Senior Loan Officer Opinion Survey on Bank Lending Practices
The April 2018 Senior Loan Officer Opinion Survey on Bank Lending Practices
The April 2018 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 first quarter of 2018.1 Responses were received from 72 domestic banks and 22 U.S. branches and agencies of foreign banks. Unless otherwise indicated, this summary refers to the responses of domestic banks.
Regarding loans to businesses, respondents to the April survey indicated that, on balance, they eased their standards and terms on commercial and industrial (C&I) loans to large and middle-market firms and left their standards unchanged for small firms. Meanwhile, banks eased standards on nonfarm nonresidential loans and tightened standards on multifamily loans, whereas standards on construction and land development loans were little changed. Demand for C&I and for commercial real estate (CRE) loans reportedly weakened.
Banks also responded to a set of special questions inquiring about changes in lending policies and demand for CRE loans over the past year. Banks reportedly eased important lending terms, including maximum loan size and the spread of loan rates over their cost of funds, across all three major CRE loan categories—that is, construction and land development loans, nonfarm nonresidential loans, and multifamily loans. Almost all banks that reportedly eased CRE credit policies cited more aggressive competition from other banks or nonbank lenders as an important reason for easing.
For loans to households, banks reported that, on balance, their lending standards on most categories of residential real estate (RRE) loans remained basically unchanged, while standards on auto and credit card loans tightened modestly. Meanwhile, banks reported weaker demand for auto loans, credit card loans, and most categories of RRE loans.
Lending to Businesses
Questions on commercial and industrial lending. On net, a moderate fraction of domestic banks reportedly eased standards on loans to large and middle-market firms, while standards on loans to small firms were little changed. Over the first three months of the year, banks reportedly eased most terms on C&I loans to large and middle-market firms and to small firms. A significant fraction of banks reportedly narrowed loan rate spreads on loans to large and middle-market firms and a moderate fraction narrowed spreads on loans to small firms.
Notably, all domestic banks that reportedly eased standards or terms on C&I loans over the past three months cited increased competition from other lenders as a reason for easing. In addition, significant fractions of banks mentioned a more favorable or less uncertain economic outlook; improvements of industry-specific problems; increased tolerance for risk; and reduced concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards as important reasons for easing.
Foreign banks reported that C&I loan standards remained about unchanged. Meanwhile, foreign banks reportedly eased several terms on C&I loans. Moderate net fractions of foreign banks reportedly increased the maximum size of credit lines, narrowed loan rate spreads, reduced the use of interest rate floors, and eased loan covenants.
A modest net percentage of domestic banks reported weaker demand for C&I loans to large and middle-market firms in the first quarter, while demand for loans to small firms changed little.2 Foreign banks also reported that demand for C&I loans remained about unchanged. The number of inquiries from potential borrowers reportedly rose moderately at domestic banks and modestly at foreign banks.
Most domestic banks that reported experiencing reduced C&I loan demand indicated that customers shifting their borrowing to other sources of credit and increases in customers’ internally generated funds were important reasons for weaker demand.
Questions on commercial real estate lending. Standards on construction and land development loans reportedly remained about unchanged, while a modest net percentage of banks reported tightening standards on multifamily loans and a modest net share of banks reported easing standards on nonfarm nonresidential loans. Notably, this was the first quarter in almost three years in which banks, on net, reported easing standards on one of the three main CRE loan categories. Meanwhile, a moderate net share of foreign banks reported tightening their standards on CRE loans.
Modest net shares of domestic banks indicated weaker demand for loans across the three main CRE loan categories. Over the same period, foreign banks reported that demand for CRE loans was about unchanged on balance.
Special Questions on Changes in Banks' Credit Policies on Commercial Real Estate Loans over the Past Year
The April survey included five special questions on CRE lending policies and demand. The questions asked banks to consider how their credit policies and loan demand for each major CRE loan category had changed over the past year and why.
Domestic banks reported that they had eased policies on all three major categories of CRE loans over the past year. In particular, moderate net fractions of banks reportedly narrowed spreads and increased the maximum size of loans across the three main CRE loan categories. Debt service coverage ratios, however, changed little on these three loan categories. Meanwhile, foreign banks also reported easing terms on all three major categories of CRE loans.
These findings contrast with the answers to the same questions in the survey administered a year ago. While banks reported last year a net tightening of most lending policies on CRE loans over 2016, in the current survey they reported a net easing of several lending policies over 2017 for all three major CRE loan categories.
A major fraction of banks that reportedly eased CRE credit policies over 2017 cited more aggressive competition from other banks or nonbank lenders as an important reason for easing. Significant net percentages of banks also mentioned increased tolerance for risk and more favorable or less uncertain outlooks for CRE property prices, for vacancy rates or other fundamentals on CRE properties, and for capitalization rates on CRE properties as important reasons for easing these credit policies over the past year.
The number of banks that reportedly experienced stronger demand for CRE loans over 2017 was only slightly larger than the number of banks that reportedly faced weaker demand. Most banks that reportedly experienced stronger demand for CRE loans mentioned, as important reasons, increases in customers’ acquisition or development of properties and a more favorable or less uncertain outlook for rental demand. Most banks that reportedly faced weaker demand cited, as important reasons, decreases in customers’ acquisition or development of properties, rising interest rates, and shifts of customer borrowing to other bank or nonbank sources. Answers from small and large domestic banks to these demand questions were similar.
Lending to Households
(Table 1, questions 13-26)
Questions on residential real estate lending. Standards for residential real estate lending remained about unchanged for all RRE loan categories except qualified mortgage (QM) jumbo residential mortgages, which reportedly eased in the first quarter of 2018.3 A modest net fraction of banks reportedly eased standards for home equity lines of credit (HELOCs).
In the first quarter of 2018, significant net shares of domestic banks reported decreased demand for government and non-QM jumbo residential mortgages. In addition, moderate net fractions of banks reported decreased demand for GSE (government-sponsored enterprise)-eligible, QM non-jumbo non-GSE-eligible, QM jumbo, and non-QM non-jumbo residential mortgages. Over the same period, a significant net share of banks reported weaker demand for HELOCs.
Questions on consumer lending. Modest net percentages of banks reported tightening standards on auto and credit card loans over the past three months, while standards on other consumer loans were reportedly little changed on net. In addition to tightening standards for consumer loans, banks also reportedly continued to tighten several terms for credit card and auto lending. A modest net share of banks reported increasing minimum required credit scores for credit card loans. A moderate net fraction of banks reportedly widened loan rate spreads on auto loans, while a modest net share of banks reportedly lowered the extent to which auto loans are extended to customers who do not meet credit scoring thresholds.
Modest net percentages of banks reported weaker demand for auto, credit card, and other consumer loans.
This document was prepared by Marcelo Rezende, with the assistance of Akber Khan and Gideon Teitel, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.
1. Respondent banks received the survey on March 26, 2018, and responses were due by April 9, 2018. 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”). 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. 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. 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 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