Banks Toughening Standards for Unsecured Loans

U.S. banks continue to toughen standards for unsecured consumer loans, including credit cards, while offering easier terms for home equity loans backed by real estate, the Federal Reserve said Monday.

In one of its periodic surveys of senior bank lending officers, the Fed said that “a large number of banks said they had raised standards on credit card loans and many said they had done so for other consumer loans.”

The survey, which covered 55 banks, also found that home equity loans, secured by borrowers’ residences, have grown more popular with banks and consumers alike.

“The recent rapid growth in home equity loans was in part the result of substitution for unsecured forms of consumer credit,” the Fed said. “This shift reportedly has arisen from bank promotion of such substitution as well as from the initiative of borrowers attempting to consolidate their debt.”

Rates on home equity loans, which are secured by real estate, are lower than those on unsecured credit card loans, about 9% versus roughly 15%.

For those who can qualify, a home equity loan is “a much more attractive way to borrow and consolidate debt,” said William Sullivan, an economist at Dean Witter Reynolds in New York. Interest on most home equity loans is also tax-deductible.

The Fed’s survey also found that banks “had eased terms on business loans over the past three months, citing pressure from other banks and non-banks as the cause.”

While making their commercial loans more attractive, “only a few banks said they had relaxed standards on those loans,” the Fed survey said. It also “found little evidence of looser standards for commercial real estate loans.”

As banks faced mounting losses from credit card loans, they made more secure home equity loans, where borrowers must put up their homes as collateral, according to banking experts.

“A lot of banks are pulling in their horns,” said Abe Bettinger, a partner in the New York-based bank consulting firm of Bettinger & Leech. “They want to diversify [spread] the risk.”

Banks are tightening standards on consumer loans after personal bankruptcies exceeded 1 million last year--an annual record--as many consumers ran up credit card bills they couldn’t pay. Banks deserve part of the blame, analysts said, because of their stepped-up promotions to issue credit cards.