Banks Expect Lending Standards to Ease, Quality to Fall This Year

Banks are expecting to ease standards this year on auto and other consumer loans, while tightening them for business loans, according to a Fed report released Monday.

The Fed’s January 2021 “Senior Loan Officer Opinion Survey on Bank Lending Practices” found banks expect demand to strengthen and loan performance to deteriorate for most loan categories in 2021.

Banks eased standards for credit cards, auto loans and other consumer loans in the fourth quarter of 2020. Demand for credit card and other consumer loans remained basically unchanged, and demand for auto loans moderately weakened, based on responses from 75 domestic banks from Dec. 14, 2020 to Jan. 4.

Most banks said they expect stronger demand for consumer loans this year. A strong majority of banks said they expect loan performance to deteriorate for consumer loans across borrower risk categories, and most banks expect performance to worsen for residential mortgages and HELOCs.

NAFCU Chief Economist Curt Long said easing standards while expecting higher delinquencies contrasts with the Great Recession, when tightening lasted three years from the recession’s start in 2007 to a year after it ended in 2009.

“Nevertheless, the fact that high-income households have fared so much better than low-income ones over the past year means that there may still be a lack of access to credit for low-income households even if underwriting standards do ease somewhat this year,” Long said.

Credit card balances have been declining at banks and credit unions since last spring and auto loans have been growing at a snail’s pace. In November, credit union auto loan portfolios were just 1.3% higher than a year earlier.

Not surprisingly, most banks eased consumer lending standards in the fourth quarter. They raised credit limits for credit card accounts in the fourth quarter, and narrowed the rate spreads charged on outstanding balances over their cost of funds for auto loans and other consumer loans.

Most banks left standards unchanged for mortgages and home equity lines of credit. Among large banks, most eased standards for government-sponsored enterprise (GSE)-eligible mortgages — like those from Freddie Mac and Fannie Mae — which make up the majority of bank mortgage originations.

Large banks reported unchanged demand across all residential mortgage categories. Most small banks reported strengthening demand across most RRE loan categories, except unchanged demand for government residential mortgages and weaker demand for HELOCs and subprime mortgages.

Banks tightened their standards on commercial and industrial loans to firms of all sizes in the fourth quarter. Despite weakened demand, they also tightened standards for the three major commercial real estate loan categories: Construction and land development loans, nonfarm nonresidential loans and multifamily loans.