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The April 2021 Senior Loan Officer Opinion Survey on Bank Lending Practices

The April 2021 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 first quarter of 2021.¹

Regarding loans to businesses, respondents to the April survey indicated that, on balance, they eased their standards on commercial and industrial (C&I) loans to firms of all sizes over the first quarter. Banks reported weaker demand, on net, for C&I loans to large and middle-market firms, and demand for C&I loans from small firms remained basically unchanged.² Standards on commercial real estate (CRE) loans secured by nonfarm nonresidential properties remained basically unchanged, while banks tightened standards on construction and land development loans and eased standards on multifamily loans. Banks reported stronger demand for construction and land development and multifamily loans and reported weaker demand for nonfarm nonresidential loans.

For loans to households, banks eased standards across most categories of residential real estate (RRE) loans, on net, and reported stronger demand for most types of RRE loans over the first quarter. Banks also eased standards across all three consumer loan categories—credit card loans, auto loans, and other consumer loans. Meanwhile, demand for credit card and other consumer loans remained basically unchanged, and demand for auto loans moderately strengthened.

The survey included two sets of special questions: one set inquiring about changes in banks' lending policies compared with pre-pandemic levels (since the end of 2019), by borrower risk rating, and one set about changes in CRE lending policies over the past year. First, in their answers about changes in lending policies compared with pre-pandemic levels, banks reported having tightened C&I and consumer credit policies for most categories of borrowers on net. For C&I loans, large banks tightened lending policies for most firms, except on loans to large investment-grade firms, for which they eased credit policies on net. Small banks tightened standards on all categories of C&I borrowers and especially on small and below-investment-grade firms. For consumer loans, banks tightened standards on all categories of consumers. Second, in their answers to the special questions about CRE lending policies, banks reported tightening most terms on nonfarm nonresidential loans and on construction and land development loans and leaving most terms unchanged on multifamily loans.

Lending to Businesses
(Table 1, questions 1–12 and 35–37; table 2, questions 1–8 and 11–13)

Questions on commercial and industrial lending. Over the first quarter, banks reported having eased standards on C&I loans to firms of all sizes. On net, significant shares of large banks reported having eased standards on loans to large and middle-market firms and small firms.³ Small banks reported having left standards on loans to large and middle-market firms basically unchanged, while a modest net share of small banks reported having eased their C&I lending standards on loans to small firms. Banks eased most lending terms on loans to large and middle-market firms and eased about half of their lending terms on loans to small firms.⁴ Significant net shares of banks narrowed the spread of loan rates over the cost of funds and the cost of credit lines on C&I loans to large and middle-market firms, and moderate net shares of banks did so on loans to small firms. Foreign banks reported having left standards and about half of their lending terms on C&I loans unchanged. Moderate net shares of foreign banks tightened collateralization requirements and lowered the maximum maturity of C&I loans or credit lines on net.

Major net shares of banks that reported easing standards or terms cited a more-favorable or less uncertain economic outlook, more-aggressive competition from other banks on nonbank lenders, and improvements in industry-specific problems as important reasons for doing so. Significant net shares of banks also mentioned increased tolerance for risk and improvements in their current or expected liquidity position as important reasons for easing lending standards and terms.

Regarding demand for C&I loans over the first quarter, a modest net share of banks reported weaker demand from large and middle-market firms while demand from small firms was basically unchanged. At the same time, a moderate net share of banks saw a higher number of inquiries from potential borrowers regarding the availability and terms of new credit lines or increases in existing lines over the first quarter. Meanwhile, over the first quarter, significant net fractions of foreign banks saw both stronger demand for C&I loans and a higher number of inquiries from potential borrowers.

Major net shares of banks that reported weaker demand cited decreases in customers' investment in plant or equipment, in customers' precautionary demand for cash and liquidity, and in customers' accounts receivable financing needs as important reasons for weaker demand. Major net shares also mentioned an increase in customers' internally generated funds, and customer borrowing having shifted to other bank or nonbank sources, as important reasons for weaker demand. In addition, significant net shares of banks reported a decrease in customer inventory financing needs and a decrease in customers' merger or acquisition financing needs as important reasons for weaker demand.

Questions on commercial real estate lending. Over the first quarter, standards on nonfarm nonresidential loans remained basically unchanged. Furthermore, a moderate net share of banks tightened standards on construction and land development loans, and a modest net share eased standards on multifamily loans.

A modest net share of banks reported weaker demand for loans secured by nonfarm nonresidential properties. Furthermore, moderate and modest net shares of banks reported stronger demand for multifamily loans and for construction and land development loans, respectively. Moderate net shares of foreign banks tightened standards on CRE loans and reported stronger demand for such loans.

Special questions on changes in banks' credit policies on commercial real estate loans over the past year. A set of special questions asked banks about changes in their credit policies for each major CRE loan category over the past year.⁵ These questions have been asked in the April survey by CRE loan category for the past five years.

Banks reported having tightened most terms on nonfarm nonresidential loans and on construction and land development loans and left most terms unchanged on multifamily loans. For nonfarm nonresidential loans and construction and land development loans, significant net shares of banks lowered loan-to-value (LTV) ratios, and moderate net shares reduced the market areas served. Furthermore, significant and moderate net shares of banks increased debt service coverage ratios on nonfarm nonresidential loans and on construction and land development loans, respectively. In addition, moderate net shares of banks lowered the maximum loan size and reduced LTV ratios on construction and land development loans and on multifamily loans, respectively. Foreign banks reported having tightened all terms on nonfarm nonresidential and on construction and land development loans and tightened most terms on multifamily loans. Significant net shares of foreign banks increased debt service coverage ratios as well as reduced LTV ratios and the market areas served for each major CRE loan category over the past year. Significant net shares of foreign banks also lowered the maximum loan size and widened the spread of loan rates over the cost of funds on most CRE loan types.

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

Questions on residential real estate lending. Over the first quarter, banks eased lending standards for most mortgage loan categories and for revolving home equity lines of credit (HELOCs), with notable differences across bank sizes.⁶

A moderate net share of large banks eased standards on government-sponsored enterprise (GSE)-eligible mortgages, which make up the majority of bank mortgage originations. Furthermore, significant net shares of large banks eased standards on HELOCs and all other mortgage categories except government and subprime mortgages. Moderate net shares of large banks eased standards on government residential mortgages. At the same time, modest net shares of small banks eased standards on qualified mortgage (QM) jumbo mortgages, on QM non-jumbo, non-GSE-eligible mortgages, and on HELOCs. Small banks left standards on all other residential mortgage types except subprime mortgages basically unchanged.

Large banks reported unchanged demand across most mortgage categories and weaker demand for HELOCs. In contrast, small banks reported stronger demand across all mortgage categories except subprime mortgages and unchanged demand for HELOCs on net. Significant net shares of small banks reported stronger demand for GSE-eligible and QM jumbo residential mortgages, and moderate net shares reported stronger demand for all other categories except government and subprime mortgages. A modest net share of small banks reported stronger demand for government mortgages.

Questions on consumer lending. Over the first quarter, a significant net share of banks eased standards for credit card loans, and moderate net shares of banks eased standards for auto loans and for other consumer loans. Consistent with easier lending standards, moderate net shares of banks reduced the minimum required credit score on credit card and other consumer loans, and a modest net share of banks did so on auto loans. Furthermore, a moderate net share of banks increased credit limits on credit card accounts. Other surveyed terms on credit cards remained basically unchanged.⁷ For auto loans, a moderate net share of banks narrowed the rate spreads charged on outstanding balances over their cost of funds, and modest net shares of banks increased the maximum maturity and reduced the minimum percent of outstanding balances required to be repaid each month. For consumer loans other than credit card and auto loans, a moderate net share of banks narrowed the rate spreads charged on outstanding balances over their cost of funds.

Regarding demand for consumer loans, a moderate net share of banks reported stronger demand for auto loans, and demand for credit cards and other consumer loans remained basically unchanged on net.

Special Questions on Changes in Banks' Lending Policies Compared with Pre-pandemic Levels, by Borrower Risk Rating
(Table 1, questions 27–34; table 2, questions 9–10)

In a set of special questions, banks were asked about changes in their C&I and consumer lending policies compared with pre-pandemic levels (since the end of 2019), by borrower risk rating. Banks reported tighter C&I and consumer lending policies, on net, for most categories of borrowers compared with pre-pandemic levels. Large banks reported having tightened policies on C&I loans to most categories of firms, except on loans to large investment-grade firms, for which they reported having eased standards and most terms on net.⁸ Large banks reported having narrowed the spread of loan rates for large C&I borrowers since the end of 2019. Small banks reported tighter standards on loans to all categories of C&I borrowers, and especially on loans to small and below-investment-grade firms. Small banks reported having tightened most terms, especially on loans to large firms within each risk category and especially for riskier firms within each firm size. However, small banks reported having narrowed the spread of loan rates for all categories of C&I borrowers since the end of 2019. Foreign banks reported having tightened standards and about half of the surveyed terms on C&I loans to below-investment-grade firms and having left standards and most terms basically unchanged on loans to investment-grade firms.

For consumer loans, banks generally reported tighter standards for credit card and auto loans compared with pre-pandemic levels. Within each loan category, banks reported having tightened standards especially for nonprime (near-prime and subprime) borrowers. Furthermore, banks reported having tightened most credit card terms across the credit score distribution and most auto loan terms for nonprime borrowers.⁹ Responses vary across bank sizes. Large banks tightened standards on both loan categories across the credit score distribution, while small banks tightened standards only on loans to nonprime borrowers. For both credit card and auto loans, the net share of banks reporting tighter standards for riskier borrowers was notably greater among large banks than among small banks. Among lending terms, large banks lowered credit card limits and widened spreads of auto loan rates across the credit score distribution, while small banks increased credit card limits and narrowed the spread of auto loan rates for most risk categories.

 

This document was prepared by Judit Temesvary, with the assistance of Elijah Broadbent, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.

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