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

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

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

A total of 53 banks responded to the residential portion ofrnthe Senior Loan Officers Survey administered by the Fed; 29 of them werernclassified as “Large Banks” and 24 as “Other Banks.”  In addition to questions about residentialrnmortgage lending, the quarterly survey asked respondents about the creditrnstandards, motivation for the standards, and the level of demand for loans inrnvarious commercial and household loan categories including commercial andrnindustrial lending, commercial real estate, and consumer loans including creditrncards.

One large bank reported considerably tightening its creditrnstandards for prime residential mortgages over the last three months while fivernlarge and 3 other banks said their standards had tightened somewhat. Four largernand one other bank had eased standards “somewhat” but none said theirrnstandards had been eased “considerably.”  

Only 21 senior officers said their institutions make nontraditional residential mortgages which were defined by thernFederal Reserve as adjustable rate mortgages with multiple payment options (notrnstandard or hybrid ARMS,) interest-only mortgages, and Alt-A products such asrnnon-owner occupied properties or limited documentation loans.  Two of those banks, both large, said thatrnstandards had eased somewhat and 3 other large banks reported credit hadrntightened somewhat. All “other” banks and the remaining 11 largernbanks said there had been little if any change.

Demand for purchase money mortgages was about the same orrnstronger over the last three months. rn45.3 percent of the 53 banks said demand was about the same while 20.8rnpercent reported stronger demand.  Thisrnincrease was felt strongest by “other” banks, 37.5 percent of which (9)rnresponded positively to that question compared to only 7 percent or two largernbanks.  13 large banks and 5 other banksrnfelt demand had grown moderately to substantially weaker.

Demand for nontraditional mortgages was generally the samernor weaker than in earlier surveys with nearly 43 percent of respondentsrnreporting moderately or substantially weaker demand and only 9.5 percent notingrnan increase in demand.  47.6 percent saidrndemand was essentially unchanged.

Only four of the 55 banks answering questions about homernequity lines of credit reported they had tightened credit somewhat while 80rnpercent said standards were unchanged. rnSix of 30 large banks said they had eased credit somewhat but only 1 ofrnthe 25 other banks had done so.  Demandrnfor these loans was reported to be about the same by half of the banks whilernnearly 40 percent responded the demand was moderately or substantiallyrnweaker.  Only 11 percent noted an increasernin demand.

Other finding of the survey:

• None of the smaller banks indicated that theyrnhad eased standards for commercial and industrial (C&I) loans to largernfirms over the past three months although a small fraction of branches andrnagencies of foreign banks did report some easing. On balance, the large banks mostly trimmedrnpricing terms including the cost of credit lines and the spreads of loan ratesrnover cost of funds.
• Almost all domestic institutions reported littlernchange in their standards for C&I lending to small firms; those reportingrntightening were the smaller banks. Thernnet fraction of banks that had increased premiums on loans to riskier borrowersrnremained fairly high in the April survey.
• The three factors that most influenced C&Irnlending practices in the survey were competitive pressures, the economicrnoutlook, and tolerance for risk in the C&I
  loan market. In particular, domestic banks that easedrntheir lending standards did so because of increased competition from otherrnbanks or nonbank sources of credit and two-thirds reported a more favorable orrnless uncertain economic climate as a factor.rn
• A small net fraction of banks said that demandrnfor C&I loans weakened during the survey period. This weakening was concentrated at smallerrndomestic banks; large domestic banks reported little change in demand on net.
• A significant number of domestic banks, on balance,rncontinued to report having tightened standards for commercial real estate (CRE)rnloans. However, this net fraction wasrnconsiderably smaller than in the previous survey. As in the January survey, domestic banksrnreported weaker demand for CRE loans on net; however, the net fraction of banksrnreporting that weaker demand moved below 10 percent for the first time sincernthe financial crisis began.
• Sizable fractions of both domestic and foreignrnrespondents reported having increased their use of CRE loan extensions over thernprevious six months. Only three banks saidrnthey had reduced their use of extensions.
• On balance, domestic banks reported tighteningrnlending standards for consumer credit cards but loosening standards on otherrnforms of consumer credit. A small netrnfraction of banks reported tightening credit standards and a moderate fractionrnhad reduced credit limits and/or increased interest rate spreads. However, a small net fraction of respondentsrnsaid they had eased standards and reduced spreads on other consumer loans.

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