MAY 4, 2010
By SUDEEP REDDY, Wall Street Journal
The credit crunch isn't over for small businesses and consumers.
Most U.S. banks kept credit tight in the first three months of the year, and some tightened lending terms further, according to the Federal Reserve's latest senior loan officer survey.
Some categories showed improvement after years of lending cutbacks. Banks reported easing terms on commercial and industrial loans to large and medium-size firms. While the easing took place only at large banks, it marked the first time since 2006 that banks reported easing standards in two straight quarters.
Some consumer loans, such as home-equity lines of credit, also showed easing in standards. But key areas, such as residential mortgages and commercial real estate, saw continued tightening in terms.
The Fed found that a third of banks tightened terms and conditions on new credit-card accounts for small businesses, while more than a quarter of banks did so for existing accounts. More than 40% of banks said they raised minimum required credit scores. Almost a third said they widened spreads—interest rates over the bank's cost of funds—on outstanding balances, and 15% reported charging higher annual fees. More than two-thirds of loan officers said their current level of standards and terms is tighter than their longer-run average.
Many small business customers, meanwhile, are cutting back on borrowing in part because of the weak economy. Noelle Tarabulski, who used credit cards to finance her Lakewood, Colo., consulting firm before the recession, relied on credit lines of up to $150,000 before her interest rates shot up to as much as 38% after the financial crisis. That came just as her revenue plummeted from $1 million in 2007 to about $200,000 last year.
"I'm just never putting myself in a position where a bank can do that to me again," said Ms. Tarabulski, whose firm, Builder Consulting Group Inc., works on best practices for homebuilders. She expects about $600,000 in revenue this year but is cutting her debt as much as possible. "At this point my approach to credit is 100% different," she said. "I have no interest in being leveraged at the level that I was. For me I think there's a healing period going on."
Businesses and households across the U.S. are trying to cut their debt and increase savings, spurring a continued drop in loan demand. The Fed said demand for prime residential mortgages fell at a third of banks surveyed, while it was stronger at a fifth of banks.
Bank of America Corp. Chief Executive Brian Moynihan said during the company's first-quarter conference call last month that loan demand remains weak because of overall economic conditions, as opposed to an unwillingness to lend. "Customers are not feeling the need to draw on our lines because they don't see economic demand," he said.
Outside of credit cards, some U.S. banks in the Fed survey increased their availability of consumer loans. About one in seven banks said they were "somewhat more willing" to make consumer installment loans compared with three months ago, while the rest were unchanged.
"The gradual normalization of bank credit supply and demand bodes well for loan growth in coming quarters, and the increasing availability of bank credit is slowly removing one of the remaining drags on the pace of recovery," said Michael Feroli, chief U.S. economist at J.P. Morgan Chase.
Separately, the number of consumer bankruptcies slipped in April compared with the prior month but remain far higher than a year ago.
There were 144,490 personal bankruptcy filings last month, down 3% from March, the American Bankruptcy Institute said based on data from the National Bankruptcy Research Center. Still, the number of filings was 15% higher than the same month last year.
—Dan Fitzpatrick contributed to this article.
Write to Sudeep Reddy at email@example.com