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Lenders Anticipate Better Credit, Fewer Defaults

The economic recovery over the past year may have prompted many lenders to ease their lending standards. And now, experts say that consumers are likely to default less and improve their credit in the coming months.

In general, experts in the financial industry say that they expect to see the overall quality of consumer credit improve in the coming months, according to the January 2013 Senior Loan Officer Opinion Survey on Bank Lending Practices issued by the Federal Reserve Board. For the most part, these institutions have not relaxed standards for mortgages in the past three months, and have seen an increased demand for prime residential home loans. Further, banks have somewhat eased terms on certain types of consumer loans.

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Experts also say they expect that the default rate on nearly all types of consumer financing to ease in the next few months, and that in turn will likely lead to significant improvements in general consumer credit, the report said. For example, on prime residential mortgages, 31 of 64 bank executives said they believe that consumers’ payment behavior will improve either somewhat or substantially, compared with 32 who believe it will more or less hold steady. Only one thought there would be some decline. In addition, 15 of 30 officers whose institutions issue nontraditional residential mortgages felt there would be an uptick, and none foresaw a decline. Finally, where subprime mortgages were concerned, all five institutions that issue them said they expected consumer payment behavior to remain the same.

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On credit cards and car loans, there was less anticipation of improvement, the report said. Only 10 of 46 surveyed expected any kind of improvement with credit cards, compared with 32 who anticipated no change, and four who expected declines. For auto financing, 13 of 60 expected loan quality to improve, while 42 said they would remain around current levels, and five expected slight deterioration.

Many consumers significantly overhauled how they dealt with credit of all types in the years following the latest recession, and many are only just now beginning to make their way back to borrowing habits that at least approximate those held prior to the start of the economic downturn.

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