About Those Rejection Rates
Several recent news stories have reported on historically high rejection rates for auto loans (see here, here, and here for example). But policymakers, as well as the media, should ensure they have the proper context for this data.
It is accurate that the 12-month rejection rate for auto loans was 14.2 percent in the June Federal Reserve Bank of New York survey on credit access, that it was indeed the highest rejection rate in the history of the survey, and a marked increase from the previous report in February.
The survey, however, while providing insights on consumer behavior and expectations, dates back only to October 2013. This is a period spanning less than a decade and well after the global financial crisis of 2008-09, the last episode of extreme and widespread financial turmoil.
There is no doubt that credit conditions are tightening. Rejection rates for credit cards, credit card limit increases, mortgages and mortgage refinances all increased in June compared to February (though none of them surpassed previous survey highs, again dating back to October 2013), among other metrics. This is the primary channel through which the Federal Reserve’s interest rate increases are intended to slow the economy and cool inflation. In the current environment, prudent lenders are exercising increased caution in extending credit and prudent borrowers are exercising increased caution in requesting it. Indeed, the survey’s measure of credit demand decreased to its lowest since October 2020.
As lenders and borrowers adjust to what will hopefully be a temporary period of tightening, the last thing for well-meaning legislatures and regulators to do is to enact policies that will serve only to further restrict credit.
July 31st, 2023
