Senior Loan Officer Opinion Survey on Bank Lending Practices
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The October 2019 Senior Loan Officer Opinion Survey on Bank Lending Practices
The October 2019 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, which generally corresponds to the third quarter of 2019.1
Regarding loans to businesses, respondents indicated that, on balance, they left their standards on commercial and industrial (C&I) loans basically unchanged, while demand for C&I loans weakened.2 Banks also reportedly tightened standards on commercial real estate (CRE) loans, while demand for most categories of CRE loans changed little on balance.
For loans to households, banks reportedly left their standards basically unchanged on most categories of residential real estate (RRE) loans, while demand strengthened for most categories of such loans. Meanwhile, banks reported tightening their standards on credit card loans, while demand for most consumer loan categories strengthened.
The survey also included a set of special questions asking banks to assess the likelihood of approving credit card and auto loan applications by borrower FICO score in comparison with the beginning of the year. Banks reported they were less likely to approve such loans for borrowers with FICO scores of 620 in comparison with the beginning of the year, while they were about as likely to approve such loans for borrowers with FICO scores of 720 over this same period. Banks that indicated a reduced willingness to approve new loans cited increased concerns regarding new borrowers’ ability to consistently make payments on their loans, a less favorable or more uncertain economic outlook, and a reduced tolerance for risk as important reasons.
Lending to Businesses
(Table 1, questions 1–12; Table 2, questions 1–8)
Questions on commercial and industrial lending. Banks reportedly left standards for C&I loans to large and middle-market firms and to small firms unchanged over the third quarter.3 At the same time, banks reportedly eased some C&I loan terms. A significant net share reportedly narrowed spreads of loan rates over the cost of funds to large and middle-market firms, while a moderate net share reportedly narrowed them for small firms. In addition, a moderate net share of banks lowered their cost of credit lines for loans to large and middle-market firms, and a modest net share lowered them for loans to small firms. In contrast, moderate net shares reported increasing their use of interest rate floors to firms of all sizes.
Major shares of banks that reported reasons for tightening standards or terms on C&I loans cited a less favorable or more uncertain outlook; a reduced tolerance for risk; and a worsening of industry-specific problems as important reasons. All of the banks that reported reasons for easing cited increased competition from other lenders as an important reason.
A significant net share of banks reported weaker demand for C&I loans from large and middle-market firms, and moderate net shares of banks reported weaker demand from small firms as well as declines in the number of inquiries from potential borrowers regarding the availability and terms of new credit lines or increases in existing lines. Major shares of banks that reported experiencing weaker demand cited customers experiencing increases in internally generated funds; a reduced need to finance mergers or acquisitions, accounts receivable, and inventories; and reduced investment in plant or equipment as important reasons. Furthermore, major shares of banks also reported customer borrowing shifting to other sources of credit as an important reason.
Modest net shares of foreign banks reportedly tightened their C&I lending standards over the third quarter. In addition, moderate net shares of foreign banks also reportedly increased premiums charged on riskier loans. Major shares of foreign banks that reportedly tightened standards cited a less favorable or more uncertain economic outlook; a worsening of industry-specific problems; and decreased liquidity in the secondary market as important reasons. Meanwhile, a moderate net share of foreign banks reported experiencing weaker demand for C&I loans.
Questions on commercial real estate lending. Moderate net shares of banks reportedly tightened standards on all types of CRE loans over the third quarter. Meanwhile, modest net shares of banks indicated that they experienced weaker demand for construction and land development loans, while banks reported that demand was unchanged for loans secured by nonfarm nonresidential and multifamily properties on balance.
Lending to Households
(Table 1, questions 13–26)
Questions on residential real estate lending. Banks reportedly left their lending standards basically unchanged for most RRE loan categories over the third quarter, except for subprime loans, for which a moderate net percentage of banks reported tightening standards.4 Meanwhile, significant net shares of banks reported demand strengthened for most categories of closed-end RRE loans during the same period, except for subprime mortgage loans and home equity lines of credit, for which demand was reportedly basically unchanged on balance.
Questions on consumer lending. Over the third quarter, moderate net shares of banks reportedly tightened their standards on credit cards, and modest net shares of banks reportedly tightened their standards on consumer loans other than credit cards and auto loans. Additionally, banks reported their standards on auto loans and their willingness to make consumer installment loans were about unchanged on balance. At the same time, moderate net shares of banks reportedly increased minimum required credit scores for credit cards, and modest net shares of banks raised minimum required credit scores for auto and other consumer loans. Meanwhile, a moderate net fraction of banks reportedly experienced stronger demand for auto loans, and a modest net fraction of banks experienced stronger demand for credit card loans. Different from credit card and auto loans, banks reported basically unchanged demand for other consumer loans during this period.
Special Questions on Banks’ Credit Card and Auto Lending Policies
(Table 1, questions 27–34)
In a set of special questions, banks were asked to assess the likelihood of approving credit card and auto loan applications by borrower FICO score in comparison with the beginning of the year. Significant and moderate net fractions of banks reported that they were less likely to approve credit card and auto loan applications, respectively, from borrowers with FICO scores of 620. In addition, a moderate net fraction of respondent banks reported a lower likelihood of approving applications for credit cards from borrowers with FICO scores of 680. Meanwhile, on net, banks reported they were about as willing to approve applications for auto loan borrowers with FICO scores of 680 and for both credit card and auto loan borrowers with FICO scores of 720.
Major shares of banks that indicated a reduced willingness to approve loans to credit card borrowers with FICO scores of 620 and 680 and auto loans to borrowers with FICO scores of 620 cited increased concerns regarding new borrowers’ ability to consistently make payments on their loans; a less favorable or more uncertain economic outlook; and a reduced tolerance for risk as important reasons. Also, in the case of credit cards only, major shares of banks also cited a deterioration or expected deterioration in the quality of their existing loan portfolio as an important reason for being less willing to approve loan applications.
This document was prepared by Robert Kurtzman, with the assistance of Andrew Castro, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.
1. Responses were received from 76 domestic banks and 22 U.S. branches and agencies of foreign banks. Unless otherwise indicated, this summary refers to the responses of domestic banks. Large banks are defined as banks having $50 billion or more in total assets as of June 30, 2019. Respondent banks received the survey on September 23, 2019, and responses were due by October 4, 2019. Return to text
2. For questions that ask about lending standards or terms, “net fraction” (or “net percentage”) refers to 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, this term refers to 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”). Generally, for this summary, when standards, terms, or demand are said to have “remained basically unchanged,” the net percentage of respondent banks that reported either tightening or easing of standards or terms, or stronger or weaker demand, is greater than or equal to 0 and less than or equal to 5 percent; “modest” refers to net percentages greater than 5 and less than or equal to 10 percent; “moderate” refers to net percentages greater than 10 and less than or equal to 20 percent; “significant” refers to net percentages greater than 20 and less than 50 percent; and “major” refers to net percentages greater than or equal to 50 percent. However, staff may deviate from these definitions if the net percentages are close to one of the boundaries. Return to text
3. Large and middle-market firms are defined as firms with annual sales of $50 million or more, and small firms are those with annual sales of less than $50 million. For C&I loans to large and middle-market firms, the overall net percentage of banks reportedly tightening their lending standards is about 5.4 percent. For C&I loans to small firms, the overall net percentage of banks reportedly tightening their lending standards is about 5.6 percent. Given the net percentages are near 5 percent, our staff has chosen to characterize C&I lending standards as about unchanged in this document. Moreover, on a portfolio-weighted basis in which banks’ responses are weighted by the amount of C&I loans outstanding, on net, standards for C&I loans to both large and middle-market and small firms are about unchanged. Return to text
4. Note that only eight banks in our survey reportedly originate subprime mortgage loans. The seven categories of residential home-purchase loans that banks are asked to consider are government-sponsored enterprise (GSE)-eligible, government, QM non-jumbo non-GSE-eligible, QM jumbo, non-QM jumbo, non-QM non-jumbo, and subprime. See the survey results tables that follow this summary for a description of each of these loan categories. The definition of a QM was introduced in the 2013 Mortgage Rules under the Truth in Lending Act (12 CFR Part 1026.32, Regulation Z). The standard for a QM excludes mortgages with loan characteristics such as negative amortization, balloon and interest-only payment schedules, terms exceeding 30 years, alt-A or no documentation, and total points and fees that exceed 3 percent of the loan amount. In addition, a QM requires that the monthly debt-to-income ratio of borrowers not exceed 43 percent. For more on the ability to repay and QM standards under Regulation Z, 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