Banks Tighten Loan Rules, See Less Than 5 Pct Of Loans In Forbearance In Q3

federal reserve, FOMC, economy

In the third quarter, banks tightened their loan standards to firms of any size and also saw weaker demand than usual, according to the Federal Reserve’s October 2020 Senior Loan Officer Opinion Survey on Bank Lending Practices.

The tightened standards and weaker demands could be seen over all of the major commercial real estate (CRE) categories, construction and land development loans, nonfarm nonresidential loans and multifamily loans, according to the report. In addition, consumer loan categories, including credit cards, auto loans and other items, saw the tightening standards.

In response to questions on forbearance policies, banks said less than 5 percent of loans were in forbearance in the third quarter, the report stated. The most common type of forbearance was payment deferral for CRE, residential real estate (RRE) and consumer loans, while covenant relief was popular for commercial and industrial loans.

And in many categories, the most widely cited factor for whether a bank was willing to approve forbearance was a borrower’s level of financial hardship, the report stated.

In terms of the reason behind tightening loan standards, the report stated many financial institutions worried about a volatile and uncertain economic future. Meanwhile, the decrease in demand in some sectors came from less need for things like financing inventory, accounts receivable, mergers or acquisitions and plant or equipment.

Banks toughened their lending standards during the pandemic because of the risk of running out of funds. According to the July 2020 Senior Loan Officer Opinion Survey on Bank Lending Practices from the Fed, banks tightened standards throughout all residential real estate (RRE) loan categories and in auto loans, credit card loans and other consumer loans in the second quarter.

“Over the second quarter, major net shares of banks tightened lending standards on all categories of consumer loans,” the Fed said in August. “Major net fractions of banks also tightened important terms on credit card loans, including credit limits and minimum credit scores required.”