October 18, 2006
OCC Survey Finds Increased Easing Of Commercial and Retail Credit Underwriting Standards
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.