Banks tighten standards on consumer, commercial loans

With the pandemic continuing to crimp the U.S. economy, banks tightened their underwriting standards on consumer and commercial loans during the third quarter, according to the Federal Reserve’s latest survey on bank lending practices.

Banks that participated in the Fed’s quarterly senior loan officer survey raised the bar for approving commercial and industrial loans, commercial real estate loans, residential mortgages, credit card loans and car loans.

The survey findings, released Monday, marked the continuation of a trend that began during the first quarter of 2020, when many banks began tightening their lending standards in response to worsening economic conditions.

The Federal Reserve said that demand for consumer loans, including loans for automobiles, increased in the third quarter.


During the third quarter, banks cited the relatively poor economic outlook, various industry-specific problems and a reduced risk tolerance in explaining their decisions to further tighten loan standards since the end of the second quarter. Some banks also pointed to less aggressive competition from other lenders or a deterioration in their own current or expected capital position.

For credit cards and auto loans, the tighter standards were often manifested in higher minimum credit score requirements. In commercial lending, banks often raised their collateralization requirements, the premiums they charged on riskier loans and their use of interest rate floors.

The survey’s findings on loan demand suggest that U.S. businesses and consumers were on divergent paths at the end of the third quarter, with consumers having benefited from government stimulus payments, even as many businesses continued to struggle.

Demand for credit card loans, auto loans and most categories of residential real estate loans rose in the third quarter. But borrower demand was weaker for commercial and industrial loans, as well as for various kinds of commercial real estate credit, including construction loans and multi-family housing loans.

At the end of the third quarter, the Fed asked participating banks a series of special questions about their use of forbearance, which has frequently been used to prevent defaults during the pandemic. The results varied substantially by loan category.

About 14% of banks that participated in the survey said that more than 5% of their construction loans were in forbearance. But approximately half of all participating banks said the same about loans secured by income-producing commercial real estate.

For banks that offered forbearance on commercial real estate loans, that leniency most frequently took the form of either a payment deferral or covenant relief.

On the consumer side, nearly four out of 10 banks that participated in the survey said that more than 5% of their residential real estate loans were in forbearance. For credit card loans, about 9% said the same.

Fifteen percent of banks that participated in the survey said that more than 5% of their auto loans were in forbearance.

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