FRB: Senior Loan Officer Opinion Survey: January 2014

April 2014

The April 2014 Senior Loan Officer Opinion Survey on Bank Lending Practices

The April 2014 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months. This summary is based on the responses from 74 domestic banks and 23 U.S. branches and agencies of foreign banks.¹

Regarding loans to businesses, the April survey results generally indicated that, on balance, banks eased their lending policies for commercial and industrial (C&I) and commercial real estate (CRE) loans and experienced stronger demand for both types of loans over the past three months.² The survey also contained special questions that asked banks about changes in their terms on CRE loans over the past year. Banks reported easing CRE loan terms, on net, over that period.

Regarding loans to households, banks reported mixed changes in standards. On net, banks eased standards on consumer credit card and auto loans and tightened standards on nontraditional closed-end mortgage loans. Reports of tightening and easing of standards on prime closed-end residential real estate loans and on home equity lines of credit were roughly equal. On the demand side, reports of weaker demand outnumbered reports of stronger demand for each type of residential real estate loan, and the opposite pattern held for credit card and auto loans.

The survey contained a second set of special questions that inquired about factors that affected banks’ consumer credit card loan growth in 2013 and about the expected pace of consumer credit card loan growth in 2014 and after. The survey respondents most widely cited the 2009 Credit Card Accountability Responsibility and Disclosure Act (Credit Card Act) and consumers’ preference for lower debt levels as important factors that constrained credit card loan growth in 2013. In the prime and superprime segments of the market, a large portion of banks expect higher growth in credit card loan balances on their books in 2014 relative to 2013.

Business Lending
(Table 1, questions 1-13; Table 2, questions 1-19)

Questions on commercial and industrial lending. A small net percentage of domestic survey respondents reported having eased standards on C&I loans, both to large and middle-market firms and to small firms.³ Larger fractions of banks reported easing terms on C&I loans on net. Of the terms included in the survey, banks reported the most widespread easing on spreads of C&I loan rates over banks’ costs of funds. In addition, for all firm sizes, banks reported having reduced the cost of credit lines, decreased the use of interest rate floors, eased loan covenants, and reduced risk premiums.

Every domestic respondent that reported having eased either standards or terms on C&I loans over the past three months cited more-aggressive competition from other banks or nonbank lenders as an important reason for having done so. Smaller numbers of banks also attributed their easing to a more favorable or less uncertain economic outlook and increased tolerance for risk.

On the demand side, slightly more banks reported having experienced stronger rather than weaker demand for C&I loans from firms of all sizes. To explain the reported increase in loan demand, banks cited a wide range of customers’ financing needs, particularly those related to inventories, accounts receivable, investment in plant or equipment, and mergers or acquisitions.

A few foreign banks reported that they had eased their C&I lending standards, while the rest described their standards as basically unchanged. Several foreign banks also reported having eased terms on C&I loans, while a smaller number tightened terms. Foreign banks reported stronger demand on net.

Questions on commercial real estate lending. More domestic banks reported that they had eased rather than tightened standards on each of the three categories of CRE loans included in the survey: construction and land development loans, loans secured by nonfarm nonresidential structures, and loans secured by multifamily residential structures. For each subcategory of CRE loans, reports of stronger demand also outnumbered reports of weaker demand at domestic banks.

Special questions on leveraged lending. The April survey included a special question (repeated annually since 2001) regarding changes in specific lending policies for CRE loans over the past year. During the past 12 months, many more domestic banks reported having reduced rather than increased spreads on CRE loans. More domestic banks also reported having eased rather than tightened policies regarding the maximum size and maturity of such loans and having increased rather than decreased the market areas served. These banks indicated few changes in their policies for debt service coverage ratios, loan-to-value ratios, or requirements for take-out financing. Several foreign respondents reported having decreased spreads, while few reported changes in other terms.

Lending to Households
(Table 1, questions 14-34)

Questions on residential real estate lending. Domestic banks reported mixed changes in standards on prime residential mortgages, with several reports of both easier and tighter standards. Reports regarding home equity lines of credit were similarly mixed between easier and tighter standards. On nontraditional home loans, banks reported having tightened standards on net. Banks reported having experienced weaker demand for each type of mortgage loan on balance.

Questions on consumer lending. Several domestic banks indicated that they were more willing to make consumer installment loans as compared with the previous quarter, while no banks indicated they were less willing. A small fraction of banks eased standards on auto and consumer credit card loans, on net, while no bank reported any changes in standards on other consumer loans. Regarding consumer loan terms, several large banks increased credit limits on consumer credit cards, and banks reported having eased interest rate spreads on auto and other consumer loans on net.

The survey contained varied reports on changes in demand for consumer loans. Banks reported stronger demand for credit card and auto loans, on net, while reports of stronger and weaker demand for other consumer loans were roughly equal.

Special questions on credit card loan growth. The April survey contained a set of special questions about factors that affected banks’ consumer credit card loan growth in 2013 and about the expected pace of consumer credit card loan growth in 2014 and after.

Many banks reported that applications from borrowers they considered prime or superprime had increased during 2013, while a few reported such applications had decreased. A small number of banks reported that applications from borrowers they considered nonprime had increased during 2013 on net.

In an assessment of the factors affecting consumer credit card loan growth over 2013, large numbers of banks cited the Credit Card Act and consumers’ preference for debt levels as factors constraining growth. Several different provisions of the Credit Card Act were cited as important, including the prohibition on raising interest rates on existing balances, the restrictions on credit card fees, the requirement for card payments to be applied to debts with the highest interest rates, the requirement for borrowers under the age of 21 to have adult cosigners, and the required disclosures to consumers. A small portion of banks, on net, also considered consumers’ use of debit cards and other payment mechanisms as factors constraining growth. Banks reported more mixed opinions on the effects of other factors, including the levels of their underwriting standards and terms relative to longer-term norms, consumers’ expectations for their households’ income growth, consumers’ self-perceived creditworthiness, and consumers’ tendency for transactional use (versus revolving use) of credit cards.

Looking ahead, a large fraction of banks, on net, expect higher growth (or lower contraction) during 2014 compared with 2013 in outstanding consumer credit card loans to prime or superprime customers. A smaller net fraction of banks expect higher growth (or lower contraction) in outstanding consumer credit card loans to nonprime borrowers. Banks had a range of expectations for when they expect consumer credit card loan growth to stabilize at its new normal level at their banks. Some reported that such growth had already stabilized, while others expect it to stabilize between 2014 and 2016, and several other banks did not expect it to stabilize over the next few years. Among those that did expect such growth to stabilize, reports were varied as to whether growth would stabilize at a rate that would be higher or lower than the average rate their banks recorded in the years prior to the financial crisis.

1. Respondent banks received the survey on or after April 1, 2014, and responses were due by April 15, 2014. Return to text

2. For questions that asked about lending standards or terms, reported net fractions equal the fraction of banks that reported having tightened ("tightened considerably" or "tightened somewhat") minus the fraction of banks that reported having eased ("eased considerably" or "eased somewhat"). For questions that asked about loan demand, reported net fractions equal the fraction of banks that reported stronger demand ("substantially stronger" or "moderately stronger") minus the fraction of banks that reported weaker demand (“substantially weaker” or “moderately weaker”). Return to text

3. The survey asked respondents separately about their standards for, and demand from, large and middle-market firms, which are generally defined as firms with annual sales of $50 million or more, and small firms, those with annual sales of less than $50 million. Return to text

This document was prepared by Jonathan Rose, with the assistance of Shaily Patel, of the Division of Monetary Affairs, Board of Governors of the Federal Reserve System.