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April 2016

**The April 2016 Senior Loan Officer Opinion Survey on Bank Lending Practices**

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The April 2016 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the standards and terms on, and demand for, bank loans to businesses and households over the past three months.1 This summary discusses the responses from 70 domestic banks and 22 U.S. branches and agencies of foreign banks.2

Regarding loans to businesses, the April survey results indicated that, on balance, banks tightened their standards on commercial and industrial (C&I) and commercial real estate (CRE) loans over the first quarter of 2016.3 The survey results indicated that demand for C&I loans had weakened and that demand for CRE loans had strengthened during the first quarter on net.

The first of two sets of special questions asked banks about lending to firms in the oil and natural gas drilling or extraction sector.  The majority of domestic banks reported that loans to firms in this sector account for less than 5 percent of their outstanding C&I loans.  In contrast, the majority of foreign banks reported that loans to firms in this sector account for more than 5 percent of their outstanding C&I loans.  On balance, both domestic and foreign banks expect delinquency and charge-off rates on such loans to deteriorate over 2016 and noted that they were undertaking several actions to mitigate the risk of loan losses.  In addition, on balance, banks indicated that the credit quality of loans made to businesses and households located in regions of the United States that are dependent on the energy sector had deteriorated somewhat. 

The second set of special questions asked banks about their CRE lending policies and securitization activity.  On balance, banks reported leaving most CRE loan terms unchanged over the past year.  In response to conditions in the commercial mortgage-backed securities (CMBS) market over the past six months, on balance, banks reported increasing the volume of origination of CRE loans while decreasing the volume of CRE loan securitization.  When asked about the anticipated large amount of CRE loans originated in 2006 and currently held in CMBS that will need to be refinanced over the next six months, some banks noted they expect standards for these refinancings to be somewhat tighter than the standards they expect to apply to other CRE loans. 

Regarding loans to households, banks reported having eased lending standards on most types of residential real estate (RRE) mortgage loans, while demand for these loans strengthened over the first quarter.  Modest net fractions of banks reported easing lending standards on credit cards and other consumer loans, whereas lending standards for auto loans remained basically unchanged.  Over the first quarter, banks reported stronger demand across all consumer loan categories. 

**Lending to Businesses**(Table 1, questions 1-23; Table 2, questions 1-18)

**Questions on commercial and industrial lending.** On balance, a moderate net fraction of banks reported a tightening of lending standards for C&I loans to large and middle-market firms over the past three months.4 Meanwhile, only a modest net fraction of banks reported tightening lending standards for C&I loans to small firms.  Banks reported that they tightened some C&I loan terms for large and middle-market firms:  A moderate net fraction of banks reported that they had increased premiums charged on riskier loans, a modest net fraction of banks reported that loan covenants had tightened, and most other terms to such firms remained basically unchanged on net.  Banks reported mixed responses regarding changes in loan terms for small firms.  A majority of the domestic respondents that tightened either standards or terms on C&I loans over the past three months cited a less favorable or more uncertain economic outlook as well as a worsening of industry-specific problems affecting borrowers as important reasons.  Meanwhile, a significant net fraction of foreign respondents reported a tightening of lending standards for C&I loans.

Regarding the demand for C&I loans, on balance, a modest net fraction of large banks reported that demand from large and middle-market firms was weaker during the first quarter, whereas demand remained basically unchanged for loans to small firms.  Among the banks that reported weaker loan demand, customers' decreased investment in plant or equipment was the most commonly cited reason, though customers' reduced needs to finance merger and acquisition activity, accounts receivable, and inventories were also cited by the majority of respondents.  Furthermore, a moderate net fraction of foreign bank respondents reported that demand for C&I loans weakened over the first quarter of 2016.

**Special questions on commercial and industrial lending**.  The April survey asked a set of special questions about lending to firms in the oil and natural gas drilling or extraction sector. Of banks that made loans to such firms, the majority of domestic banks indicated that such lending accounts for less than 5 percent of their outstanding C&I loans, whereas the majority of foreign banks reported that loans to firms in this sector account for more than 5 percent of their outstanding C&I loans.  The majority of both domestic and foreign banks reported that they expect delinquency and charge-off rates on loans to firms in the oil and natural gas drilling or extraction sector to deteriorate somewhat over the remainder of 2016.  At the same time, the majority of both domestic and foreign banks reported taking a variety of actions to mitigate loan losses over the past year, including tightening lending policies on new loans or lines of credit made to firms in this sector, restructuring outstanding loans, requiring additional collateral, and setting aside additional reserves for a potential increase in loan losses.  A significant percentage of banks also reported enforcing material adverse change clauses or other covenants to limit draws on existing credit lines to firms in this sector, tightening lending policies on new loans or lines of credit to firms in other sectors, and hedging the risks arising from declines in energy prices through derivatives contracts.

On balance, banks indicated a spillover from the energy sector onto credit quality of loans made to businesses and households located in energy-sector-dependent regions.  In particular, a significant net fraction of banks reported that credit quality deteriorated for both auto loans and non-energy-sector C&I loans somewhat over the past year.  Furthermore, moderate fractions of banks indicated that CRE loans, consumer credit card loans, and consumer loans other than credit card and auto loans made to businesses and households in these regions also deteriorated somewhat over the past year.

**Questions on commercial real estate lending.** On net, survey respondents indicated that their lending standards for CRE loans of all types tightened during the first quarter.5 A significant net fraction of banks reported tightening standards for construction and land development loans and loans secured by multifamily residential properties, whereas a moderate net fraction of banks reported tightening standards for loans secured by nonfarm nonresidential properties. 

During the first quarter of 2016, on balance, banks indicated that they had experienced stronger demand for all three types of CRE loans.  Moderate net fractions of banks reported stronger demand for construction and land development loans and loans secured by nonfarm nonresidential properties, and a modest net fraction of banks reported stronger demand for loans secured by multifamily residential properties.  Meanwhile, nearly all foreign banks reported leaving CRE lending standards basically unchanged, while a significant net fraction of foreign banks reported experiencing weaker demand for such loans.

**Special questions on commercial real estate lending.**  The April survey included a set of special questions regarding CRE lending activities.  First, banks were asked about changes over the past year in their lending policies for CRE loans.  In particular, moderate net fractions of banks reported increasing maximum loan size and tightening loan-to-value ratios, while a modest net fraction reported tightening debt-service coverage ratios.  Survey respondents indicated that other loan terms remained basically unchanged, on net, over the past year.

Next, banks were asked about their responses to conditions in the CMBS markets over the past six months. A moderate net fraction of banks reported moderately increasing the volume of origination of CRE loans, while a significant fraction reported moderately decreasing the volume of CRE loan securitization.  On balance, banks reported that demand for loans or lines of credit from nonbank financial institutions, used to fund their CRE loan pipelines prior to securitization, remained basically unchanged over the past six months, while a moderate fraction of banks indicated tightening standards applied to such loans or lines of credit during this period.  When asked about the anticipated large amount of CRE loans originated in 2006 and currently held in CMBS that will need to be refinanced over the next six months, a moderate net fraction of banks noted they expect standards for these refinancings to be somewhat tighter than standards they expect to apply to other CRE loans.

**Lending to Households**(Table 1, questions 24-37)

**Questions on residential real estate lending.** During the first quarter, a moderate net fraction of banks reported having eased standards on GSE-eligible loans, while a modest net fraction of banks reported having eased standards on QM and non-QM jumbo residential mortgage loans as well as on QM non-jumbo non-GSE-eligible and non-QM non-jumbo residential mortgage loans.6 Meanwhile, banks left lending standards basically unchanged for all other categories of RRE loans on net.

Over the first quarter of 2016, banks reported stronger demand for most categories of RRE mortgage loans.  In particular, a significant net fraction of banks reported stronger demand for GSE-eligible and QM jumbo residential mortgages.  At the same time, a moderate net fraction of banks reported stronger demand for government, QM non-jumbo non-GSE-eligible, and non-QM jumbo residential mortgages, and a modest fraction of banks reported stronger demand for non-QM non-jumbo residential mortgages.  Credit standards were reportedly little changed for approving applications for revolving home equity lines of credit, and a moderate fraction of banks reported that demand for revolving home equity lines of credit had strengthened on net.

**Questions on consumer lending.** A moderate net fraction of banks indicated that they were more willing to make consumer installment loans during the first quarter compared with three months prior.  Over the first quarter, a modest net fraction of banks reported easing lending standards on credit cards and other consumer loans, whereas lending standards for auto loans remained basically unchanged.  On balance, banks reported that terms across all categories of consumer loans remained basically unchanged over the first quarter.  Banks generally reported that demand for consumer loans had strengthened in the first quarter:  Moderate net fractions of banks reported stronger demand for auto loans and consumer loans other than credit card and auto loans, whereas a modest net fraction reported that demand for credit card loans strengthened during the first quarter. 

*This document was prepared by Maya Shaton, with the assistance of William Hayes and Blake Taylor, Division of Monetary Affairs, Board of Governors of the Federal Reserve System.*

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1. Respondent banks received the survey on or after March 29, 2016, and responses were due by April 12, 2016. Return to text

2. Unless otherwise indicated, this document refers to reports from domestic respondents. Return to text

3. For questions that ask about lending standards or terms, reported net fractions equal the fraction of banks that reported having tightened ("tightened considerably" or "tightened somewhat") minus the fraction of banks that reported having eased ("eased considerably" or "eased somewhat").  For questions that ask about loan demand, reported net fractions equal the fraction of banks that reported stronger demand ("substantially stronger" or "moderately stronger") minus the fraction of banks that reported weaker demand ("substantially weaker" or "moderately weaker").  For this summary, when standards, terms, or demand are said to have "remained basically unchanged," the net percentage of respondent banks that reported either tightening or easing of standards or terms, or stronger or weaker demand, is between 0 and 5 percent; the modifier "modest" refers to net percentages between 5 and 10 percent; the modifier "moderate" refers to net percentages between 10 and 20 percent; the modifier "significant" refers to net percentages between 20 and 50 percent; and the modifier "majority" refers to net percentages over 50 percent. Return to text

4. The survey asked respondents separately about their standards for, and demand from, large and middle-market firms, which are generally defined as firms with annual sales of $50 million or more, and small firms, which are those with annual sales of less than $50 million. Return to text

5. The three categories of CRE loans that banks are asked to consider are construction and land development loans, loans secured by nonfarm nonresidential properties, and loans secured by multifamily residential properties. Return to text

6. The seven categories of residential home-purchase loans that banks are asked to consider are GSE-eligible, government, QM non-jumbo non-GSE-eligible, QM jumbo, non-QM jumbo, non-QM non-jumbo, and subprime.  See the survey results tables that follow this summary for a description of each of these loan categories.  The definition of a qualified mortgage (QM) was introduced in the 2013 Mortgage Rules under the Truth in Lending Act (12 CFR Part 1026.32, Regulation Z).  The standard for a QM excludes mortgages with loan characteristics such as negative amortization, balloon and interest-only payment schedules, terms exceeding 30 years, alt-A or no documentation, and total points and fees that exceed 3 percent of the loan amount.  In addition, a QM requires that the monthly debt-to-income ratio of borrowers not exceed 43 percent.  For more on the ability to repay and QM standards under Regulation Z, see the Consumer Financial Protection Bureau's website at www.consumerfinance.gov/regulations/ability-to-repay-and-qualified-mortgage-standards-under-the-truth-in-lending-act-regulation-z. Return to text

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