FRB: Senior Loan Officer Opinion Survey: April 2012

April 2012

The April 2012 Senior Loan Officer Opinion Survey on Bank Lending Practices

The April 2012 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the supply of, and demand for, bank loans to businesses and households over the past three months. This summary is based on responses from 58 domestic banks and 23 U.S. branches and agencies of foreign banks.¹

Overall, in the April survey, modest net fractions of domestic banks generally reported having eased their lending standards and having experienced stronger demand over the past three months.² Standards on C&I loans to large and middle-market firms, and to small firms, were about unchanged.³ However, moderate to large net fractions of domestic banks eased many terms on C&I loans to firms of all sizes, with most indicating that they had done so in response to more aggressive competition from other banks or nonbank lenders. Domestic banks also reported an increase in demand from firms of all sizes. In contrast, a small net fraction of foreign respondents again reported a tightening of their lending standards on C&I loans and a decrease in demand for such loans. A moderate net fraction of domestic banks reported having eased standards for commercial real estate (CRE) loans. As has been the case recently, significant net fractions of domestic banks reported that demand for CRE loans had strengthened. On net, foreign branches and agencies reported that standards and demand for CRE loans were little changed.

Regarding loans to households, standards on prime residential mortgage loans and home equity lines of credit (HELOCs) were about unchanged. However, the April survey indicated a moderate strengthening in demand for prime residential mortgage loans. With respect to consumer loans, moderate net fractions of banks reported that they had eased standards on most types of these loans over the past three months. In addition, demand for all types of consumer loans increased somewhat, on net, with demand for auto loans showing the largest increase.

The survey included two sets of special questions: the first set asked banks about lending to firms with European exposures, and the second set asked banks about their residential real estate (RRE) lending policies. In response to the first set, banks reported tightening standards on loans to European banks and on loans to nonfinancial firms with substantial business in Europe, and domestic respondents reported increased demand owing to reduced competition from European banks. In response to the second set, banks reported that they were less likely than in 2006, to varying degrees, to originate mortgages to any borrowers apart from those with the strongest credit profiles. A moderate net fraction of banks reported anticipating increasing their exposure to RRE assets over the next year. However, several large banks indicated that they anticipated reducing their exposures somewhat or substantially, and banks of all sizes cited a variety of factors that were limiting their current ability to originate or purchase RRE loans. A moderate share of banks reported that they were actively soliciting applications for the revised Home Affordable Refinance Program, or "HARP 2.0."

Business Lending
(Table 1, questions 1-11; Table 2, questions 1-10)

Questions on commercial and industrial lending. Domestic banks reported that their credit standards on C&I loans to both large and middle-market firms and to small firms were little changed over the first quarter of 2012. However, for the third consecutive quarter a small net fraction of U.S. branches and agencies of foreign banks reportedly tightened their standards on C&I loans.

Moderate to large net fractions of domestic banks eased many terms on C&I loans to firms of all sizes. A large net fraction of respondents indicated that they had decreased spreads on C&I loan rates over the cost of funds to both large and middle market firms and to small firms. A sizeable net fraction of banks also indicated a reduction in their use of interest rate floors and reduced costs of credit lines.

Almost all domestic banks that reported having eased standards or terms on C&I loans cited more-aggressive competition from other banks and nonbank lenders as a reason for having done so, with fewer than half of the banks that reported having eased standards attributing the change to an improved or less uncertain economic outlook. The few banks that reported having tightened at least one C&I loan term cited a variety of reasons, including a less favorable or more uncertain economic outlook, a worsening of industry-specific problems, a reduced tolerance for risk, and increased concerns about legislative, supervisory, or accounting policies.

Meanwhile, a moderate net fraction of foreign survey respondents increased the costs of credit lines on C&I loans. The foreign respondents that reported having tightened their standards or terms on C&I loans cited a variety of reasons, including a less favorable or more uncertain economic outlook, a worsening of industry-specific problems, a reduced tolerance for risk, deterioration in their current or expected liquidity position, and increased concerns about legislative, supervisory, or accounting policies.

For the second straight survey, reports from domestic banks of stronger demand for C&I loans outnumbered reports of weaker demand. Domestic banks also reported that the number of inquiries from potential business borrowers regarding new or increased credit lines increased, on net. Banks reporting stronger demand cited shifts in borrowing from other bank and nonbank sources, as well as increases in customers' funding needs related to inventories, investment in plant or equipment, accounts receivable, and mergers and acquisitions as important factors underlying the increase. The small fraction of banks indicating that demand had decreased cited an increase in their customers' internally generated funds, as well as decreases in customers' funding needs related to inventories, investment in plant or equipment, and accounts receivable. In contrast, a small net fraction of foreign respondents saw weaker demand for C&I loans, and those that did most often cited customers' decreased investment in plant and equipment and reduced financing needs for merger or acquisition activity.

Special questions on lending to firms with European exposures. A set of special questions in the April survey asked respondents about lending to banks headquartered in Europe and their affiliates or subsidiaries (regardless of the location of the affiliates and subsidiaries), as well as to nonfinancial firms that have operations in the United States and significant exposure to European economies (regardless of the location of the firms). Most of these questions were also asked in the previous two surveys, conducted in January 2012 and October 2011.

Moderate net fractions of both domestic and foreign respondents reported having tightened standards on loans to European banks, and small net fractions stated that they had also tightened standards on loans to nonfinancial firms that have operations in the United States and significant exposure to European economies. However, in all cases, the net fractions that reported having tightened were substantially smaller than in the January survey. Demand for credit was reportedly little changed, on net, from European banks (or their affiliates and subsidiaries) and from nonfinancial firms with significant European exposures. About two-thirds of the domestic respondents who reported competing with European banks for business noted an increase in business as a result of decreased competition from European banks and their affiliates or subsidiaries, a somewhat larger fraction than in January.

Questions on commercial real estate lending. A modest net fraction of domestic banks reported easing their standards on CRE loans in the April survey. Foreign survey respondents indicated that their standards on CRE loans were about unchanged. As has been the case in recent surveys, moderate net fractions of domestic banks reported that demand for CRE loans had strengthened, on net, over the past three months. In contrast, the foreign respondents reported that demand for CRE loans had changed little over that period.

Lending to Households
(Table 1, questions 12-33)

Questions on residential real estate lending. Most banks continued to report little net change in standards on prime residential mortgage loans, while a modest net fraction of banks indicated that standards on nontraditional residential mortgage loans had tightened over the previous three months. Moderate net fractions of banks indicated that demand for both types of loans had strengthened, although a few large banks reported a weakening in demand. Most banks continued to report little change in their lending standards for home equity lines of credit, and demand for such loans was also about unchanged.

Special questions on residential real estate lending. A set of special questions asked survey respondents about residential real estate lending policies at their institutions. Banks were asked to compare their willingness to originate a GSE-eligible 30-year fixed-rate mortgage loan intended for home purchase today with their willingness in 2006 for borrowers with FICO (or equivalent) credit risk scores of 620, 680, and 720, and down payments of 10 or 20 percent (for a total of six categories of borrowers). A large majority of banks indicated that they were less likely to originate a GSE-eligible mortgage loan to potential borrowers with a FICO score of 620 and a 10 percent down payment than they were in 2006. Raising the down payment to 20 percent reduced the fraction of banks less likely to originate such a loan somewhat. A moderate net fraction of banks were less likely to originate loans to borrowers with a FICO score of 680, regardless of down payment size. A modest net fraction of banks were less likely to originate loans to borrowers with a FICO score of 720 and a 10 percent down payment, although survey respondents indicated that they were about as likely to originate loans now as they were in 2006 if such borrowers had a down payment of 20 percent. Most banks cited borrowers having higher costs for, or greater difficulty in obtaining, mortgage insurance coverage as an important factor contributing to the reduced likelihood of originating GSE-eligible mortgage loans. About as many respondents noted the higher risk of putbacks of delinquent mortgages by the GSEs as an important factor, and that factor was listed as the most important one by the largest number of banks. Similar fractions of respondents pointed to less favorable or more uncertain outlooks for house prices or for the economy more broadly as factors. A majority of respondents reported as at least somewhat important factors greater concern about their bank's exposure to residential real estate loans; increased concerns about effects of legislative changes, supervisory actions, or accounting standards; higher servicing costs if mortgages were to become delinquent; the prevailing spread of mortgage rates over cost of funds being insufficient to compensate for risks; and borrowers having higher costs of greater difficulty in obtaining simultaneous second liens.

A moderate net fraction of banks reported that they anticipated increasing their exposure to RRE assets over the next year (such as RRE loans or government backed or other mortgage-backed securities). However, several large banks indicated that they anticipated reducing their RRE holdings either somewhat or substantially.

Banks were also asked to indicate what factors were currently impeding their ability to originate or purchase additional RRE loans. Most survey respondents cited periods during which the high volume of RRE loan applications exceeded their application processing capacity, difficulty in completing timely and accurate underwriting or in completing timely and accurate appraisals or in hiring sufficient servicing or loan processing staff as important factors.

Several special questions asked about banks' participation in HARP 2.0. About one-third of banks reported that they were actively soliciting HARP 2.0 applications and were satisfying most demand as it comes in. In contrast, nearly half indicated that they had very little participation in HARP 2.0. A majority of those that were participating reported that they anticipated that 60 percent or more of such applications would be approved and successfully completed. Many respondents reported the risk that the GSEs might put back the mortgage, difficulty in obtaining transfers of existing private mortgage insurance coverage, difficulty in identifying junior lien holders, or difficulty in obtaining resubordination of a known second lien as factors reducing their willingness or ability to offer such loans. A moderate fraction of banks reported that they were actively soliciting applications or satisfying most demand as it came in for refinancing underwater loans outside of HARP 2.0 for borrowers who have been current on their existing mortgage for at least 12 months.

Questions on consumer lending. As in the previous four surveys, small to moderate net fractions of domestic banks reported having eased standards on credit card, auto, and other consumer loans. Moderate net fractions of banks reported having narrowed spreads on auto loans. However, other terms across the categories of consumer loans were little changed on net. Demand for consumer loans reportedly continued to increase, especially for auto loans.

¹Respondent banks received the survey on or after March 27, 2012, and responses were due by April 10, 2012. Return to text

²For questions that ask about lending standards or terms, reported net fractions equal the fraction of banks that reported having tightened standards ("tightened considerably" or "tightened somewhat") minus the fraction of banks that reported having eased standards ("eased considerably" or "eased somewhat"). For questions that ask about 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

³Large and middle-market firms are generally defined as firms with annual sales of $50 million or more and small firms as those with annual sales of less than $50 million. Return to text

This document was prepared by John Driscoll with the assistance of Sam Haltenhof, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.