The standards and policies that banks and other lending institutions use to determine their lending practice vary over time for a variety of different reasons. The overall economic climate, a bank’s particular financial situation, and the local real estate market are among these reasons. The Federal Reserve sets interest rate policy for banks across the United States, and the Federal Reserve regularly surveys major banks and credit unions to determine their attitudes towards lending and lending standards.
The January 2021 Senior Loan Officer Opinion Survey on Bank Lending Practices
Earlier this year, the Federal Reserve issued a survey of opinions from senior loan officers at banks and other lending institutions. The Federal Reserve regularly surveys lending institutions in order to gauge the attitudes of those lending institutions. The survey was divided into three different sections, each with questions regarding a different area of lending.
- Lending to Businesses
- Lending to Households
- Questions on Banks’ Outlook for 2021
Banks are easing lending standards for commercial lending
You can read the report, see the full data and visualizations at the Federal Reserve’s website. The main takeaway is that banks are starting to ease lending standards for consumer lending. There are three main categories of consumer lending — credit card loans, auto loans, and other consumer loans, and standards eased across all.
It’s interesting to note that banks reported tightening lending standards across the major categories for Commercial real estate — construction and land development loans, non-farm non-residential loans, and multifamily loans. Many banks reported that they expected to continue tightening standards for most business loans into 2021.
How this impacts borrowers
The standards and policies that banks and other lending institutions use when making loans have a direct impact on borrowers. When banks ease lending standards, that can translate into things like lower interest rates, more access to loans, a lower credit score required in order to get a loan, and lower down payments required.
While lending standards for commercial lending remain tight, residential lending standards are easing. Some banks reported easing standards for credit card loans, and even more banks reported easing standards for auto loans and for other consumer loans. Many banks also reported increasing credit limits on existing credit card accounts as well as lowering rate spreads on auto loans and other consumer loans.
How this impacts potential home buyers and sellers
Easing residential lending standards has a positive impact on both home buyers and home sellers. With an easing of residential lending standards, that may mean that it’s easier to get a home loan. When it’s easier to qualify for new loans, it means more people are eligible, and therefore looking for new houses. When more people are looking for new houses, it strengthens the real estate market and makes it easier to sell. On the other hand, some may find it more difficult to find a home to buy due to increased competition.
The study also reported a statistically significant difference in residential real estate lending standards based on the bank size. Large banks reported unchanged demand, while smaller banks reported strengthening demand for most types of residential mortgages. One impact from this difference is that it may be relatively easier or a smarter decision to look for smaller or community lenders if you’re looking to get a mortgage.
Banks’ Outlook for 2021
In addition to questions about lending standards, bank loan officers were also asked questions about their bank’s outlook for 2021. Many banks reported expecting weaker demand for most types of residential mortgages. Additionally, most banks expect stronger demand for consumer loans. Banks also report that they expect loan performance on existing consumer loans to deteriorate for most types of borrowers.
The Bottom Line
The Federal Reserve regularly surveys banks of different sizes all throughout the United States. In the most recent survey, banks reported an overall easing of mortgage lending standards. Easing lending standards allows more people to potentially qualify for a mortgage, and for borrowers to get lower interest rates or put down lower amounts for a down payment. Interest rates are still at historical lows, so this may be a perfect time to buy or refinance a home.
Dan Miller is a freelance writer and founder of PointsWithACrew.com, a site that helps families to travel for free / cheap. His home base is in Cincinnati, but he tries to travel the world as much as possible with his wife and 6 kids.