Banks still reluctant to lend

Fewer banks tightened lending standards in the past three months, but loans are still tough to come by. Banks said this won't change until next year at the earliest.

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By David Goldman, staff writer

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NEW YORK ( -- Loans for consumers and businesses remained tough to come by over the past three months, according to a report published Monday by the Federal Reserve.

In the central bank's latest survey of senior loan officers, banks said they lent less from May through July, as demand for loans dwindled further and the creditworthiness of potential loan recipients worsened.

The only category of loans where banks reported greater demand was prime residential mortgages, home loans to borrowers with the highest credit quality. Mortgage rates fell during the May through July period, sparking a wave of applications for refinancing.

Still, nearly 90% of respondents reported that lending standards were currently tighter than average for both subprime and prime home loans.

Half of the banks surveyed said they lowered credit limits, and 35% reported tightening standards for credit card applicants. None said they loosened standards or raised limits for existing customers. About 20% of banks reported weaker demand for all types of consumer loans.

Though a smaller percentage of banks said they were tightening their standards when compared to earlier this year, bankers were still pessimistic about the future.

Most banks said they expected their lending standards would be tighter than average until at least the second half of next year. For subprime companies and consumers, the majority of lenders said those standards will be stricter than normal for the foreseeable future.

Banks' willingness to lend money has become a focal point during the recession as the U.S. government has provided a massive amount of aid to financial firms in an effort to get credit flowing again.

Despite criticism from both lawmakers and taxpayers, industry executives maintain they are still making new loans and extending existing credit lines to both consumers and businesses.

In a separate survey released Monday, the Treasury Department said that the 22 largest recipients of government aid reported a 13% increase in loan originations in June from May.

The Treasury added that much of the increase was due to higher demand for mortgages as a result of new home purchases. Business lending continued to slump however. Banks surveyed by the Treasury indicated that demand for commercial and industrial loans as well as commercial real estate loans were "well below normal levels."

Talkback: Are you still finding it tough to get a loan from a bank? Have you had your credit limits cut? Share your comments below. To top of page

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