Trends in Consumer Underwriting Standards

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Did you know that the Federal Reserve conducts a quarterly survey of senior loan officers at about eighty large domestic banks and twenty-four U.S. branches and agencies of foreign banks? The survey, called the Senior Loan Officer Opinion Survey on Bank Lending Practices, is among the data considered by the Federal Open Market Committee (FOMC) in preparation for its policy discussions and decisions.

What good is that survey to you? Well, for credit union leaders the data, which can be downloaded via the Fed’s website, provides some indication of how credit underwriting standards and demand are changing at large institutions – standards than can impact many thousands of consumers and businesses across the country and influence overall industry policy. In your own strategic assessment of these trends you may be able to pick up on potentially harmful market changes, or emerging untapped opportunity.

What to Know About the Data

Here are a few things to know about the survey and survey data…

Question Types

The survey reports on three types of questions, each important to understanding underlying national lending trends. The first question pertains to demand, the second to underwriting standards, the third to willingness to make loans.

Net Percentage Responses

The survey reports data in terms of net percentage of respondents. For example, one of the reported results fields tracks the following:

Net percentage of domestic banks reporting stronger demand for auto loans

If the net percentage is a positive number, then a greater percentage of bank respondents are reporting that demand for auto loans has increased over the last survey period. Conversely, if the number is negative then there is a decrease in demand.

Using the Data

Knowing how loan demand and underwriting standards are moving in the marketplace is very helpful in terms of strategy planning. So what does the data look like and how can it be helpful to you? Consider the chart below. It tracks the net percentage of domestic banks tightening standards for credit card loans.

Let’s focus on the time period right before the Great Recession, which ran from December 2007 to June 2009. The prevailing trend at the beginning of 2007 was that the industry was not tightening standards, meaning the majority was not making it harder to get a credit card. This is evidenced by the chart dipping below 0% in Q2 and Q3.

By Q4, however, the line moved above 0% to 3.2%, and by Q4 2008 it hit 67% – an incredible mass movement to make it harder for consumers to get credit card loans. Banking institutions using the survey data during that time would have definitely seen that “something was up” as the tide changed and could, perhaps, have used the data as inspiration to take a harder look at their own marketplace risk. This certainly would have helped some credit unions as many were slow to tighten in the early days of the recession and as a result ended up with an abundance of risky loans – in some cases to the demise of the credit union.

Current Data Trends

So what does the latest survey tell us about key consumer product underwriting standards? In the chart below we highlight the net percentage of domestic banks tightening standards for auto loans, credit cards, consumer loans (excluding credit card and auto loans), and conforming mortgage loans. Interestingly, we see that tightening occurred for the majority of consumer loan types – with a healthy majority focused on tightening credit card standards. Conforming mortgages, on the other hand, saw a slight majority loosening standards.

So why are standards tightening for most consumer loan types but not for mortgages? It would help to have the demand side of the equation to compare to since sometimes standards are set in reaction to demand, such as tightening to temper aggressive demand growth. The chart below gives us the demand picture.

As is clear from the chart, aggressive demand is most definitely NOT the cause of tightening standards.

But what do we assume is happening then? Given that standards are tightening while demand is weakening it is likely that survey respondents are working to protect against future risk. There has been a lot of talk of late about fears of a slowing economy, inverted yield curves, recession. It makes sense given the rhetoric that survey respondents would want to be proactive in cleaning up portfolios by eliminating a risk tier or two.

Why are mortgages different? Why wouldn’t standards be tightening for mortgages too, perhaps even more so than credit cards? Likely two reasons. First, interest rate increases in 2018 slowed demand considerably. One way to try to stir up demand is to loosen standards slightly so that more borrowers are qualified. The other reason is that if institutions are working to reduce risk on consumer loan portfolios they’ll need some other place to put deposited funds, and mortgages are certainly a less risky option than unsecured consumer loans (keep in mind that we are not talking about subprime mortgage loans).

We encourage credit union lenders to keep an eye on the survey results, in addition to other factors, to maintain a well-rounded view of lending trends. For savvy credit unions, adding such information to the dataset allows for better informed lending policy decisions, and perhaps could lead to a unique market advantage. For example, you may be able to act counter to the trends, growing in certain loan categories even as others are pulling back. If you know your local market will behave differently than the market as a whole, then maybe you can work aggressively fill the competitive void that will exist as national lenders close the door on people in your local community.

The survey data is published quarterly and is available on the Federal Reserve’s website at

Note: The survey also tracks standards and demand for commercial loans.

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