Washington-area banks are raising their interest rates on personal loans, demanding larger down payments from car buyers and screening credit applications with unprecedented severity in response to the Federal Reserve Board's tight money policy.
Interest rates that have not gone up already will do so in the near future, according to a survey of local bankers interviewed this week.
Consumers and businesses are responding to the higher interest charges and tightening credit terms by sharply cutting back on applications for new loans.
That is precisely what the Federal Reserve Board hoped would happen when it adopted its tight money policy earlier this month. The board raised the loan interest rates it charges to member banks and increased the amount of money they must hold in reserve, both in an effort to pressure financial institutions to reduce their lending.
Less borrowing is supposed to mean less buying, and less buying should reduce the rate of inflation, holding down the cost of living for everybody.
But for people who need -- or want -- to borrow now, the inflation-fighting strategy causes problems.
It is not that the banks have stopped making loans. They are just being much, much more selective.
Consumers with a steady job, a good credit rating and, perhaps most important, an established relationship with a bank, can still walk in the door and get the money they want for a new car, a boat, a vacation or an addition to their house.
Business also can count on borrowing for their normal needs, the bankers say. But lans to expand a business or to launch new ventures are not likely to be approved, lenders warn.
"our doors are not closed. We're still taking applications and making loans. We've just tightened our quality control," said Warren P. Rothe, senior vice president of Suburban Trust Company of Maryland.
"We're not lending money just to lend it," said C. A. Hutchins, president of Virginia National Bank. "We are being very selective."
Virginia National, like many banks, bases consumer loan decisions on a credit scoring system that gives points for income, length of employment, home ownership and similar factors. The passing score was just raised from 203 to 213. That means some people who could get credit last week can't get it now.
Banks that don't use formal scoring systems, like National Savings & Trust in Washington, "are considering things more carefully," said comsumer loan specialist Paul Hammond.
"We're looking at the stability or the people. How long they've had their jobs? Do they have equity in real estate? How much do they already owe?" added Hammond.
Banks always look more favorably on lending money to established customers, and at most banks today people who have checking and savings accounts there are likely to be the only ones who get loans.
New customers "would get much sterner scrutiny than they would have a month ago," explained Bill Johnson, vice president of National Bank of Washington.
Other connections are important too. People who don't have accounts at First American Bank of Virginia can probably get mortgages to buy a house from a builder who does business with the bank, said President Milton Drewer. Many banks will finance cars that are purchased from dealers that are customers of the bank, even if the car buyer is unknown to the bank.
Reversing the trend toward giving customers more and more time to pay off car loans, many banks have eliminated five-year car loans altogether. Others will permit them only on models -- like a Mercedes -- that are expected to hold their value over a long term.
Banks are also demanding bigger down payments on cars. Virginia National now requires 25 percent down for a 48-month car loan, up from 20 percent a few weeks ago. Several banks said they're considering 33 percent down payments. American Security Bank in Washington is considering demanding bigger down payments on big cars, which are depreciating rapidly in the face of soaring gasoline prices.
Car loans cost more too. Riggs National Bank -- which limits most loans to established customers -- raised its auto loan interest rate from 10 to 11 percent this month. First American of Virginia went from 11 to 11.5 percent. Suburban Trust of Maryland replaced its sliding scale with a flat 12 percent rate.
Personal loan rates jumped from 11.5 percent to 13 percent at National Savings & Trust. American Security just raised its personal loan rate to 13. Burrowing against the equity in a house with a second mortgage now costs 15 percent at many banks.
The personal and auto loan rates will probably go even higher in the District of Columbia and Maryland, where usury laws not limit the interest that banks can charge.
The D.C. City Council this week voted to raise the ceiling on interest charges in the District from 11 to 15 percent. The council will take final action on the measure Nov. 6, then it goes to Mayor Barry, who has already approved a temporary boost to 15 percent.
The Maryland Bankers Association plans to introduce a package of legislation when the state legislature meets in January to raise the permissible interest rate on most consumer credit in Maryland to 18 percent a year. Lower ceilings now apply to various types of consumer loans in Maryland, depending on how much the customer borrows.
There are no such ceilings on most loans to businesses, which generally pay a rate tied to the prime rate, the one charged banks' biggest and most credit worthy customers.
The prime rate was raised to 15 percent by several big New York banks this week and Washington area lenders who have not already followed suit are expected to do so by next Monday.Business borrowers usually pay 1, 2 or 3 points more than the prime rate, but many banks are putting a ceiling on those floating rates.
"We'll try to give small businesses a break," said Suburban Trust Vice President Rothe. "If they should be paying 3 percent over, we won't necessarily charge him" that much.
"The main thing that concerns us," said Virginia National's Cutchins, "is how long small businesses can go along without choking on these rates."
"The demand for consumer loans is really not that strong," agreed Cutchins of Virginia National.
"We're finding our customers are curtailing their demand," said Drewer of First American of Virginia. "I don't know how much of that is the result of our policy or how much is the high cost of funds."
Dale Jernberg, president of National Bank of Washington, said, "Real estate investors are stepping back because of the cost of funds." Real estate investment loans in general and loans to develop land in particular are out of favor, several bankers reported.
The bank executives said there is as yet no evidence that consumers or businesses are unable to pay their debts. Loan delinquencies this year are down a little from 1978, Muller of Union Trust pointed out.