WASHINGTON–Lenders across the country are reporting they largely continue to ease their underwriting standards for both commercial and household borrowers, according to a new survey, although there are some exceptions.
The Federal Reserve’s April 2021 Senior Loan Officer Opinion Survey on Bank Lending Practices found lenders were generally consistent during Q1 with what they said during the same survey in the prior quarter.
“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,” the Fed reported. “Banks reported stronger demand for construction and land development and multifamily loans and reported weaker demand for nonfarm nonresidential loans.”
According to the Fed survey, 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.
NAFCU Analysis
"Banks are beginning to ease up on underwriting standards, but have still not resumed their pre-COVID posture," said NAFCU Chief Economist and Vice President of Research Curt Long. "With demand returning, the presence of credit unions as a competing source of credit will be particularly important to the overall economy in 2021."
Special Sets of Questions
The Fed said its Q2 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,” the Fed reported. “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,” the Fed continued. “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.”
‘Notable Differences’ by Asset Size
The Fed noted that 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.
“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,” the Fed said. “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,” the Fed continued. “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, the Fed survey found.
Reducing Minimum Scores
The Fed further noted that 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, the Fed added.