FRB: Senior Loan Officer Opinion Survey: January 2015

January 2015

The January 2015 Senior Loan Officer Opinion Survey on Bank Lending Practices

The January 2015 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 This summary discusses the responses from 73 domestic banks and 23 U.S. branches and agencies of foreign banks.²

Regarding loans to businesses, the January survey results indicated that, on balance, banks reported little change in their standards for commercial and industrial (C&I) loans to firms of all sizes in the last quarter of 2014.³ In addition, smaller net fractions of banks than in prior surveys reported that they had eased price terms or some of the nonprice terms. Standards for all three categories of commercial real estate (CRE) loans included in the survey were also reported to be little changed on net.⁴ On the demand side, modest net fractions of banks reported stronger demand for C&I loans to larger firms; similarly, respondents experienced stronger demand for all three categories of CRE loans covered in the survey.

Regarding loans to households, the January survey featured revised and expanded categories of residential real estate loans to reflect the Consumer Financial Protection Bureau's qualified mortgage (QM) rules and provide more detailed information on the mortgage market. Several large banks reported having eased lending standards for a number of categories of residential mortgage loans over the past three months, including those eligible for purchase by government-sponsored enterprises (referred to as GSE-eligible). Most banks reported no change in standards and terms on consumer loans. On the demand side, modest net fractions of banks reported weaker demand across most categories of home-purchase loans. In contrast, modest fractions of large banks experienced stronger demand for auto and credit card loans on balance.

Survey respondents were asked about their expectations for loan delinquency and charge-off rates in 2015, assuming that economic activity progresses in line with consensus forecasts. Banks stated that they generally anticipated improvements in the performance of most loan types this year. However, modest net fractions of domestic and foreign banks indicated that they expected the credit performance of syndicated leveraged loans to deteriorate this year, and about one-third of the banks that originate subprime auto loans expected delinquency and charge-off rates to increase in 2015.

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

Questions on commercial and industrial lending. On balance, banks reported little change in standards for C&I loans to firms of all sizes over the past three months.⁵ Moderate net fractions of banks continued to report having eased spreads, interest rate floors, and the cost of credit lines. However, the number of banks that had eased price terms was noticeably lower than in prior surveys. Nonprice terms generally remained about unchanged, except for a modest net fraction of banks which indicated having eased loan covenants. Foreign banks described most of their C&I lending policies as little changed on net, except for a modest net fraction which reported having increased the maximum size of credit lines.

Most respondents 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, increased tolerance for risk, or improvements in industry-specific problems.

Banks which reported having tightened either their standards or terms on C&I loans predominantly pointed to industry-specific problems as the main reason for having tightened their lending policies to nonfinancial businesses. Some survey respondents specifically noted their concerns about the oil and gas sector resulting from the sharp decline in the price of oil as a reason that they had tightened their lending policies. In addition, half of the banks reporting tightening indicated increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards.

On the demand side, a modest net fraction of domestic banks reported having experienced stronger demand for C&I loans from large and middle-market firms. In addition, a modest net fraction of banks reported an increase in the number of inquiries from potential business borrowers regarding the availability and terms of new credit lines or increases in existing lines. Banks reported that loan demand from small firms had remained about unchanged on net. To explain the reported increase in loan demand by larger firms, banks cited a wide range of customers' financing needs, particularly those related to mergers or acquisitions, as well as inventories, accounts receivable, and investment in plant or equipment. Foreign banks also reported having seen stronger C&I loan demand on net.

Questions on commercial real estate lending. On balance, most banks reported little change in lending standards on all three categories of CRE loans: construction and land development loans, loans secured by nonfarm nonresidential structures, and loans secured by multifamily residential properties. As has been the case for the past several surveys, a few large banks reported having eased standards for all three categories of CRE loans. Regarding changes in demand for CRE loans, modest net fractions of banks indicated that they had experienced stronger demand for construction and land development loans and loans secured by nonfarm nonresidential properties. A somewhat larger net fraction of banks reported stronger demand for loans secured by multifamily residential properties. A modest net fraction of foreign banks reported having eased lending standards on CRE loans and having seen stronger demand for such loans over the past three months.

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

Questions on residential real estate lending. The January 2015 survey revised and expanded the residential mortgage loan categories to reflect the Consumer Financial Protection Bureau's qualified mortgage (QM) rules and provide additional detail on important developments in the residential mortgage market both now and in the future. In particular, the survey included the following seven mutually exclusive categories of residential home-purchase mortgage loans: GSE-eligible residential mortgages; government residential mortgages; QM non-jumbo, non-GSE-eligible residential mortgages; QM jumbo residential mortgages; non-QM jumbo residential mortgages; non-QM non-jumbo residential mortgages; and subprime residential mortgages.⁶ Modest net fractions of large banks indicated that they had eased standards on GSE-eligible and QM non-jumbo, non-GSE-eligible mortgage loans, as well as on both QM and non-QM jumbo mortage loans. Regarding changes in demand, modest net fractions of banks of all sizes reported weaker demand across most categories of home-purchase loans. Few banks reported having changed their standards on home equity lines of credit (HELOCs), and while survey respondents indicated, on balance, that they had experienced little change in demand, several large banks reported stronger demand for such loans.

Questions on consumer lending. A small net fraction of large banks indicated that they were more willing to make consumer installment loans over the past three months. Few banks reported having eased their standards for auto loans, while standards for approving applications for credit card and other consumer loans were about unchanged on net. Moreover, most terms on credit cards were reported to have changed little. Very few banks reported changes on any of the terms on auto loans or other consumer loans, except for a small net fraction of banks that reported having reduced the spreads of loan rates over cost of funds for both loan types.

Modest net fractions of large banks reported having experienced an increase in demand for auto loans and credit cards over the past three months. In contrast, demand for other consumer loans was reported to have remained about unchanged.

Special questions on banks' outlook for loan performance in 2015
(Table 1, questions 27-30; Table 2, questions 9-10)

The January survey contained a set of special questions on respondents' expectations for loan performance in 2015, 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, domestic banks expected improvements in delinquency and charge-off rates for most loan categories included in the survey over this year, with the notable exceptions of syndicated leveraged C&I loans and subprime auto loans.

Regarding the outlook for the performance of business loans, most banks reported that they expected little change in the delinquency and charge-off rates on most types of C&I loans to firms of all sizes. The exception was syndicated leveraged loans, for which several large domestic and foreign banks anticipated credit quality to deteriorate somewhat this year. Turning to CRE loans, modest net fractions of banks indicated that they anticipated lower delinquency rates and charge-offs on all three categories of such loans. Almost all foreign banks reported that they expected little change in the credit performance of CRE loans.

Regarding the outlook for residential mortgage loans, modest net fractions of banks anticipated all seven categories of such loans to experience lower delinquency and charge-off rates in 2015. Similarly, on balance, domestic banks expected credit performance of HELOCs to improve this year, though that fraction was down somewhat from the fractions reported in last year's survey.

In the consumer loan categories, most banks anticipated that delinquency and charge-off rates on credit card, prime auto, and other consumer loans would remain around current levels. In contrast, close to one-third of the banks that originated or held on their books subprime auto loans anticipated some deterioration in the performance of such loans in 2015, which is a somewhat smaller fraction of banks expecting deterioration relative to a year ago.

This document was prepared by Vladimir Yankov, with the assistance of Kamran Gupta and Rebecca Zhang, 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 (QM) rules.⁷ The seven new categories of RRE loans are defined as follows:

The GSE-eligible category of residential mortgages includes loans that meet the underwriting guidelines, including the loan limit amounts, of the government-sponsored enterprises Fannie Mae and Freddie Mac.
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.
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.
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.
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.
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 loans classified as subprime from this category.
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 that include payment delinquencies, charge-offs, judgments, and/or bankruptcies; reduced repayment capacity as measured by credit scores or debt-to-income ratios; or incomplete credit histories.

1. Respondent banks received the survey on or after December 30, 2014, and responses were due by January13, 2015. Return to text

2. Unless otherwise indicated, the document refers to reports from domestic banks in the survey. Return to text

3. For questions that ask 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 ask 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

4. The three categories of CRE loans covered in the survey are construction and land development loans, loans secured by nonfarm nonresidential structures, and loans secured by multifamily residential properties. Return to text

5. 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

6. See the appendix for a description of the seven new categories of residential home-purchase loans. Return to text

7. The definition of a qualified mortgage was introduced in the 2013 Mortgage Rules under the Truth in Lending Act (12 CFR Part 1026.32, Regulation Z). The standard for a qualified mortgage excludes mortgages with loan characteristics such as negative amortization, balloon and interest-only payment schedules, terms exceeding 30years, alt-A or no documentation, and total points and fees that exceed 3 percent of the loan amount. In addition, a qualified mortgage requires that the monthly debt-to-income ratio of borrowers not exceed 43 percent. See the Consumer Financial Protection Bureau's website at www.consumerfinance.gov/regulations/ability-to-repay-and-qualified-mortgage-standards-under-the-truth-in-lending-act-regulation-z. Return to text