December 16, 2014
Underwriting Standards Continue to Ease, OCC Survey Shows
WASHINGTON — The Office of the Comptroller of the Currency’s 20th Annual Survey of Credit Underwriting, released today, shows a third consecutive year of underwriting standards easing within both commercial and retail products.
“This year’s survey showed a continued easing in underwriting standards, with trends very similar to those seen from 2004 through 2006,” said Jennifer Kelly, Senior Deputy Comptroller for Bank Supervision Policy and Chief National Bank Examiner. “As banks continue to reach for volume and yield to improve margins and compete for limited loan demand, supervisors will focus on banks’ efforts to maintain prudent underwriting standards, monitor portfolio credit risk, and reduce exceptions to policy.”
The underwriting survey showed national banks and federal savings associations (banks) continued to adapt to changing economic conditions and competition by adjusting underwriting. Examiners noted that banks have eased underwriting standards and increased levels of credit risk in response to competitive pressures, abundant liquidity, and desire for yield in the low interest-rate environment. Large banks, as a group, reported the highest share of eased underwriting standards. Leveraged loans, indirect consumer, credit cards, large corporate loans, and international loans experienced the most easing in standards and continued the trend from last year.
Examiners also noted increasing policy exceptions centered in commercial products. The combination of increasing policy exceptions and easing underwriting standards can layer risk into loan portfolios that only surfaces during times of stress. Boards of directors and senior management should consider carefully the impact of the changing mix of more aggressively underwritten loans on the quality and volatility of performance in their loan portfolios.
Banks should properly control the credit risks in underwriting, loan structures, and loan administration, as competition and the anxiety for income can lead to heightened risk. This pressure is especially notable for loan products that have already seen easing, such as leveraged lending, indirect consumer lending, and credit cards.
The survey is a compilation of examiner observations and assessments of credit underwriting standards. The 2014 survey included 91 of the largest national banks and federal savings associations and covers the 12-month period ending June 30, 2014. The survey covered loans totaling $4.9 trillion representing approximately 94 percent of all loans in the federal banking system.