Bank lending gets tougher

WASHINGTON — More banks are tightening lending standards on home mortgages and other consumer and business loans as a deepening credit crisis exerts a heavier toll on the economy.

The Federal Reserve said Monday the percentage of banks reporting tighter lending standards rose across various loan types in its July survey. In April, the central bank had found that the percentage of banks reporting tighter lending standards already was near historic highs.

The new survey, conducted in early July, found that about 75 percent of the banks surveyed indicated they had tightened their lending standards for prime mortgages. That was up from about 60 percent of banks that said they were tightening lending standards for prime mortgages in the previous survey.

The Fed's July survey covered 50 banks that hold about 80 percent of the residential mortgages on the books of all commercial banks.

Out of this group of 50 banks, 32 said they were still originating so-called nontraditional home mortgages.

Among those 32 banks, about 85 percent said they had tightened their lending standards, up from 75 percent that said they were tightening lending standards for nontraditional mortgages in the April survey.

The Fed defines nontraditional mortgages as adjustable-rate mortgages with multiple payment options; interest-only loans; and "Alt-A" mortgages that require limited verification of income.

The Fed survey found that seven of the 50 banks said they were still participating in subprime mortgages, loans made to borrowers with weak credit histories. Of those seven, six said they had tightened lending standards on subprime loans, with only one saying it had left standards basically unchanged.

The survey found that most banks were reporting tighter lending standards across a broad swath of consumer and business loans over the past three months.

For home equity lines of credit, 80 percent of the banks surveyed said they had tightened their lending standards.

For credit cards, about 65 percent of the banks in the survey reported tighter lending standards, more than double the 30 percent that reported they were tightening lending standards for credit cards three months ago.

Analysts said the big jump in standards for credit card debt could represent a serious threat to the already weak economy, given that consumer spending accounts for more than two-thirds of total economic activity.

Harm Bandholz, an economist with UniCredit Markets, said the tightening in bank standards for credit cards and other types of consumer loans would be "another nail in the coffin of the U.S. consumer, who is already suffering from the weak labor market, high inflation and falling house prices."

David Wyss, chief economist for Standard & Poor's in New York, said he did not believe bank lending will start to pick up until next spring, when he is forecasting the economy will begin to rebound.