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Comment: Fed’s Senior Loan Officer Survey shows lending standards tightened significantly since prior report

There was a marked change of direction in the Fed’ Senior Loan Officer Opinion Survey on Bank Lending Practices for April from the January report. It was a result of the spread of COVID-19 and the impact that it had on the risks facing both lenders and borrowers. The report said, “Many banks also provided written comments about the coronavirus (COVID-19) pandemic in addition to answering the standardized survey questions. In these comments, banks reported that the changes in standards and demand across loan categories reported for the first quarter occurred late in March as the economic outlook shifted when news emerged about the rapid global spread of COVID-19.”

The survey showed that on net, standards and terms for C&I loans were far more restrictive than in the prior report and at levels consistent with an economic downturn.
Demand for business loans other than real estate rose for middle- and large-market firms and were about unchanged at smaller firms. Businesses were more inclined to get or maintain lines of credit due to “precautionary demand for cash and liquidity, a decrease in customers’ internally generated funds, and an increase in customers’ accounts receivable financing needs.”

Banks tightened standards or terms due to “a less favorable or more uncertain economic outlook, worsening of industry-specific problems, and reduced tolerance for risk.” The report also noted that banks were more inclined to work with existing clients rather than new ones.

Commercial real estate loan demand weakened “across all three major commercial real estate (CRE) loan categories—construction and land development loans, nonfarm nonresidential loans, and multifamily loans.”

Banks also raised standards for all types of consumer loans in the prior three months. Consumer real estate loans also saw tighter standards for lending. The rush to buy or refinance a home while mortgage rates were low was not entirely gone by the end of March. The report said, “Banks reported stronger demand for all categories of closed-end mortgage loans,” still, demand was weaker “for all categories of consumer loans.” Consumers were probably already in the closure process ahead of events related to the response to the global pandemic. Demand for home loans is likely to dry up in the second quarter 2020, while standards and terms for such loans will make them harder to get. Similarly, consumers will find terms on loans for credit cards, autos, and other types of lending to be tighter than these were. However, it is also clear that consumers have cut back drastically on spending on nonessentials, so demand will be down in the next quarter as well.

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