Tightened lending standards may reduce losses, prevent supply from meeting demand

Written on May 17, 2010 – 10:37 pm | by Alicia Ross

Increased efforts to deter deceptive lending practices may widen the gap between credit availability and demand, according to a recent report by FICO.

Eighty-five percent of bank risk professionals surveyed in March 2010 also expected that the Credit Card Accountability, Responsibility and Disclosure Act of 2009 would lead to lower credit limits and increased interest rates. A wave of provisions effective the previous month restricted the fees charged by lenders and elevated disclosure efforts.

Eighty-three percent of respondents said they expected the average credit card limits to be reduced for new cards, according to the report, while 92 percent of them did not predict lending standards to loosen during the current quarter.

Restricted credit availability may protect lenders from some of the losses associated with delinquencies. Sixty percent of respondents expected a growth in the number of mortgage delinquencies, while 59 percent predict consumers to fall increasingly behind on credit card payments.

“Banks will stay focused on loss prevention,” Andrew Jennings, chief research officer at FICO, said. “Our survey found most bankers are still concerned about delinquencies. Throw in the CARD Act, which makes it harder for lenders to rein in risky cardholders, and it becomes highly unlikely we’ll see lenders throw caution to the wind.”

Therefore, risk management efforts will become a higher priority for 24 percent of the survey’s respondents, while 34 percent expect to keep this priority at its current level. None plan to reduce their commitment to risk management.

A recent report by TransUnionshowed an 8.3 percent drop in credit card delinquencies during the first quarter of 2010. This brought the ratio of consumers who are 90 or more days behind on at least one account to 1.11 percent.

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