Senior Loan Officer Opinion Survey on Bank Lending Practices
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The October 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 third quarter of 2018.1
Regarding loans to business borrowers, banks indicated that they eased their standards and terms for commercial and industrial (C&I) loans while experiencing weaker demand for such loans on balance.2 At the same time, banks reportedly left their standards unchanged on most categories of commercial real estate (CRE) loans, while demand reportedly weakened for most categories of such loans.
For loans to households, banks reported easing their standards on most categories of residential real estate (RRE) loans while experiencing weaker demand for such loans on balance. In contrast, banks reportedly left their standards on auto and credit card loans about unchanged, while demand for such loans also remained unchanged. To better understand how consumer lending standards have been changing conditional on borrower credit quality, this 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 consumer loans for borrowers with FICO scores of 620 in comparison with the beginning of the year, while they were more likely to approve such consumer loans for borrowers with FICO scores of 720 over this same period.
In addition, the survey included two sets of special questions inquiring about the effect of the slope of the yield curve on lending policies. Banks were first asked how their lending policies have changed in response to the flattening of the yield curve since the beginning of this year. Banks generally indicated that the change in the slope of the yield curve so far this year had not affected their standards or price terms across the major loan categories. In contrast, when asked to assess their potential response to a prolonged hypothetical moderate inversion of the yield curve, banks responded that they would tighten standards or price terms across every major loan category if the yield curve were to invert, a scenario that they interpreted as a signal of a deterioration in economic conditions.
Lending to Businesses
(Table 1, questions 1–12; Table 2, questions 1–8)
Questions on commercial and industrial lending. A moderate net fraction of domestic banks reportedly eased standards on loans to large and middle-market firms, while banks reportedly left their standards on loans to small firms unchanged on balance.3 Over the third quarter, banks also reportedly eased a number of terms on C&I loans, with significant net fractions of banks reportedly narrowing loan rate spreads on C&I loans to firms of all sizes. A significant net fraction of banks also reportedly eased loan covenants to large and middle-market firms. Meanwhile, foreign banks reportedly left their standards and most of their terms for C&I loans unchanged over the third quarter on balance.
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 an important reason for banks’ easing their standards or terms. In addition, significant net fractions of banks indicated that a more favorable or less uncertain economic outlook and an increased tolerance for risk were important reasons for banks’ easing.
Meanwhile, moderate net shares of domestic banks reported weaker demand for C&I loans from firms of all sizes in the third quarter. Foreign banks, however, reported that demand for C&I loans remained unchanged over the third quarter on balance. Major net shares of domestic banks that reported weaker C&I loan demand indicated that increases in customers’ internally generated funds, reduced customer investment in plant or equipment, and customers’ borrowing having shifted to other lenders were important reasons.
Questions on commercial real estate lending. Over the third quarter, banks reportedly left their standards unchanged on loans secured by nonfarm nonresidential and multifamily properties, on balance, while a modest net share of banks reported tightening their standards on construction and land development loans. Meanwhile, moderate net shares of domestic banks indicated that they experienced weaker demand for construction and land development loans and loans secured by nonfarm nonresidential properties, while banks reported that demand was unchanged for loans secured by multifamily properties on balance.
Lending to Households
(Table 1, questions 13–26)
Questions on residential real estate lending. Banks reported easing their standards on most categories of RRE loans over the third quarter on balance.4 Specifically, moderate net shares of banks reported easing their standards on government-sponsored enterprise (GSE)-eligible and government residential mortgages, while modest net shares of banks reported easing their standards on non-jumbo non-GSE-eligible mortgages that conform to qualified mortgage (QM) rules and on QM and non-QM jumbo mortgages.5 Meanwhile, significant or moderate net shares of banks reported weaker demand across all surveyed RRE loan categories.
Questions on consumer lending. Over the third quarter, banks reported little change in their credit standards and most terms across categories of consumer loans on balance. Meanwhile, demand for auto and credit card loans was reportedly unchanged, on balance, while a modest net share of banks reported a strengthening of demand for consumer loans other than auto and credit card loans.
Special Questions on Banks’ Credit Card and Auto Lending Standards
(Table 1, questions 27–28)
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 this 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. Meanwhile, respondents reported that their likelihood of approving an application for a credit card from borrowers with FICO scores of 680 remained unchanged, on net, while modest net fractions of banks reported they were more likely to approve auto loan applications from such borrowers. In addition, moderate net fractions of banks reported they were more likely to approve applications for credit card and auto loans for borrowers with FICO scores of 720.
Special Questions on Bank Lending Policies and the Yield Curve
(Table 1, questions 29–32; Table 2, questions 9–12)
Banks were asked about the effects of the flattening of the yield curve since the beginning of this year on their lending policies, independent of other factors that have influenced those policies. In response, banks generally indicated that the change in the slope of the yield curve so far this year had not affected their standards or price terms across the major loan categories. However, moderate net shares of banks indicated that they tightened their standards for CRE loans and their price terms for both CRE and RRE loans.
Banks were also asked how their lending policies would potentially change in response to a hypothetical moderate inversion of the yield curve prevailing over the next year.6 Significant shares of banks indicated that they would tighten their standards or price terms across every major loan category if the yield curve were to invert.
Those banks that indicated they would tighten their lending policies because of an inversion of the yield curve were asked to provide reasons for their response. Major shares of banks indicated that their bank would interpret this scenario as signaling a less favorable or more uncertain economic outlook and as likely being followed by a deterioration in the quality of their existing loan portfolio. In addition, major shares of banks reported lending would become less profitable and their bank’s risk tolerance would decrease in this scenario.
This document was prepared by Robert Kurtzman, with the assistance of Jared Berry, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.
1. Responses were received from 70 domestic banks and 22 U.S. branches and agencies of foreign banks. Respondent banks received the survey on October 1, 2018, and responses were due by October 12, 2018. Unless otherwise indicated, this summary refers to the responses of domestic banks. 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 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
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. Return to text
4. 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
5. We do not report on subprime loans in this section, as only three lenders in our panel reportedly originate subprime residential mortgages. Return to text
6. Specifically, banks were asked to assume that the 3-month Treasury bill yield remains at its current level and the 10-year Treasury yield falls moderately below that level, and that this situation prevails over the next year. Return to text