Senior Loan Officer Opinion Survey on Bank Lending Practices
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The October 2020 Senior Loan Officer Opinion Survey on Bank Lending Practices
The October 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 correspond to the third quarter of 2020.1
Regarding loans to businesses, respondents to the October survey indicated that, on balance, they tightened their standards and terms on commercial and industrial (C&I) loans to firms of all sizes.2 Banks reported weaker demand for C&I loans from firms of all sizes. Meanwhile, banks tightened standards and reported weaker demand across all three major commercial real estate (CRE) loan categories—construction and land development loans, nonfarm nonresidential loans, and multifamily loans—over the third quarter of 2020.
For loans to households, banks tightened standards across all categories of residential real estate (RRE) loans and across all three consumer loan categories—credit card loans, auto loans, and other consumer loans—over the third quarter of 2020 on net. Banks reported stronger demand for credit card loans, auto loans, and most categories of RRE loans.
Banks also responded to a set of special questions inquiring about their forbearance policies. For all loan categories, a majority of banks reported that less than 5 percent of loans were in forbearance in the third quarter. Payment deferral was the most widely cited form of forbearance for CRE, RRE, and consumer loans, while covenant relief was the most cited form of forbearance for C&I loans. For most categories, a borrower’s degree of financial hardship was the factor most widely cited as important in determining banks’ willingness to approve forbearance requests or the terms of forbearance.
Lending to Businesses
(Table 1, questions 1–12; table 2, questions 1–9)
Questions on commercial and industrial lending. Over the third quarter, significant net shares of banks reported having tightened standards for C&I loans to both large and middle-market firms and to small firms.3 At the same time, banks tightened all lending terms across firms of all sizes.4 Significant net shares of banks increased collateralization requirements, loan covenants, premiums charged on riskier loans, and the use of interest rate floors for both loans to small firms and loans to large and middle-market firms.5 Meanwhile, a significant net share of foreign banks tightened standards for C&I loans. Significant net shares of foreign banks reported having tightened loan covenants and collateralization requirements, increased premiums charged over riskier loans, and reduced the maximum maturity of loans or credit lines. Remaining terms were tightened by modest or moderate net shares of domestic and foreign banks.
Major net shares of banks that reported tightening lending standards or terms cited a less favorable or more uncertain economic outlook, worsening of industry-specific problems, and reduced tolerance for risk as important reasons for doing so.6 Significant net shares of banks also mentioned deterioration in their bank’s current or expected capital position; less aggressive competition from other banks or nonbank lenders; and increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards as important reasons for tightening lending standards and terms.
Regarding demand for C&I loans over the third quarter, a significant net share of banks reported weaker demand for C&I loans to firms of all sizes. In addition, a significant net share of banks reported that the number of inquiries from potential borrowers decreased over the third quarter. Meanwhile, a significant net fraction of foreign banks reported that demand for C&I loans weakened, and a moderate net fraction of foreign banks reported that the number of inquiries from potential borrowers decreased.
Major net shares of banks that reported weaker demand cited a decrease in customers’ inventory financing needs, a decrease in customers’ accounts receivable financing needs, a decrease in customers’ investment in plant or equipment, and a decrease in customers’ merger or acquisition financing needs as important reasons for weaker demand. In addition, significant net shares of banks reported an increase in customers’ internally generated funds and a decrease in customers’ precautionary demand for cash and liquidity as important reasons for weaker demand.
Questions on commercial real estate lending. Over the third quarter, major net shares of domestic banks tightened standards for construction and land development loans and loans secured by nonfarm nonresidential properties, while a significant net share of banks tightened standards for loans secured by multifamily residential properties. Meanwhile, significant net shares of domestic banks reported weaker demand for all three CRE loan categories during this period. Similarly, major net shares of foreign banks tightened standards on CRE loans, and significant net shares of foreign banks reported weaker demand for such loans.
Lending to Households
(Table 1, questions 13–26)
Questions on residential real estate lending. Over the third quarter, moderate net shares of banks tightened lending standards for most mortgage loan categories, including for government- sponsored enterprise (GSE)-eligible mortgages, which make up the majority of bank mortgage originations.7 In addition, significant net shares of banks tightened standards for qualified mortgage (QM) jumbo mortgages and revolving home equity lines of credit (HELOCs). A greater share of other banks reported tightening standards on GSE-eligible and QM jumbo mortgages compared with large banks, while most other mortgage loan categories showed little difference between respondent size groups.
Regarding demand for RRE loans, a major net share of banks reported stronger demand for GSE- eligible residential mortgages, and significant net shares of banks reported stronger demand for most of the remaining RRE categories. Large banks reported somewhat lower increases in demand compared with other banks, particularly for GSE-eligible mortgages and QM non-jumbo mortgages. Demand was reported weaker, on net, only for subprime mortgages and HELOCs.
Questions on consumer lending. Over the third quarter, a significant net share of banks tightened lending standards for credit card loans, while a moderate net share of banks tightened standards for auto loans and other consumer loans. Consistent with tighter lending standards, a significant net share of banks increased minimum required credit scores for credit card loans, and moderate net shares of banks increased minimum credits scores for auto loans and other consumer loans. In addition, banks tightened the majority of surveyed loan terms.8
Regarding demand for consumer loans over the third quarter, modest net fractions of banks experienced stronger demand for auto loans and weaker demand for other consumer loans, while demand for credit card loans was basically unchanged, on net. Reported changes in demand for consumer loans differed by bank size, with large banks reporting stronger or unchanged demand for all categories while other banks reported demand to be weaker.
Special Questions on Banks’ Forbearance Policies
(Table 1, questions 27–38; table 2, questions 9–14)
The October 2020 survey included a set of special questions that asked respondents about forbearance policies at their banks.9 Specifically, respondents were asked to report the following:
- The fraction of loans currently in forbearance.
- How frequently forbearances incorporate various loan terms.
- How important various factors are in determining the outcome of a forbearance request.
For every surveyed loan category, most banks indicated that the fraction of loans in forbearance did not exceed 5 percent in the third quarter.10 However, significant net shares of banks reported forbearance rates above 10 percent for residential mortgages loans and commercial mortgages secured by income-producing properties. For C&I, consumer, and construction and land development loans, at most only a modest share of banks reported forbearance rates above 10 percent. Forbearance was least prevalent for construction and land development loans, for which a significant share of banks reported having no loans in forbearance and only a moderate share of banks reported a forbearance rate above 5 percent.
Regarding the terms of forbearance policies, a majority of banks reported that it was very frequent for payment deferral to be incorporated into forbearance agreements for all loan categories.11 Most banks also reported that covenant relief was frequently incorporated into C&I and CRE loans and that reduced or waived late fees, or not reporting late payments to credit agencies, were very frequently incorporated into forbearance for residential mortgages and consumer loans. Moreover, significant shares of banks indicated that maturity extension was frequently used for C&I, CRE, and residential mortgage loans, and a major share of banks reported maturity extension as frequently used for consumer loans. Other terms were less widely cited as being frequently used.12
When asked to provide reasons for loan forbearance decisions, a majority of banks cited the degree of a borrower’s financial hardship as a very important determinant of banks’ forbearance decisions for all core loan categories. Borrowers’ history of loan payments was also cited as very important by a majority of banks for C&I and CRE loans and by significant shares of banks for residential mortgages and consumer loans. Additionally, a majority of banks reported that the regulatory and supervisory treatment of loans was very or somewhat important for granting forbearance for all loan categories, and a major share of banks reported that the extent of a borrower’s relationship with their bank was very or somewhat important for granting forbearance for C&I and CRE loans.
This document was prepared by Elijah Broadbent, David Glancy, and Brandon Nedwek, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.
1. Responses were received from 72 domestic banks and 22 U.S. branches and agencies of foreign banks. Respondent banks received the survey on September 28, 2020, and responses were due by October 9, 2020. Unless otherwise indicated, this summary refers to the responses of domestic banks. Return to text
2. 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. Return to text
3. 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”). 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. Return to text
4. Lending standards characterize banks’ policies for approving applications for a certain loan category. Conditional on approving loan applications, lending terms describe banks’ conditions included in loan contracts, such as those listed for C&I loans under question 2 to both domestic and foreign banks and those listed for credit card, auto, and other consumer loans under questions 21–23 to domestic banks. Thus, standards reflect the extensive margin of lending, while terms reflect the intensive margin of lending. The eight lending terms that banks are asked to consider with respect to C&I loans are the maximum size of credit lines, maximum maturity of loans or credit lines, costs of credit lines, spreads of loan rates over the bank’s cost of funds, premiums charged on riskier loans, loan covenants, collateralization requirements, and use of interest rate floors. Return to text
5. Specifically, moderate net shares of domestic banks tightened for maximum maturity of loans or credit lines, costs of credit lines, and loan spreads across all firm sizes. Moderate net shares of foreign banks tightened for the maximum size of credit lines and use of interest rate floors, while modest net shares tightened for costs of credit lines. Return to text
6. In their written comments, domestic banks most frequently mentioned the hotel industry in reference to industry-specific problems. These banks also frequently referenced the restaurant, retail, and energy sectors. Foreign banks frequently mentioned energy-related and travel-related industries in reference to industry-specific problems. These results are similar to recent surveys. Return to text
7. The seven categories of residential home-purchase loans that banks are asked to consider are 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 Protections Bureau (2019), “Ability to Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z),” webpage, www.consumerfinance.gov/regulations/ability-to-repay-and-qualified-mortgage-standards-under-the-truth-in- lending-act-regulation-z. Return to text
8. Banks were asked about changes in loan rate spreads over costs of funds, the minimum percent of outstanding balances required to be repaid each month, the extent to which loans are granted to borrowers not meeting credit score criteria, credit limits (credit cards and other consumer loans only), and maximum maturity (auto loans only). The net shares of banks reporting tightening was no more than moderate for any term. Return to text
9. In their responses, banks were instructed to interpret “forbearance” broadly so as to include troubled debt restructuring, covenant relief, reduction or deferral of required loan payments, or other credit risk mitigation strategies their bank classifies as forbearance. Return to text
10. Banks were asked about forbearance rates for C&I loans to large and middle-market firms, C&I loans to small firms, CRE loans secured by income-producing properties, construction and land development loans, closed- end residential mortgages that are held on their balance sheets, credit card loans, and auto loans. For each category, banks were provided the options: “no loans in forbearance,” “5 percent or less,” “more than 5 percent but less than 10 percent,” “more than 10 percent but less than 20 percent,” or “more than 20 percent.” Return to text
11.For each forbearance term, banks were asked to respond whether the incorporation of the term in forbearance agreements was “not frequent,” meaning under 20 percent of forbearances; “somewhat frequent,” meaning 20–60 percent of forbearances; or “very frequent,” meaning over 60 percent of forbearances. For this summary, when a term is said to be frequently used, this means a bank reported “very frequent” or “somewhat frequent,” meaning the term applies to at least 20 percent of forbearances. Return to text
12. These less commonly cited terms include lower interest rate, principal reduction, and release of reserves for debt service payments, the last of which was only asked for CRE loans. Return to text