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Banks Eased Lending Standards on Personal Loans in Q4: Fed

Further easing is expected but banks warn of a deterioration in loan performance

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  • Written by  Banking Exchange staff
Banks Eased Lending Standards on Personal Loans in Q4: Fed

Banks eased lending standards for personal loans and left mortgage lending standards unchanged in Q4 2020 as demand remained consistent, new figures show.

According to the Federal Reserve’s senior loan officer opinion survey on bank lending practices, while lending standards were left unchanged by banks for most mortgage loan categories and for revolving home equity lines of credit (HELOCs) during the quarter, elsewhere there was some easing.

The survey revealed that 8.3% of large banks “eased somewhat” standards for government-sponsored enterprise (GSE) eligible mortgages, which make up the majority of bank mortgage originations.

“Modest shares” of large banks eased credit standards for qualified mortgage (QM) jumbo loans, and for QM non-jumbo, non-GSE-eligible residential mortgages, the Fed’s report showed.

Banks reported demand for credit card and other consumer loans was constant in Q4 of last year and eased lending standards across all consumer loan categories of credit card loans, auto loans, and other consumer loans.

When banks were asked how their credit standards for approving applications for credit cards from individuals or households had changed in the quarter, 14.9% said they had “eased somewhat”, with none reporting having “eased considerably”.

Among respondents, 10.5% of banks said they had “eased somewhat” credit standards for approving applications for auto loans.

Demand for residential real estate loans fluctuated across different bank sizes, with large banks seeing demand unchanged across all mortgage categories.

When asked about expectations for 2021, banks of all sizes said they generally expected to ease standards for all household loans amid strengthening demand, but warned that loan performance was likely to deteriorate for most loan categories.

Banks set aside billions of dollars through 2020 to protect against loan defaults as the pandemic was expected to hit the US economy.

Commercial and industrial (C&I) loans to large and middle-market firms were the exception to the performance expectation, with banks forecasting loan performance in this category to improve over the year.

For Q4 2020, banks indicated in the survey that, on balance, they tightened their standards on C&I loans to firms of all sizes and tightened standards across all three major commercial real estate loan categories – construction and land development loans, non-farm non-residential loans, and multi-family loans – while reporting weaker demand.

Banks’ Q4 earnings reports showed they extended fewer loans to small businesses last year, with JPMorgan and Wells Fargo among the biggest lenders to post a drop in small business loans between Q3 and Q4 2020 following the closure of the Paycheck Protection Program.

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