential real estate loans, according to the survey of 66 domestic banks and 19 U.S. branches and agencies of foreign banks. Standards were stricter and weaker demand for home equity lines of credit as well. 

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The survey also showed that demand weakened for auto and other consumer loans but remained basically unchanged for credit card loans.

Increasing credit score criteria

For credit card loans, banks reported tightening the extent to which they granted loans to some customers who do not meet credit scoring requirements. They also reported increasing the minimum required credit scores and decreasing credit limits.

Banks are expected to further tighten standards on all loan categories in the second half as lenders pull back, according to the survey. 

As Kiplinger previously reported, the ongoing turmoil in the banking system due to bank closures is raising concerns that lending standards may tighten even further, especially in light of the Fed's interest rate hikes to a target range of 5.25%-5.5%, the highest in more than 22 years.

At a July 26 news conference, Fed Chair Jerome Powell said he expected the loan survey to be “consistent with what you would expect. You’ve got lending conditions tight and getting a little tighter, you’ve got weak demand and, you know, it gives a picture of pretty tight credit conditions in the economy.”

Kathryn Pomroy

For the past 18+ years, Kathryn has highlighted the humanity in personal finance by shaping stories that identify the opportunities and obstacles in managing a person's finances. All the same, she’ll jump on other equally important topics if needed. Kathryn graduated with a degree in Journalism and lives in Duluth, Minnesota. She joined Kiplinger in 2023 as a contributor.