Credit Score Under 600? New Rules Make That Loan Unlikely
That's basically the response from the Federal Reserve in its Senior Loan Officer Opinion Survey released this week.
The report, which surveys credit and lending professionals from more than 90 global financial institutions, measures bank loan activity to households and businesses over the past 90 days.
The survey did see a significant rise in residential mortgages, auto loans and commercial real estate loans. It also notes that lending standards for commercial real estate loans lightened over the past three months, but standards for residential home loans remained unchanged.
On the credit score front, the good news from the Federal Reserve report was that lending standards for FHA-approved loans stood at 2006 levels, but only for consumers with sterling credit.
For those consumers with credit scores below 660, the news wasn't so positive. The report notes that borrowers with scores lower than 660 had "tightened."
Additionally, the report notes that:
- Most home refinancing loan applications were linked to the Home Affordable Refinance Program, and that a "significant portion of HARP 2.0 applications were expected to be completed."
- A "modest" number of banks reported "an easing of standards on credit card and auto loans."
- Demand for "most other loans" remained stable over the 90 days.
But it's the credit score issue that really stood out in the Federal Reserve survey:
A pair of special questions asked banks to compare their bank's standards for approving an application for an FHA-insured purchase mortgage for a borrower with a given FICO score with the standards that prevailed at their bank in 2006. Two-thirds of banks reported that their bank was about as likely to approve an application for an FHA mortgage from a borrower with a FICO score of 660 as they were in 2006. For a borrower with a FICO score of 620, a small majority of banks reported that they would be less likely to approve the loan under their current lending policies, and for a FICO score of 580, nearly three-fourths of respondents indicated that they would be less likely to approve such a loan using their current standards.
When asked what really persuaded banks to stiff-arm low FICO-score borrowers, lenders pointed to the possibility of "delinquent mortgages" -- a sure sign banks are well over their penchant for approving home loans for borrowers of all credit score stripes - a big contributor to the housing bust of the past four years, economists say.
Consumers with low credit scores can't exactly say they are surprised by banks' reluctance to grant them loans. But seeing the official imprint of the Federal Reserve, under the banner of the U.S. government, isn't going to make them feel any better.