Research, regulation, industry reports

OCC study: Credit card lending standards tighten sharply

Daniel Ray

Credit card lending standards have tightened sharply this year, according to a federal banking report issued June 12, and that means credit card offers will be tougher to come by for already cash-strapped consumers.
lending-standards.gifThe nation’s 62 largest banks were included in the 14th annual “Survey of Credit Underwriting Practices” conducted by the U.S. Office of the Comptroller of the Currency, the federal agency that charters and regulates national banks.

Of the banks surveyed, the percentage that tightened credit card lending standards leaped from 5 percent in 2007 to 35 percent in 2008.

Credit card users will feel the pinch, as will those taking out mortgages and home equity loans. All banks surveyed showed drastically higher lending standards compared to a year ago. That means more hard times for consumers who are already saddled by rising gas prices and falling home values. Even if they have equity in their homes, it will be hard to tap it, and they’ll be less likely to be bailed out by credit cards.

The federal regulators said the sagging economy played a role in the tightened lending standards, but they also shook a finger at the lending industry for its free-and-easy lending practices of the past.

“The OCC expects that the lessons learned from the recent market turbulence will lead to more prudent underwriting standards for both commercial and retail credit exposures,” the report said in its conclusions. “The OCC emphasizes that it is important for bankers to maintain and enforce prudent credit underwriting standards throughout the economic cycle, both when financial market liquidity is robust and when it is poor.”

While the tightening and loosening of standards is important to consumers, regulators conduct the survey to see what kind of risk there is in bank portfolios — a key issue for them, since they’ll have to take action if the banking system has taken on too much risk.

And they saw that risk — particularly in home equity and credit card lending. As the report put it, “This increased level of risk was most pronounced in credit card and home equity lending. Examiners cited concerns about the continued downturn in residential property values and general economic conditions as the bases for increased risk levels. Examiners expect retail credit risk to continue to increase over the next 12 months at 88 percent of the banks, particularly in home equity and credit card portfolios.”

For consumers, findings such as this ratchet up the importance of keeping up with the basics of personal finance, such as paying bills on time and keeping an eye on your credit report.

We’ve already seen that credit card mail offers are drying up. In this atmosphere of tighter lending standards, people with smirches on their credit will be the first ones cut off from lending offers and more likely to see their existing credit cards’ terms worsen.

See related: Card issuers’ bad earnings reshape credit card offers

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  • Perry

    Can you please explain how credit card companies fund credit cards? Can any of the money come from the federal reserve, how can the bank recoup any money that is losses from bad debt other than collections and selling off of the debt?