Senior Loan Officer Opinion Survey on
Bank Lending Practices

The January 1997 Senior Loan Officer Opinion Survey on Bank Lending Practices posed questions about bank lending standards and terms, loan demand by businesses and households, the recent rapid growth in home equity loans, and the use of credit scoring models for small business lending.
        The survey results suggest that competition for commercial credits remains stiff. Many of the respondents reported that they had eased terms on business loans over the past three months, citing pressure from other banks and nonbanks as the cause. While competing aggressively on loan terms, only a few banks said they had relaxed standards on these loans. The survey also found little evidence of looser standards for commercial real estate loans. A small net number of banks reported increased demand for business loans from large and middle-market customers, although several reported greater demand from small businesses. Several domestic and many foreign respondents also experienced an increase in demand for commercial real estate loans.
        The results were consistent with the recent slowdown in consumer loan growth and the marked pick up in the growth of home equity loans. A large number of banks said they had raised standards on credit card loans and many said they had done so for other consumer loans. Furthermore, several banks eased standards on home equity loans. In addition, several banks reported weaker demand for consumer loans, but many experienced increased demand for home equity loans. The responses to special questions on the survey suggest that the recent rapid growth in home equity loans was in part the result of substitution for unsecured forms of consumer credit. This shift reportedly has arisen from bank promotion of such substitution as well as from the initiative of borrowers attempting to consolidate their debt.
       Other special questions found that about two-thirds of the respondents use credit scores in their small business lending. The scores are most commonly used to decide whether a loan will be made, and rarely for the setting of loan terms.

Lending to Businesses   (Table 1, questions 1-13; table 2, questions 1-7)

The survey found a slight easing of lending standards for business loans over the past three months (chart). For loans to large, middle-market, and small businesses, about 5 percent of domestic banks indicated that they had eased standards; a similar percentage of foreign banks eased standards. Much larger fractions of banks reported easing terms on business loans. One-third of the domestic respondents reported a decrease in the spreads of loan rates over market rates for loans to large and middle-market firms, and about one-tenth reported narrower spreads for small businesses. Smaller net fractions eased other terms, including credit line costs, size of credit lines, loan covenants, and collateralization requirements. Banks generally said they had eased standards and terms to meet competition from other banks and, to a lesser extent, from nonbank lenders. A similar degree of easing of standards and terms was found in the November survey.
        Also as in November, only slight net margins of banks reported stronger demand for business loans. About 15 percent, on net, of domestic respondents reported increased demand for business loans from small firms and somewhat fewer indicated increased demand from large or middle-market firms. Demand was up at about 10 percent of the foreign respondents. Banks attributed the increased demand from small firms to plant and equipment investment and inventory financing needs. The increased demand from large and middle-market firms reportedly also derived somewhat from these factors but mainly from greater merger and acquisition financing.
        Only one domestic respondent, on net, and two foreign respondents indicated an easing of standards on construction and land development loans. About 15 percent of the domestic respondents and nearly one-third of the foreign respondents experienced an increase in demand for these loans.

Lending to Households   (Table 1, questions 14-26)

For the fifth consecutive survey, significant fractions of banks said they had tightened standards on consumer loans. Nearly 40 percent of the banks, on net, said they had tightened standards over the past three months for approving new credit card accounts, and 20 percent tightened standards on other consumer loans. Nevertheless, the survey found essentially no change in banks' willingness to make consumer installment loans (chart). Terms on credit cards tightened: One-fourth of the respondents, on net, lowered credit limits, and about 10 percent raised spreads on these loans and on other consumer loans. Other terms on consumer loans were about unchanged. On net, 15 percent of the respondents reported a decline in demand for consumer loans.
        Banks indicated a slight tightening in standards for approving home mortgages over the past three months and a slight increase, on net, in demand for these loans. About 15 percent of the banks reported easing standards for home equity loans and similar fractions reported easing maximum loan-to-value levels. Smaller net fractions eased spreads and fees on these loans.
        The easing of terms for home equity loans was apparently a factor in the recent rapid growth in these loans. One-third of the respondents said that easing terms on home equity loans, including entering the market for low- or no-equity loans, had boosted the amount of these loans on their books. However, a significantly larger fraction of the banks--two-thirds--said that encouraging specific customers to switch from unsecured consumer loans to home equity loans had boosted home equity outstandings. In addition, three-quarters said increased demand for these loans was a factor in the recent growth.
        Those banks that had followed policies to increase their holdings of home equity loans said they did so because the increased riskiness of, and the increased competition for, unsecured consumer loans had made the risk-adjusted yield on home equity loans relatively more attractive. Those banks that experienced increased demand for home equity loans attributed the increase to debt consolidation and to the increased credit needs of their customers.

Credit Scores and Small Business Loans   (Table 1, questions 27-33)

Special questions on the survey examined respondents' use of credit scores for small business lending. Two-fifths of the respondents said they always use credit scores when making small business loans and one-fourth said they sometimes use them. Of those banks that used credit scores, two-fifths used them for the automatic acceptance or rejection of some applications and nearly all used them as part of the evaluation process other than automatic acceptance or rejection. Banks most commonly used the scores for automatic acceptance or rejection of loans of amounts less than $50,000, but used the scores for some part of the evaluation process for loans of amounts up to $100,000. Two-fifths of the banks used the scores to evaluate existing loans. Only a few of the banks--15 percent--used the scores to set loan terms. Most of the banks purchase their scores, although several used scores from an internally developed credit scoring model.
        Only two of the respondents reported having securitized any small business loans, and these two had securitized only SBA-guaranteed loans. One of these banks said the use of credit scores had not facilitated the securitization of the loans, and the other bank said scoring had helped, but only slightly.

The report, with charts and tables, is available in Acrobat (PDF) format. Obtaining the Acrobat Reader

Charts (16 KB PDF)
Measures of lending practices from current and previous surveys
Chart data (ASCII)

Table 1 (44 KB PDF)
Summary of responses from large banks

Table 2 (13 KB PDF)
Summary of responses from branches and agencies of foreign banks

Full report (82 KB PDF)