NEW YORK (MainStreet) Demand for loans is rising as the economy heals -- and to become more competitive, banks are slowly loosening their lending standards. The Federal Reserve's quarterly survey of senior loan officers says that the move to ease loan requirements is accelerating at its fastest pace in eight years. And that will come as good news to business borrowers and prospective homeowners alike.
"Domestic banks generally continued to ease their lending standards and various terms for commercial and industrial loans," the Fed report says. "[U.S. banks] also reported having eased standards on most types of commercial real estate loans on balance. Although many banks reported having eased standards for prime residential real estate loans, respondents generally indicated little change in standards and terms for other types of loans to households."
Nearly one-quarter of the banks surveyed reported lowering mortgage loan requirements for borrowers with excellent credit. The Fed notes some larger banks are also increasing credit limits while lowering the minimum required credit scores for credit card loans. Over the past three months, banks have also seen stronger demand for many more loan categories than reported for April.
Residential mortgage demand for the most credit-worthy consumers is higher for the first time in a year, while demand strengthened for home equity line of credit loans (HELOCs) for the first time since the October 2013 Fed survey.
For commercial loans, the Fed survey reveals that banks are getting skinnier on their deals -- lowering profit margins, reducing the cost of credit lines and even softening loan covenants, especially for large and middle-market businesses.
"More-aggressive competition from other banks or nonbank lenders [was] an important reason for having done so," the Fed says. "Smaller numbers of banks also attributed their easing to a more favorable or less uncertain economic outlook or to an increased tolerance for risk."