WASHINGTON–A new Fed report on bank lending practices has found “significantly tightened” loan underwriting standards and terms for commercial and consumer borrowers during the first quarter, while also finding strong demand for most categories of closed-end residential real estate loans and weaker demand for credit card and auto loans.
The Federal Reserve’s April 2020 Senior Loan Officer Opinion Survey on Bank Lending Practices found the tougher underwriting on commercial and industrial (C&I) loans to firms of all sizes, while also finding stronger demand for C&I loans from large and middle-market firms. Demand for C&I loans from small firms was about unchanged, according to the report.
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 first quarter of 2020, the report found.
“For loans to households, banks tightened standards across all three consumer loan categories—credit card loans, auto loans, and other consumer loans—over the first quarter of 2020, on net, while moderate fractions of banks tightened their lending standards on most categories of residential real estate (RRE) loans,” the Fed stated. “Banks reported stronger demand for all categories of closed-end mortgage loans and weaker demand for all categories of consumer loans.”
Special Questions
According to the Fed, the survey also included two sets of special questions: one set about C&I loan demand across firms’ industries over the past six months and one set about changes in CRE lending policies over the past year. Banks reported C&I loan demand from borrowers from most industries changed little over the past six months, and most banks that reported stronger demand cited an increase in customers’ precautionary demand for cash and liquidity and a decrease in customers’ internally generated funds as reasons for stronger demand, the Fed said.
“In their answers to the special questions about CRE lending policies, banks reported having tightened loan-to-value ratios, debt service coverage, and the spreads of loan rates over their costs of funds across all three major CRE loan categories over the past year,” according to the report.
Participants in the study indicated the coronavirus pandemic has played a role in decision-making to tighten standards, the Fed said.
Consumer Real Estate
In response to a specific question from the Fed, the report found during the first quarter a moderate net share of banks tightened standards for non-government-sponsored enterprise (GSE)-eligible mortgage loans and for revolving home equity lines of credit (HELOCs). A modest net fraction of banks eased standards for government residential mortgages, and standards for GSE-eligible residential mortgages were about unchanged, the report found.
As CUToday.info has reported, two major banks have recently announced they are not making any new home equity loans.
Regarding demand for RRE loans over the first quarter, the Fed said it found a significant net share of banks reported having experienced stronger demand for most categories of closed-end RRE loans, including GSE-eligible and qualified mortgage (QM) jumbo mortgages, which make up the majority of bank mortgage originations, while demand for HELOCs was about unchanged.
Consumer Lending
According to the report,over the first quarter, a moderate net share of banks tightened lending standards on auto loans, while significant net shares of banks tightened standards on credit card loans and other consumer loans. Significant net fractions of banks also tightened important terms on credit card loans, including credit limits, minimum credit scores required, and the extent to which loans are granted to customers who do not meet credit scoring thresholds.
“Regarding demand for consumer loans over the first quarter, significant net fractions of banks experienced weaker demand for credit card and auto loans, and a moderate net fraction of banks reported weaker demand for other consumer loans. In their written comments, several banks indicated that the weakening in loan demand for auto loans is largely driven by lower demand following the COVID-19 outbreak,” the Fed said.