Consumer Finance

Moody’s: Underwriting Standards Loosen, A Bit, In Q1

It got a little easier to get credit in the first quarter, said Moody’s on May 8, but auto loans bear watching.

The findings, contained in the company’s Q1 Senior Loan Officer Opinion Survey, show that there has been “a modest tightening” of bank underwriting standards across credit card and auto loan applications as measured in the first quarter of this year.

That counts as a “mild credit positive,” said Moody’s. Across other verticals, credit standards as they exist across residential mortgages were largely unchanged.

In commentary from Warren Kornfeld, the author of the report and senior vice president at Moody’s, “We believe auto loan underwriting is weak and that credit card underwriting is on the looser end of historically average standards — even in light of the modest tightening reported in the newly released Senior Loan Officer Opinion Survey. In addition, we believe that lenders will further loosen credit card underwriting standards given consumer’s strong current financial position.”

Moody’s expects credit card underwriting to deteriorate. That may come in tandem with consumers taking on relatively too much credit in an environment that is accommodative.

Digging a bit deeper into the details, Moody’s illuminated that only one bank out of 53 surveyed reported a “modest loosening” of credit standards. Banks, however, did report that they had tightened minimum credit scores. The net deterioration Moody’s projects should come over the next 12 to 18 months, according to the report. The expectation has been in place for a while, as the overall outlook had been moved to stable from positive last July.

In reference to loan losses in the auto segment, Moody’s noted those losses have been only slightly above historical averages, “but should be much lower given the strong economy.” That disconnect implies, then, that “underlying risk in the loan portfolios … is well above historical standards.”

Some caution is warranted, said Moody’s: “Our concern stems from lenders’ tendency to grow complacent and increase the risk in their consumer loan portfolios, thinking they have plenty of time to tighten before the next downturn. Time and time again, lenders have proved unable to tighten in time.”

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