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April 2015

The April 2015 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)

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The April 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 76 domestic banks and 23 U.S. branches and agencies of foreign banks.²

Regarding loans to businesses, the April survey results indicated that, on balance, banks reported little change in their standards on commercial and industrial (C&I) loans in the first quarter of 2015.³ On net, banks reported having eased some price terms. With respect to commercial real estate (CRE) lending, on balance, survey respondents reported having eased standards on loans secured by nonfarm nonresidential properties. A few large banks also indicated that they had eased standards on construction and land development loans, and some large banks reported that they had eased standards on loans secured by multifamily properties.⁴ In addition, survey respondents reported having eased some CRE loan terms, on net, over the past year. On the demand side, banks indicated having experienced little change in demand for C&I loans in the first quarter; in contrast, respondents reported stronger demand for all three categories of CRE loans covered in the survey.

The survey contained a set of special questions about lending to firms in the oil and natural gas drilling or extraction sector. Banks expected delinquency and charge-off rates on such loans to deteriorate over 2015, but they indicated that their exposures were small, and that they were undertaking a number of actions to mitigate the risk of loan losses.

Regarding loans to households, banks reported having eased lending standards for a number of categories of residential mortgage loans over the past three months on net. Most banks reported no change in standards and terms on consumer loans. On the demand side, moderate net fractions of banks reported stronger demand across most categories of home-purchase loans. Similarly, respondents experienced stronger demand for auto and credit card loans on balance.

Lending to Businesses
(Table 1, questions 1-18; Table 2, questions 1-14)

Questions on commercial and industrial lending. Banks reported little change in standards for C&I loans to firms of all sizes over the past three months, as the small number of banks that reported having tightened standards about equaled the small number that reported having eased them.⁵ Moderate net fractions of banks continued to report having narrowed spreads, including interest rate floors less frequently, and reducing the cost of credit lines; a modest net fraction of banks reduced the premium charged on riskier loans to large and middle-market firms. Banks generally indicated that they had left nonprice terms about unchanged, although modest net fractions of banks reported having eased policies on loan covenants and having increased the maximum size of credit lines. A few foreign banks reported having eased standards on C&I loans, and modest net fractions of such banks indicated they had increased the maximum size of credit lines or decreased the use of loan covenants.

Most domestic 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.

The small number of banks that reported having tightened either their standards or terms on C&I loans predominantly pointed to industry-specific problems, a less favorable or more uncertain economic outlook, or increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards as the main reasons for having tightened their lending policies to nonfinancial businesses.

Responses about demand for C&I loans were mixed, and, on balance, demand was little changed over the first quarter of 2015. Those banks that reported having seen stronger demand primarily attributed it to increased investment in plant or equipment, increased financing needs for accounts receivable, increased financing needs for inventories, increased funding needs for mergers or acquisitions, or a shift of customer borrowing to their bank from other bank or nonbank sources. Banks that reported having experienced weaker demand pointed to decreased need for merger or acquisition financing, a shift of customer borrowing away from their bank to other bank and nonbank sources, decreased investment in plant or equipment, and increases in customer internally generated funds. The large majority of foreign banks reported having experienced little change in loan demand over the first quarter of 2015.

Special questions on commercial and industrial lending. The April survey asked a set of special questions about lending to firms in the oil and natural gas drilling or extraction sector. Of the banks that made loans to such firms, more than 80 percent indicated that such lending accounted for less than 10 percent of their C&I loans outstanding. More than half of the banks who made loans to this sector expected loan quality to deteriorate somewhat over the remainder of 2015. Banks indicated they were taking a variety of actions to mitigate loan losses, including restructuring outstanding loans, reducing the size of existing credit lines, requiring additional collateral, tightening underwriting policies on new loans or lines of credit, and enforcing material adverse change clauses or other covenants.

Questions on commercial real estate lending. On balance, survey respondents reported having eased standards on loans secured by nonfarm nonresidential properties. A few large banks indicated that they had eased standards on construction and land development loans, and some large banks reported that they had eased standards on loans secured by multifamily properties. Regarding changes in demand for CRE loans, modest net fractions of banks indicated that they had experienced stronger demand for loans secured by multifamily residential properties and loans secured by nonfarm nonresidential properties. A somewhat larger net fraction of banks reported stronger demand for construction and land development loans. Foreign respondents reported little change to either standards on, or demand for, CRE loans.

Special questions on commercial real estate lending. The April survey included a set of special questions (repeated annually, with some differences, since 2001) regarding changes in specific lending policies for CRE loans over the past year. Moderate net fractions of banks reported that, over the past 12 months, they had eased spreads, increased maximum loan sizes, and increased the maximum maturity on such loans; a modest net fraction indicated that they had increased market areas served. Survey respondents did not report many changes in other loan terms, such as loan-to-value ratios and debt service coverage ratios. Several foreign respondents reported having decreased spreads over the past year, while few reported changes in other terms.

Survey respondents were asked to rank the top four reasons for their changes in lending policies. Both domestic and foreign banks primarily pointed to more-aggressive competition from other bank or nonbank lenders and more favorable or less uncertain outlooks for vacancy rates or CRE property prices.

Finally, banks were asked how they expected the pace of CRE loan originations during 2015 to change relative to 2014. A modest net fraction of domestic banks and a few foreign banks expected an increase in the pace of originations for loans secured by nonfarm nonresidential properties. In addition, domestic banks also expected the pace of one- to four-family residential construction loans to increase somewhat during 2015 relative to 2014. In contrast, the expected paces of originations for the remaining categories of CRE loans were about unchanged for both domestic and foreign respondents.

Lending to Households
(Table 1, questions 19-33)

Questions on residential real estate lending. Modest net fractions of banks indicated that they had eased standards on loans eligible for purchase by government-sponsored enterprises (known as GSE-eligible mortgage loans) and on government and qualified mortgage (QM) jumbo mortgage loans.⁶ Regarding changes in demand, modest to moderate net fractions of banks reported stronger demand across most categories of home-purchase loans. Modest net fractions of banks reported having eased their standards on, and experienced stronger demand for, home equity lines of credit.

Special questions on residential real estate lending. A special question asked banks about how they had responded to new guidelines issued by the GSEs on November 20, 2014, on the definition of life-of-loan representation and warranty exclusions. These policies were designed, in part, to reduce uncertainty and increase transparency about the conditions under which securitized mortgages would be returned to the bank that originated the loan.⁷ Only a few banks indicated that they had changed their lending policies in response to the new guidelines.

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. A few large banks reported having eased their standards for auto loans and for consumer loans other than credit card and auto loans, while standards for approving applications for credit card 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 the cost of funds for both loan types.

A modest net fraction of large banks reported having experienced an increase in demand for credit cards over the past three months; a modest net fraction of smaller banks indicated having seen stronger demand for auto loans. In contrast, demand for other consumer loans was reported to have remained about unchanged.

This document was prepared by John Driscoll, with the assistance of Shaily Patel, 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.⁸ 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.
   

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