Moody's: Easing standards may lead to higher defaults

Though consumers have been waiting for banks to ease lending standards for years, a report by Moody's Investors Services explains that this attitude could lead to less protection, creating the same risk that led to the banks revoking lending in the first place. 

According to American Banker, more than two-thirds of major banks have lowered rates on loans given to medium and large-sized business, and 50 percent of banks have said that they have relaxed their lending standards, an increase from earlier this year. 

While these numbers signal an improvement in both borrower and lender confidence, it's even more important to lend to qualified borrowers as standards ease and prices fall. 

"Thinner pricing and weaker covenants mean that when loans start to go bad, you have less protection for those loans," Megan Snyder, a Moody's analyst, told American Banker. "To the extent they give away those covenants by not including them in loan documents, they give away their level of protection."

The report added that more regulations since the crisis have helped keep risky lending practices from getting out of hand. Still, with the "competitive nature" of banks, it can be easy for the short-term benefits of risky loans to overshadow the long-term benefits of having more worthy borrowers. 

However, tools can help lenders both compete with low rates while lending to qualified borrowers. With credit and risk management software, lenders have more information about borrowers and their ability to pay back a loan. With more information, lenders can make more accurate decisions while continuing to lower rates and prices, avoiding potential defaults while increasing profits. 

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