Loan officers report loan demand weakening; some standards eased

Demand for commercial and industrial (C&I), residential real estate, and commercial real estate (CRE) loans weakened in the three-month period of August-October, even though many lending standards on many of those loans were either eased or remained unchanged from the previous period, the Federal Reserve reported Monday.

In its October 2017 “Senior Loan Officer Opinion Survey on Bank Lending Practices,” the Fed stated that banks eased standards and terms on C&I loans, and had weaker demand for the loans during the three-month period. Demand for CRE loans, according to the Fed, was reported weaker by the banks (although standards remained “basically unchanged”).

The quarterly report from the Fed details survey responses to an opinion survey of senior loan officers from 72 domestic banks. The survey was conducted in October for the that month and the previous two months (August and September).

The Fed said its survey results show that, for loans to households, banks reported that their lending standards on all categories of residential real estate (RRE) loans either eased or remained basically unchanged over the three-month period (on balance). Demand for all categories of RRE loans weakened, the Fed said.

“In contrast, banks reportedly tightened their standards and terms on credit card and auto loans, while demand for these loans reportedly remained basically unchanged,” the Fed report noted.

The central bank also said that the survey asked banks two new sets of special questions about changes in lending conditions to households over the past year.

The first set asked banks to specify reasons why they have changed their credit policies on credit card and auto loans to prime and subprime borrowers over this year. “Respondents’ most reported reasons for tightening their standards or terms on credit card and auto loans were a less favorable or more uncertain economic outlook, a deterioration or expected deterioration in the quality of their existing loan portfolio, and a reduced tolerance for risk,” the report stated. “Further, for auto loans in particular, less favorable or more uncertain expectations regarding collateral values was also reportedly an important reason for tightening standards or terms over this year.”

The second set of special questions, the Fed said, asked banks why they have experienced stronger or weaker demand for credit card and auto loans over this year.

Among the most-reported reasons for a strengthening of demand for credit card and auto loans from prime borrowers, the Fed said in the report, were that customers’ confidence as well as their ability to manage their debt service burdens had improved. “Some of banks’ most reported reasons for a weakening of demand for credit card and auto loans from prime borrowers over this year were that the general level of interest rates had increased and customers’ borrowing had shifted from their bank to other bank or nonbank sources,” the report stated.

Senior Loan Officer Opinion Survey on Bank Lending Practices