WASHINGTON, D.C. -- The Office of
the Comptroller of the Currency (OCC) released the twelfth annual Survey of
Credit Underwriting Practices today and reported that competitive pressures
have led to a third consecutive year of eased commercial and retail credit underwriting
standards.
The 2006 survey indicates a
pronounced trend toward easing commercial credit underwriting standards, with
significantly more banks easing underwriting standards than tightening
standards. Examiners reported that 31 percent
of surveyed banks eased, with only 6 percent tightening standards. Notably, 43 percent of the surveyed banks
eased standards in at least one of the past two years, with 18 percent of the
banks easing standards in both years.
The loosening of underwriting standards has been most noteworthy in
large corporate credits and leveraged loans, but examiners also observed
spillover effects in middle market lending as well. Commercial real estate underwriting standards
continue to loosen while concentrations continue to grow.
In addition, the survey found that underwriting
standards for retail credit products eased in more than a quarter of the
surveyed banks for the second consecutive year.
Easing of underwriting standards for retail credit was most notable in
residential mortgages and home equity lending.
Reduced documentation requirements and more relaxed underwriting
criteria are increasingly layered on new products, a combination that can
magnify risk levels, especially for unseasoned retail portfolios. Many borrowers have not yet been asked to
perform at higher interest rate levels, or on a principal-amortizing repayment
structure.
“Credit performance remains quite
strong, and it’s not surprising that we have seen several years of eased
commercial underwriting standards following a five-year period of tightening,”
said Kathryn Dick, Deputy Comptroller for Credit and Market Risk. “However, we are paying increasingly close
attention because serial easing of underwriting terms has been a reliable
indicator of future problems if not governed by an effective credit risk
management process.” Ms. Dick added that
“we want to make sure that our banks prudently evaluate the risk/reward profile
of their lending activities, particularly in light of narrowing credit spreads,
intense competition for earning assets, and evidence that weaker standards have
spilled over into middle market and commercial real estate lending.”
Ms. Dick emphasized that the OCC
will continue to focus supervisory attention and resources to ensure that
credit risk in national banks is appropriately identified and that credit risk
management practices are commensurate with risk levels assumed. Ms. Dick cautioned that banks, when
purchasing large commercial loans originated by others, should conduct an
independent credit analysis to satisfy themselves that the credit exposure is
one that they would assume directly.
With regard to retail lending
trends, Ms. Dick noted that retail credit performance is also sound, but there
is a level of uncertainty associated with future performance of new product
structures, particularly in the residential real estate area. “We will be monitoring the performance of
these unseasoned credits as the structure of these loans has not yet required
borrowers to perform at the higher payment levels associated with the increase
in interest rates over the past year.”
The 2006 survey included the 73
largest national banks that have assets of $2 billion or greater and covered
the 12-month period ending March 31, 2006.
The aggregate loan portfolio of the surveyed banks was approximately $3
trillion and represents approximately 90 percent of all outstanding loans in
national banks.
This Survey of Credit
Underwriting Practices 2006 can be found on the OCC’s Web site at http://www.occ.gov/2006Underwriting/CreditUnderwriting2006.htm.
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The
Office of the Comptroller of the Currency was created by Congress to charter
national banks, to oversee a nationwide system of banking institutions, and to
assure that national banks are safe and sound, competitive and profitable, and
capable of serving the banking needs of their customers in the best possible
manner. OCC press releases and other
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