Responding to rising default rates on consumer loans, banks are encouraging borrowers to transfer unsecured debt to home equity lines, according to a Federal Reserve Board survey released Monday.

To attract this business, bankers are cutting fees, lowering rates, and accepting credits with higher loan-to-value ratios. The goal is to encourage customers either to transfer credit card debt to equity lines or to consolidate existing loans into a single credit.

"The shift reportedly has arisen from bank promotion of such substitution as well as from the initiative of borrowers attempting to consolidate their debt," the Fed said in its quarterly survey of senior loan officers.

Bankers said home equity loans are becoming more profitable as rising delinquencies hit other types of loans to consumers. As a result, two- thirds of the 57 domestic banks queried said they increased the number and value of home equity loans on their books and one-third said they entered the market for low- or no-equity loans.

"This is a rational response to changes in the perceived risks of consumer loans," said Nicholas S. Perna, chief economist for Fleet Financial Group.

Joel L. Naroff, chief bank economist at First Union Corp., said, "Encouraging the use of home equity lines is a positive for both the borrower and lender because the lender gets the security and individuals get the tax deductibility of the product."

Lynn A. Reaser, chief economist at Barnett Banks Inc., said banks are reacting to last year's dramatic increase in bankruptcies.

"Institutions realized it was imperative to reduce their level of unsecured loans," she said.

While consumers were taking more home equity lines, demand for other types of consumer loans fell at 17% of the banks surveyed. Hoping to stem rising default rates, 35% of the banks tightened credit card standards and 24% boosted standards for unsecured consumer loans.

On the commercial side, loans were less profitable as lenders cut rates to compete with other banks and nonbanks. But bankers said they were not easing underwriting standards to attract business.

"Our view of the business market is very similar," said Frederick Breimyer, chief economist at State Street Bank and Trust Co. "Pricing is very competitive."

"There is compression on rates and terms," said David L. Littmann, senior economist Comerica Bank in Detroit. "There is no question that has been going on for over a year. Fortunately, the demand has produced enough volume to salvage profits."

Meanwhile, demand for small business loans rose at 15% of the banks surveyed. Bankers said small firms needed credit to invest in plant, equipment, and inventory while large companies relied on loans for mergers and acquisitions.

The Fed survey also included a series of special questions on credit scoring for small business loans.

About 40% of bankers said they use credit scoring for business loans. Of that number, 40% either accepted or rejected a loan based on the credit score and 30% used the programs to help make credit decisions. Two-thirds of these banks limit credit scoring to loans of less than $100,000. Most banks use commercially developed credit scoring products rather than creating their own models.

The survey, conducted in January, was sent to 57 banks, which hold $1.5 trillion of the industry's $3.8 trillion of assets; 30 of the banks had at least $15 billion of assets.

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