---

January 2016

The January 2016 Senior Loan Officer Opinion Survey on Bank Lending Practices

Current survey | Full report (826 KB PDF)
Table 1 | Table 2 | Chart data
Table 1 (PDF) | Table 2 (PDF) | Charts (PDF)

---

The January 2016 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.¹ The survey included two sets of special questions: The first set asked banks about their outlook for lending practices and conditions over 2016, and the second set asked banks about their outlook for credit quality in 2016. This summary discusses the responses from 73 domestic banks and 24 U.S. branches and agencies of foreign banks.²

Regarding loans to businesses, the January survey results indicated that, on balance, banks tightened their standards on commercial and industrial (C&I) and commercial real estate (CRE) loans in the fourth quarter of 2015.³ The survey results indicated that demand for C&I loans had weakened somewhat and demand for CRE loans strengthened somewhat during the fourth quarter on net. In response to the special questions, banks, on net, indicated that they expected standards on C&I and CRE loans to tighten over 2016 and loan performance of C&I loans and loans secured by multifamily residential properties (MF loans) to deteriorate over that same period.

Regarding loans to households, on balance, the survey found a moderate easing of standards on some categories of residential mortgage loans as well as on auto loans, while banks reported having left standards on credit card loans basically unchanged. Moderate net fractions of banks reported weaker demand across most categories of residential real estate loans, while demand for auto loans and credit card loans remained basically unchanged on net. In response to the special questions, banks, on net, indicated that they expected to ease standards on some categories of residential mortgage loans over 2016 and that delinquency and charge-off rates on subprime auto loans would increase.

Lending to Businesses
(Table 1, questions 1-12; Table 2, questions 1-8)

Questions on commercial and industrial lending. On balance, a modest net fraction of banks reported a tightening of lending standards for C&I loans to large and middle-market firms over the past three months.⁴ Meanwhile, standards for C&I loans to small firms remained basically unchanged on net. A moderate fraction of banks reported that they had increased premiums charged on riskier loans to large and middle-market firms on net. At the same time, for loans to large and middle-market firms, a moderate fraction of banks reported that spreads of loan rates over their cost of funds narrowed, a moderate fraction of large banks reported that the maximum size of credit lines increased, and banks reported that most other terms remained basically unchanged on net. Meanwhile, modest net fractions of foreign respondents reported a tightening of lending standards for C&I loans or credit lines. Moderate net fractions of foreign banks reported that the cost of credit lines increased and spreads over their cost of funds widened. Foreign banks reported similar trends to those of domestic banks for loans to large and middle-market firms for most of the remaining lending terms on net.

A majority of the domestic respondents that tightened either standards or terms on C&I loans over the past three months cited a less favorable or more uncertain economic outlook as well as a worsening of industry-specific problems affecting borrowers as important reasons, with some banks noting in their optional comments that energy-related industries, including oil and gas, were the concern. Significant net fractions of banks also attributed the tightening of loan terms to reduced tolerance for risk; decreased liquidity in the secondary market for these loans; and increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards.

On balance, a moderate fraction of banks reported that demand for C&I loans was weaker during the fourth quarter for loans to large and middle-market firms as well as for loans to small firms. Among the banks that reported weaker loan demand, decreased investment in plant or equipment was the most commonly cited reason, though a reduced need to finance merger and acquisition activity, customer accounts receivable, and inventories were also cited by the majority of respondents. Additional reasons for weaker loan demand cited by significant net fractions of respondents included customers' internally generated funds increased and customers' borrowing shifted from the bank surveyed to another bank or nonbank source. During the fourth quarter of 2015, foreign bank respondents reported that demand for C&I loans remained basically unchanged on net.

Questions on commercial real estate lending. On net, survey respondents indicated that their lending standards for CRE loans of all types tightened during the fourth quarter.⁵ A significant net fraction of banks reported tightening standards for MF loans, a moderate net fraction reported tightening standards for construction and land development loans (CLD loans), and a small net fraction reported tightening standards for loans secured by nonfarm nonresidential properties (NFNR loans). Regarding changes in demand, modest net fractions of banks indicated that they had experienced stronger demand for all three types of CRE loans during the fourth quarter of 2015. Meanwhile, nearly all foreign banks reported leaving CRE lending standards unchanged, while a significant net fraction of foreign banks reported experiencing stronger demand for such loans.

Lending to Households
(Table 1, questions 13-26)

Questions on residential real estate lending. During the fourth quarter, a moderate net fraction of banks reported having eased standards on GSE-eligible loans, while a modest net fraction of banks reported having eased standards on QM jumbo and non-QM jumbo residential mortgage loans.⁶ Meanwhile, banks left lending standards basically unchanged for all other categories of residential real estate loans on net. On the demand side, a moderate net fraction of banks reported weaker demand across most categories of home-purchase loans. Credit standards were reportedly little changed for approving applications of revolving home equity lines of credit, and a moderate fraction of banks reported that demand for such revolving home equity lines of credit had strengthened, all on net.

Questions on consumer lending. A moderate net fraction of banks indicated that they were more willing to make consumer installment loans compared with three months prior. Survey respondents stated that standards for credit card loans remained basically the same, on net, while a few large banks indicated that they had eased standards for approving applications for auto loans. Regarding terms on consumer loans, a modest net fraction of banks reported that they had increased credit card limits on new or existing credit card accounts, while all remaining terms surveyed remained basically unchanged on net.

Regarding demand for consumer loans, on balance, banks reported that demand for credit card and auto loans remained about unchanged during the fourth quarter.

Special Questions on Banks' Outlook for Lending Practices and Conditions over 2016
(Table 1, questions 27-33; Table 2, questions 9-12)

Survey respondents were asked about their expectations for lending practices and conditions over 2016, assuming that economic activity progresses in line with consensus forecasts. Modest net fractions of banks stated they expect to tighten their lending standards on C&I loans, moderate net fractions of banks stated they expect to tighten their lending standards on NFNR loans, and significant net fractions stated they expect to tighten their lending standards on CLD and MF loans over the course of this year. A majority expect interest rates charged on all categories of business loans to rise. Respondents expect spreads over their costs of funds to remain basically unchanged on C&I loans to large and middle-market firms, on net, while a small net fraction expects spreads over their cost of funds to widen for C&I loans to small firms. Moderate net fractions of banks expect spreads over their cost of funds to widen for NFNR and MF loans, while a significant net fraction expects spreads over their costs of funds to widen for CLD loans over 2016. On balance, a moderate net fraction of banks expects the volume of originations to increase for C&I loans to large and middle-market firms, and a significant net fraction of banks expects the volume of originations to increase for C&I loans to small firms. A significant net fraction expects the volume of originations to decrease for MF loans over 2016, and a moderate net fraction expects the volume of originations to decrease for CLD loans; meanwhile, respondents expect the volume of originations of NFNR loans to remain basically unchanged on net.

Significant net fractions of foreign banks expect to tighten their standards and expect spreads over their costs of funds to rise on all categories of business loans over 2016. A significant net fraction expects interest rates to rise on C&I loans, and majorities expect interest rates to rise on all categories of CRE loans. Modest net fractions of foreign banks expect the volume of originations of C&I loans to large and middle-market firms to decrease over 2016. On net, foreign banks expect the volume of originations of all categories of CRE loans except NFNR loans to remain unchanged over 2016. Moderate net fractions of foreign banks expect the volume of originations of NFNR loans to increase over 2016.

In contrast to their outlook for business loans, modest net fractions of domestic respondents expect to ease their standards for GSE-eligible and nonconforming jumbo residential mortgage loans. A majority expect interest rates to rise, and a moderate net fraction expects spreads over their cost of funds to increase. A small net fraction of respondents expects the volume of originations of GSE-eligible mortgage loans to decrease, while respondents expect the volume of originations of nonconforming jumbo residential mortgage loans to remain basically unchanged on net.

Special Questions on Banks' Outlook for Loan Performance over 2016
(Table 1, questions 34-36; Table 2, questions 13-14)

The January survey also contained a set of special questions on respondents' expectations for loan performance in 2016, assuming that economic activity progresses in line with consensus forecasts. These questions have been repeated annually, with some changes in loan categories, since 2006. On balance, a significant fraction of domestic banks reported that they expect an increase in delinquency and charge-off rates for all categories of C&I loans included in the survey over this year. A moderate net fraction of banks reported that they expect a deterioration of credit quality for MF loans, while credit quality for CLD and NFNR loans is expected to remain basically unchanged on net in 2016. In the consumer loan category, a significant net fraction of banks reported that they expect their delinquencies and charge-offs on subprime auto loans to increase in 2016.

A majority of foreign respondents expect an increase in delinquency and charge-off rates for syndicated leveraged C&I loans to large and middle-market firms this year, and a significant net fraction expects such an increase for C&I loans to small firms. A moderate net fraction of foreign respondents expects an increase in delinquency and charge-off rates for syndicated nonleveraged and nonsyndicated C&I loans to large and middle-market firms. Foreign respondents expect loan quality to remain basically unchanged for CRE loans.

This document was prepared by Robert Kurtzman, with the assistance of Edward Kim and Blake Taylor, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.

Appendix: Definitions
The January 2015 survey introduced new categories of residential real estate (RRE) loans that were designed to reflect the Consumer Financial Protection Bureau's qualified mortgage rules.⁷ The seven new categories of RRE loans are defined as follows:

1. The GSE-eligible category of residential mortgages includes loans that meet the underwriting guidelines, including the loan limit amounts, of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
2. The government category of residential mortgages includes loans that are insured by the Federal Housing Administration, guaranteed by the Department of Veterans Affairs, or originated under government programs, including the U.S. Department of Agriculture home loan programs.
3. The QM non-jumbo, non-GSE-eligible category of residential mortgages includes loans that satisfy the standards for a qualified mortgage and have loan balances that are below the loan limit amounts set by the GSEs but otherwise do not meet the GSE underwriting guidelines.
4. The QM jumbo category of residential mortgages includes loans that satisfy the standards for a qualified mortgage but have loan balances that are above the loan limit amount set by the GSEs.
5. The non-QM jumbo category of residential mortgages includes loans that do not satisfy the standards for a qualified mortgage and have loan balances that are above the loan limit amount set by the GSEs.
6. The non-QM non-jumbo category of residential mortgages includes loans that do not satisfy the standards for a qualified mortgage and have loan balances that are below the loan limit amount set by the GSEs. Banks were asked to exclude from this category loans classified as subprime.
7. The subprime category of residential mortgages includes loans classified by banks as subprime. This category typically includes loans made to borrowers with weakened credit histories, which may include payment delinquencies, charge-offs, judgments, or bankruptcies; reduced repayment capacity as measured by credit scores or debt-to-income ratios; or incomplete credit histories.

---