Subprime and small business squeezed 

November 2, 2026

The Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS) show bank lending standards to large and medium-size businesses held up during the third quarter. Smaller firms were not as fortunate; they faced tighter credit conditions. 

The percentage of banks reporting stricter standards for medium and larger sized firms was steady but 5% of banks tightened their standards for small businesses. Banks reported stricter collateral requirements and the use of interest rate floors for those customers.

For commercial real estate (CRE), banks tightened lending standards the most in two years. More stringent standards were imposed on construction and land development, nonfarm nonresidential properties and multifamily. This may be an emerging sign of backlash against data center development across the country. Financial institutions are likely to apply more due diligence against this type of lending as previous bullish assumptions of return on investment are reassessed. The ongoing negative free cash flow positions of hyperscalers is inviting more scrutiny from creditors.  

Increasing numbers of banks reported weaker demand for business loans and commercial real estate loans. That reflects a sharp deterioration from demand in the previous quarter. About 12% of banks cited weaker commercial and industrial (C&I) loan demand from large firms (defined as having $50 million or more in revenues). Another 12% reported weaker loan demand from small firms. Banks said decreasing customer investment in plant and equipment was behind the drop-off in demand. Data center construction is showing evidence of crowding out other kinds of investment. 

On the consumer side, lending standards stayed the same for credit cards and auto loans in aggregate. A special question that looked deeper at consumer lending revealed a fracture when banks were asked about approving credit card applications across borrower risk categories. 

Banks were more likely to approve credit card applications for super-prime and prime borrowers and less likely to approve applications for subprime borrowers for credit card and other consumer loans. Banks cited price changes in goods and services in the higher demand for credit card loans, an indication that inflation continues to erode purchasing power. 

Another indication of the struggle in some households comes from the Federal Reserve’s 2025 Survey of Consumer Finances; it found roughly one-quarter of families have reached their budget limits; their saving rates are less than or equal to 0. About 10% of banks reported stronger demand for credit cards, the highest reading since 2022. Although overall debt levels continue to rise, they are rising at a slower pace as consumers become more cautious about borrowing, as confirmed by the monthly consumer credit report.  

Residential real estate (RRE) loan demand sunk to its weakest reading in two years. Nearly one-third of banks reported weaker RRE demand. This is not surprising given the sharp increase in mortgage rates to above 7%. 

Affordability concerns are showing up in vehicle loans; 13% of banks reported weaker demand for auto loans, the highest percentage since last year. For those who can obtain a loan, an estimated 20% of new vehicle loans are now stretching out to seven years.