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The January 2020 Senior Loan Officer Opinion Survey on Bank Lending Practices

The January 2020 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 fourth quarter of 2019.¹

Regarding loans to businesses, banks in the January survey indicated that, on balance over the fourth quarter, they left standards on commercial and industrial (C&I) loans basically unchanged, while demand weakened from firms of all sizes.² Also, banks reported that lending standards and demand were unchanged for all commercial real estate (CRE) loan categories except construction and land development loans, for which standards tightened and demand weakened over the fourth quarter of 2019.

For loans to households, banks reportedly left their lending standards unchanged for all types of residential real estate loans (RRE) over the fourth quarter, while demand strengthened for most categories of closed-end mortgage loans and weakened for home equity lines of credit (HELOCs). However, banks reportedly tightened their lending standards on credit card and auto loans, while demand remained unchanged for credit cards and weakened for auto loans.

In addition, the survey included a set of special questions inquiring about banks’ expectations for lending standards, loan demand, and loan performance over 2020. Banks reported expecting to tighten standards for most categories of business loans, credit card loans, and auto loans, but to leave standards unchanged for closed-end mortgage loans. Banks expect demand to remain unchanged for all types of loans except multifamily CRE and auto loans, for which they expect demand to weaken, and credit cards, for which they expect demand to strengthen. Meanwhile, banks expect loan performance to deteriorate somewhat for most surveyed loan categories. As one notable exception, banks expect no deterioration in loan performance for closed-end residential mortgage loans over 2020. In contrast, credit card and auto loans to nonprime borrowers stand out as the loan categories for which the largest net shares of banks expect a deterioration in loan performance over 2020.

Lending to Businesses

(Table 1, questions 1–12; Table 2, questions 1–8)

Questions on commercial and industrial lending. Over the fourth quarter of 2019, banks reported that standards for C&I loans to firms of all sizes remained basically unchanged.³ However, banks reportedly eased some key terms on C&I loans, especially to large and middle-market firms.⁴ In particular, a significant net share of banks reported lowering the interest rate spreads on loans to large and medium-market firms, and a moderate net share of banks reported doing so for loans to small firms. In addition, modest net shares of banks reported lowering the cost of credit lines and easing loan covenants to large and middle-market firms. However, banks also reported tightening some terms on loans to large and middle-market firms. Modest net shares of banks reported increasing the premiums charged on risky loans and the use of interest rate floors for such firms. Meanwhile, foreign banks reported tightening standards but lowering interest rate spreads for C&I loans.

Nearly every bank that reported having eased standards or terms over the fourth quarter attributed this change, in part, to increased competition from other banks or nonbank lenders. In contrast, among the banks that reported having tightened standards or terms over the fourth quarter, major net shares cited a less favorable or more uncertain economic outlook as well as reduced tolerance for risk as important reasons.

Regarding demand for C&I loans over the fourth quarter, moderate net shares of domestic banks reported that demand for such loans weakened from firms of all sizes, while a modest net share of foreign banks also reported weaker demand for C&I loans. A majority of the banks that reported weaker demand over the fourth quarter cited decreases in customers’ investment in plants and equipment as well as lower needs to finance accounts receivable, inventories, and mergers and acquisitions as important reasons for weaker demand.

Questions on commercial real estate lending. Over the fourth quarter, banks reportedly left their lending standards unchanged for all CRE loan categories except construction and land development, for which a modest net share of banks reported tightening standards. Meanwhile, demand was basically unchanged for all CRE loan types except construction and land development loans, for which a modest net share of banks reported weaker demand.

Lending to Households

(Table 1, questions 13–26)

Questions on residential real estate lending. Over the fourth quarter, banks reportedly left standards unchanged for all types of RRE loans, including all closed-end mortgage loan categories and HELOCs. Meanwhile, banks reported stronger demand for most mortgage loan categories but weaker demand for HELOCs.⁵ Specifically, significant net shares of banks reported stronger demand for government-sponsored enterprise (GSE)-eligible residential mortgages, moderate net shares of banks reported stronger demand for qualified mortgage (QM) and non-QM jumbo residential mortgages, and modest net shares of banks reported stronger demand for QM and non-QM non-jumbo residential mortgages. In contrast, a moderate net share of banks reported weaker demand for HELOCs. While, on balance, banks reported stronger demand for most closed-end mortgage categories, several banks with large holdings of closed-end mortgages reported weaker demand for such loans.

Questions on consumer lending. Over the fourth quarter, a moderate net share of banks reported tighter standards on credit card loans, and a modest net share of banks reported tighter standards on auto loans, while banks reportedly left standards unchanged for other consumer loans. Some banks also reported tightening terms on credit card loans. Specifically, a moderate net share of banks reportedly increased minimum credit scores, while modest net shares of banks tightened credit limits and reduced the extent to which loans are granted to customers that do not meet credit score thresholds for credit card loans. Meanwhile, banks reported that demand remained unchanged for credit card and other consumer loans. A modest net share of banks reported that demand for auto loans weakened during the fourth quarter, although several banks with large auto loan portfolios reported stronger demand for auto loans over the fourth quarter.

Special Questions on Banks’ Outlook for 2020

(Table 1, questions 27–39; Table 2, questions 9–15)

A set of special questions asked banks about their expectations for lending standards, loan demand, and loan performance as measured by delinquencies and charge-offs over 2020, assuming that economic activity progresses in line with consensus forecasts. On balance, banks reported expecting tighter standards and a deterioration in loan performance for most loan categories over 2020. With a few exceptions, banks expect loan demand to remain unchanged.

Regarding the outlook for loans to businesses, modest net fractions of banks reportedly expect to tighten standards on C&I loans to large and medium-market firms and also on nonfarm nonresidential CRE loans. In addition, moderate net shares of banks expect to tighten standards on construction and land development as well as multifamily CRE loans. Meanwhile, banks expect demand to remain unchanged for all business loan categories other than multifamily CRE loans, for which modest net shares of banks expect weaker demand. Additionally, banks reportedly expect performance to deteriorate somewhat for all types of business loans surveyed except multifamily CRE loans, for which performance is expected to remain unchanged.⁶

The outlook for loans to households over 2020 was mixed across RRE and consumer loans.⁷ Banks reportedly expect to keep standards unchanged for closed-end mortgage loans, while a moderate net share of banks expect tighter standards for credit card loans, and a modest net share expect tighter standards on auto loans. Meanwhile, banks reported expecting demand to remain unchanged for closed-end mortgage loans, whereas modest net shares of banks expect stronger demand for credit card loans and weaker demand for auto loans. In addition, banks reportedly expect loan performance to remain unchanged for closed-end mortgage loans, and also for credit card loans to prime borrowers. However, a modest net share of banks expect performance to deteriorate for HELOCs, a moderate net share expect performance to deteriorate for auto loans to prime borrowers, and significant net shares of banks expect performance to deteriorate for both credit card and auto loans to nonprime borrowers.

Banks that reported expecting to tighten standards for any loan category were additionally asked to assess the importance of several potential reasons for the expected tightening.⁸ A majority of banks pointed to an expected deterioration in the quality of their loan portfolios, an expected reduction in their risk tolerance, and an expected deterioration in collateral values as important reasons for the expected tightening in lending standards.

This document was prepared by Andrei Zlate, with the assistance of Quinn Danielson, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.

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