More banks are easing their underwriting
standards as they adapt to changing economic conditions and competition the
Office of Comptroller of the Currency (OCC) said today as it released results
of its 19th Annual Survey of
Credit Underwriting. Banks are relaxing underwriting for both
commercial and retail products, with large banks as a group reporting the
highest share of eased standards. Some loan products, such as home equity loans, instead saw tighter standards.
The survey, a compilation of
examiner observations and assessments, included 86 of the largest national
banks and federal savings associations and covers the 18-month period ending
June 30, 2013. The survey covered loans totaling $4.5 trillion
representing approximately 87 percent of total loans in the national bank and
federal savings association system. Eleven
categories of commercial lending were addressed and seven categories of retail
products including residential first mortgages, affordable housing, and both
conventional and high loan-to-value (LTV) home equity lending.
OCC said its examiners reported banks'
increasing risk appetite and greater market liquidity were factors that
contributed to easing standards with indirect consumer products, large
corporate loans, credit cards, asset-based lending, international lending, and
leveraged loans benefiting most. Despite
their conclusions about easing, examiners reported that most
banks maintained good or satisfactory adherence to underwriting standards.
Seventy-eight or 91 percent of the
surveyed banks originated residential real estate loans and 76 percent reported
their residential lending standards were unchanged. Eleven percent said their standards had eased,
up from 10 percent in 2012, while 13 percent said they had tightened requirements
compared to 25 percent in the previous survey and 40 percent in 2011.
Examiners reported that the level of
risk in loan portfolios had decreased or remained unchanged at 87 percent of
the banks. OCC notes that although the
housing market has experienced a noticeable recovery since the last survey two
banks had exited the residential real estate business but none of the remaining
banks indicated they planned to do so in the coming year.
Conventional home equity lending moved a
bit in the opposite direction, with loosening of standards reported at 5
percent of banks and tightening at 22 percent while 73 percent reported no
change. However, in 2012 standards were
eased by 18 percent and only tightened by 14 percent.
It was high LTV home equity lending
which saw the most tightening. In 2012
standards were eased at 17 percent of institutions; in the most recent survey
no institutions reported relaxing lending standards. Instead they were tightened by 50 percent
(down from 66 percent) and unchanged at 50 percent (compared to 17 percent in
the previous survey).
"This year's survey showed a
progression toward easing underwriting standards as the economic environment
stabilizes," said John Lyons, Senior Deputy Comptroller and Chief National Bank
Examiner. He went on to indicate "that as banks ease standards to improve
margins and compete for limited loan demand, examiners will continue to monitor
underwriting standards to ensure they are prudent and are applied consistently
regardless of whether loans are underwritten to hold or distribute."
The survey indicates that 70 percent of examiners responding expect
that the overall level of credit risk will either remain unchanged or increase
over the next 12 months, a decline from last year's survey, which indicated
that 77 percent of examiner responses showed an expectation for no change or an
increase in the level of credit risk over the next 12 months. Where examiners
expect risk to increase they based their responses on expectations of changes
in the state of the economy and continued strong competition.
Underwriting standards, as presented in this report, refer to
the terms and conditions under which banks extend or renew credit, such as
financial reporting and collateral requirements, repayment programs, terms,
pricing, and covenants. A conclusion
that underwriting standards for a particular loan category eased or tightened
does not necessarily indicate an adjustment in all of the standards for that
particular product but an easing or tightening of the aggregate conditions
under which banks extended credit.