Banks Report Stronger Demand, Easier Credit Standards


Banks reported easing lending criteria for a range of consumer and business loans, according to the Federal Reserve's July survey of senior loan officers. The survey also found a broad-based pickup in demand for loans.

The report, released on August 4, summarizes the responses of 75 domestic banks and 23 foreign banks with U.S. operations.

Business lending picks up
Domestic banks eased the standards and terms on commercial and industrial (C&I) loans during the past three months. The most widespread easing was on the spreads over their costs of funds, while a significant share also reported cutting the costs of credit lines and decreasing the use of interest rate floors, the report said.

Banks cited more aggressive competition as a primary reason behind loosening their standards and terms on loans to businesses. Other factorsinclu—ding a more favorable or less uncertain economic outlook and, to a lesser extent, increased tolerance for risk—also played a role.

On the demand side, banks noted an increase in demand for C&I loans, which they attributed to a range of business financing needs, especially those related to investments in plant or equipment, accounts receivable, inventories, or mergers and acquisitions.

Demand for commercial real estate (CRE) loans also strengthened, the report noted. Banks loosened their lending criteria on certain categories of CRE lending, namely construction and land development loans and those secured by nonfarm residential properties.

Banks note stronger demand for residential mortgages, other loans to households
On household lending side, banks for the first time in a year noted stronger demand for prime residential mortgages. Demand for home equity lines of credit (HELOCs) also picked up during the past three months. While a modest share of banks reported easing standards on mortgage loans to the most creditworthy borrowers, lending criteria for nontraditional loans and HELOCs remained about the same.

Banks also noted stronger demand for other loans to households, including auto and credit card loans. Overall, banks made little change to their standards and requirements on such loans, although "a few large banks eased standards, increased credit limits, and reduced the minimum required credit score for credit card loans," the report said.

New rules affecting prime jumbo, nontraditional home loans
In response to a special set of questions about the impact of the Ability-to-Repay and Qualified Mortgage (ATR/QM) Standards, which went into effect earlier this year, banks said the new rule had little effect on approval rates for prime conforming mortgages, in part because such loans qualify for a safe harbor, banks noted. In contrast, roughly half of respondents said the ATR/QM rule reduced approval rates on prime jumbo mortgages and nontraditional home loans.

Another set of annual questions on the level of standards, as opposed to the change in standards during the past three months, "indicated that lending conditions had eased, on net, over the past year for many loan categories," the report said. Banks said their standards on business and CRE loans were easier than or near the midpoint of their ranges since 2005. However, a moderate to large share said their current standards on all residential real estate and credit card loans were at least somewhat tighter than the midpoint of their longer-term ranges.

August 19, 2014

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