Fed Survey: Loan Demand, Standards Begin to Stabilize

Loan demand and standards for lending began to stabilize in the third quarter after demand weakened and standards tightened during the economic freefall of the second quarter. Fewer banks reported tightening on commercial and industrial, commercial real estate, residential real estate and personal loans, although most banks kept standards unchanged, according to the Federal Reserve’s senior loan officer survey released today.

C&I. About half as many banks on net reported tightening standards on C&I loans for firms of all sizes in the third quarter versus the second quarter. A majority of banks kept their standards unchanged. The handful of banks who eased standards cited more aggressive competition as the most important reason. C&I loan demand was mixed but was weaker on net. However, 35.3% of banks saw weaker demand from large and midsize firms, while 45.5% of banks saw weaker demand from smaller firms. Unlike the second quarter, when many businesses protectively drew down credit lines, nearly half of banks said that consumers’ precautionary demand for liquidity was an important reason for weaker demand.

CRE. Amplifying the trend in C&I loans, more than half of banks tightened standards to some degree on construction and land development loans and loans secured by nonfarm nonresidential properties, while nearly half did so for multifamily residential property loans. Almost no banks reported easing standards for CRE loans, and most banks reported moderately to substantially weaker demand for CRE loans.

Mortgages. Most banks kept standards unchanged for mortgage loans in the third quarter. About one in 10 on net reported tightening, except for jumbo loans, where one in five reported tightening. However, demand remained strong as interest rates remained near historic lows. Nearly two-thirds of banks reported stronger demand for conforming mortgages, with 30% reporting “substantially stronger” demand for conforming loans.

Personal loans. The share of banks tightening standards on credit cards fell dramatically from seven in 10 to about a quarter, while 64.4% kept standards unchanged. The long-running tightening trend on auto loans went into reverse, with just 13.5% on net tightening but 78.8% keeping standards unchanged. Demand for credit cards and auto loans was mixed.

Forbearance. This quarter’s survey asked banks about loan forbearance. For more than nine in 10 banks, the share of C&I, residential mortgage, credit card and auto loans in forbearance was about 10% or less. In keeping with the effects of the pandemic response, nearly a quarter of banks had more than 10% of CRE loans secured by income-producing collateral in forbearance, compared to just 1.5% of banks having more than 10% of their construction loans in forbearance. The most common forms of forbearance were payment deferrals and covenant relief and, for mortgages, reduced or waived late fees and not reporting late payments to credit bureaus.