Banks tighten lending standards, weigh forbearance considerations

The Federal Reserve Board’s October 2020 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the standards, terms on and demand for bank loans to businesses and households in the past three months, and stayed relatively consistent with the previous quarter.

Respondents generally tightened their standards and terms on commercial and industrial loans while also reporting weaker demand for C&I loans. Banks also tightened standards and reported weaker demand across all three major commercial real estate loan categories: Construction and land development loans, nonfarm nonresidential loans, and multifamily loans.

For household loans, banks tightened standards in the third quarter across all categories of residential real estate loans and across all consumer loan categories, including credit card loans, auto loans, and other consumer loans. Banks reported stronger demand for credit card loans, auto loans, and most categories of RRE loans.

Banks also responded to a set of questions about their forbearance policies. For all loan categories, most banks said fewer than 5 percent of loans were in forbearance in the third quarter. Payment deferral was the most widely cited form of forbearance for CRE, RRE, and consumer loans, while covenant relief was the most cited form of forbearance for C&I loans. A borrower’s degree of financial hardship was the factor most widely cited as important in determining banks’ willingness to approve forbearance requests or the terms of forbearance.

Commercial and industrial lending
Significant net shares of banks reported having tightened standards for C&I loans to both large and middle-market firms and to small firms, and banks tightened all lending terms across firms of all sizes. Significant net shares of banks increased collateralization requirements, loan covenants, premiums charged on riskier loans, and the use of interest rate floors for both loans to small firms and loans to large and middle-market firms.

Most banks that reported tightening lending standards or terms cited the reasons as an unfavorable or more uncertain economic outlook, worsening of industry-specific problems, and reduced tolerance for risk. Many banks mentioned deterioration in their bank’s current or expected capital position; less aggressive competition from other banks or nonbank lenders; and increased concerns about the effects of legislative changes, supervisory actions, or changes in accounting standards as important reasons for tighter lending standards and terms.

Demand for C&I loans over the third quarter weakened overall, and many banks also said the number of inquiries from potential borrowers decreased. Many banks also reported an increase in customers’ internally generated funds and a decrease in customers’ precautionary demand for cash and liquidity as important reasons for weaker demand.

Commercial real estate lending

Over the third quarter, many domestic banks tightened standards for construction and land development loans and loans secured by nonfarm nonresidential properties, while a notable share of banks tightened standards for loans secured by multifamily residential properties. A significant number of domestic banks also reported weaker demand for all three CRE loan categories.

Residential real estate lending

Over the third quarter, some banks tightened lending standards for most mortgage loan categories, including for GSE-eligible mortgages, which make up the majority of bank mortgage originations. A significant number of banks tightened standards for qualified mortgage jumbo mortgages and revolving home equity lines of credit. A larger share of other banks reported tightening standards on GSE-eligible and QM jumbo mortgages compared with large banks, while most other mortgage loan categories showed little difference between respondent size groups. Demand was reported weaker overall for subprime mortgages and HELOCs.

Consumer lending

Banks generally tightened lending standards for credit card loans, while a moderate share of banks tightened standards for auto loans and other consumer loans. Consistent with tighter lending standards, banks increased minimum required credit scores for credit card loans, and moderate net shares of banks increased minimum credits scores for auto loans and other consumer loans. Banks also tightened the majority of surveyed loan terms.
A few banks saw stronger demand for auto loans and weaker demand for other consumer loans, while demand for credit card loans was generally unchanged.

Forbearance policies

Respondents were asked to report on forbearance policies at their banks. For each loan category, most banks indicated that the fraction of loans in forbearance did not exceed 5 percent in the third quarter. A significant number of banks, however, reported forbearance rates more than 10 percent for residential mortgages loans and commercial mortgages secured by income-producing properties.

For C&I, consumer, and construction and land development loans, a modest share of banks reported forbearance rates more than 10 percent. Forbearance was least prevalent among construction and land development loans.