Loan Officer Survey: Most Banks Hold Steady on Defensive Lending Standards

By: Jann Swanson • Tue, May 4 2010, 1:19 PM

The Federal Reserve has released the Q1 2010 Senior Loan Officer Survey.

There has been little change in lending standards for either residential mortgage loans or home equity lines of credit over the past few months. According to the Federal Reserve, 79.2 percent of the banks surveyed had kept their credit standards basically unchanged for the prime category of mortgages.

A total of 53 banks responded to the residential portion of the Senior Loan Officers Survey administered by the Fed; 29 of them were classified as "Large Banks" and 24 as "Other Banks." In addition to questions about residential mortgage lending, the quarterly survey asked respondents about the credit standards, motivation for the standards, and the level of demand for loans in various commercial and household loan categories including commercial and industrial lending, commercial real estate, and consumer loans including credit cards.

One large bank reported considerably tightening its credit standards for prime residential mortgages over the last three months while five large and 3 other banks said their standards had tightened somewhat. Four large and one other bank had eased standards "somewhat" but none said their standards had been eased "considerably."

Only 21 senior officers said their institutions make nontraditional residential mortgages which were defined by the Federal Reserve as adjustable rate mortgages with multiple payment options (not standard or hybrid ARMS,) interest-only mortgages, and Alt-A products such as non-owner occupied properties or limited documentation loans. Two of those banks, both large, said that standards had eased somewhat and 3 other large banks reported credit had tightened somewhat. All "other" banks and the remaining 11 large banks said there had been little if any change.

Demand for purchase money mortgages was about the same or stronger over the last three months. 45.3 percent of the 53 banks said demand was about the same while 20.8 percent reported stronger demand. This increase was felt strongest by "other" banks, 37.5 percent of which (9) responded positively to that question compared to only 7 percent or two large banks. 13 large banks and 5 other banks felt demand had grown moderately to substantially weaker.

Demand for nontraditional mortgages was generally the same or weaker than in earlier surveys with nearly 43 percent of respondents reporting moderately or substantially weaker demand and only 9.5 percent noting an increase in demand. 47.6 percent said demand was essentially unchanged.

Only four of the 55 banks answering questions about home equity lines of credit reported they had tightened credit somewhat while 80 percent said standards were unchanged. Six of 30 large banks said they had eased credit somewhat but only 1 of the 25 other banks had done so. Demand for these loans was reported to be about the same by half of the banks while nearly 40 percent responded the demand was moderately or substantially weaker. Only 11 percent noted an increase in demand.

Other finding of the survey:

None of the smaller banks indicated that they had eased standards for commercial and industrial (C&I) loans to large firms over the past three months although a small fraction of branches and agencies of foreign banks did report some easing. On balance, the large banks mostly trimmed pricing terms including the cost of credit lines and the spreads of loan rates over cost of funds.
Almost all domestic institutions reported little change in their standards for C&I lending to small firms; those reporting tightening were the smaller banks. The net fraction of banks that had increased premiums on loans to riskier borrowers remained fairly high in the April survey.
The three factors that most influenced C&I lending practices in the survey were competitive pressures, the economic outlook, and tolerance for risk in the C&I
loan market. In particular, domestic banks that eased their lending standards did so because of increased competition from other banks or nonbank sources of credit and two-thirds reported a more favorable or less uncertain economic climate as a factor.
A small net fraction of banks said that demand for C&I loans weakened during the survey period. This weakening was concentrated at smaller domestic banks; large domestic banks reported little change in demand on net.
A significant number of domestic banks, on balance, continued to report having tightened standards for commercial real estate (CRE) loans. However, this net fraction was considerably smaller than in the previous survey. As in the January survey, domestic banks reported weaker demand for CRE loans on net; however, the net fraction of banks reporting that weaker demand moved below 10 percent for the first time since the financial crisis began.
Sizable fractions of both domestic and foreign respondents reported having increased their use of CRE loan extensions over the previous six months. Only three banks said they had reduced their use of extensions.
On balance, domestic banks reported tightening lending standards for consumer credit cards but loosening standards on other forms of consumer credit. A small net fraction of banks reported tightening credit standards and a moderate fraction had reduced credit limits and/or increased interest rate spreads. However, a small net fraction of respondents said they had eased standards and reduced spreads on other consumer loans.