Fed Survey Reveals Increased Loan Rejections for Americans Amid Financial Strain

Just as Americans find themselves in need of loans to manage their financial situations, obtaining one is becoming more challenging. According to a recent Federal Reserve survey, the rejection rate for credit applications has risen to 21.8%, marking the highest level in five years and a significant increase from 17.3% in February. This trend is observed across different age groups, with the highest rejection rates seen among individuals with credit scores below 680 (ranging from the lowest 350 to the highest 850).

The survey highlights the cautious approach adopted by financial institutions amidst one of the most aggressive cycles of Fed interest rate hikes in history and concerns about a potential recession. Major banks, including JP Morgan Chase, Citigroup, Wells Fargo, and now Bank of America, have reported setting aside more funds to cover bad consumer loans as credit card balances continue to rise. Delinquency rates in credit cards and other retail credit lines are also increasing, with Citigroup’s CFO, Mark Mason, noting that they are expected to rise further before stabilizing at “normal levels.”

During the first three months of 2023, the four largest US lenders collectively wrote off $3.4 billion in bad consumer loans, representing a 73% increase compared to the same period last year.

As financial institutions exercise caution, loan rejections are prevalent across various loan types. Auto loan rejection rates have climbed to 14.2%, surpassing the application rate and reaching the highest level since data collection began in 2013. This tightening trend has been observed in auto lending over the past year, as banks have scaled back or exited the market, adversely impacting consumers’ borrowing options.

The survey also revealed increased rejection rates for credit cards (21.5%), credit card limit increase requests (30.7%), mortgages (13.2%), and mortgage refinance applications (20.8%).

The overall credit application rate has declined over the past year to 40.3%, the lowest since October 2020. However, respondents’ likelihood of applying for credit in the next twelve months has risen to 26.4%, indicating persistent demand despite the challenging lending environment.

The survey concludes that the reported probability of loan applications being rejected has significantly risen across all loan types. Auto loans have reached a record high rejection rate of 30.7%, credit cards at 32.8%, credit limit increase requests at 42.4% (a new high), mortgages at 46.1% (also a record high), and mortgage refinancings at 29.6%. These statistics highlight the growing difficulty for consumers in obtaining new loans as financial institutions tighten their lending criteria.