The Office of Comptroller of the Currency (OCC) recently completed its 18th annual "Survey of Credit Underwriting Practices." The survey seeks to identify trends in lending standards and credit risks for the most common types of commercial and retail credit offered by National Banks and Federal Savings Associations (FSA).  The latter was included for the first time in this year's survey.

The survey covers OCC's examiner assessments of underwriting standards at 87 banks with assets of three billion dollars or more.  Examiners looked at loan products for each company where loan volume was 2% or more of its committed loan portfolio.  The survey covers loans totaling $4.6 trillion as of December 31, 2011, representing 91% of total loans in the national banking and FSA systems at that time.  The large banks discussed in the report are the 18 largest by asset size supervised by the OCC's large bank supervision department; the other 69 banks are supervised by OCC's medium size and community bank supervision department.  Underwriting standards refer to the terms and conditions under which banks extend or renew credit such as financial and collateral requirements, repayment programs, maturities, pricings, and covenants.

The results showed that underwriting standards remain largely unchanged from last year.  OCC examiners reported that those banks that changed standards generally did so in response to shifts in economic outlook, the competitive environment, or the banks risk appetite including a desire for growth.  Loan portfolios that experienced the most easing included indirect consumer, credit cards, large corporate, asset base lending, and leverage loans.  Portfolios that experienced the most tightening included high loan-to-value (HLTV) home equity, international, commercial and residential construction, affordable housing, and residential real estate loans.

Expectations regarding future health of the economy differed by bank and loan products but examiners reported that economic outlook was one of the main reasons given for easing or tightening standards.  Others were changes in risk appetite and product performance. Factors contributing to eased standards were changes in the competitive environment, increased competition and desire for growth and increased market liquidity. 

The survey indicates that 77% of examiner responses reflected that the overall level of credit risk will remain either unchanged or improve over the next 12 months.  In last year's survey 64% of the responses showed an expectation for improvement in the level of credit risk over the coming year. Because of the significant volume of real estate related loans, the greatest credit risk in banks was general economic weakness and its results and impact on real estate values.   

Eighty-four of the surveyed banks (97 percent) originate residential real estate loans.  There is a slow continued trend from tightening to unchanged standards with 65 percent of the banks reporting unchanged residential real estate underwriting standards.  Despite the many challenges and uncertainties presented by the housing market, none of the banks exited the residential real estate business during the past year however examiners reported that two banks plan to do so in the coming year.  Additionally, examiners indicated that quantity of risk inherent in these portfolios remained unchanged or decreased at 81% of the banks.

Similar results were noted for conventional home equity loans with 68% of banks keeping underwriting standards unchanged and 18% easing standards since the 2001 survey.  Of the six banks that originated high loan-to-value home equity loans, three banks have exited the business and one plans to do so in the coming year

Commercial real estate (CRE) products include residential construction, commercial construction, and all other CRE loans.  Almost all surveyed banks offered at least one type of CRE product and these remain a primary concern of examiners given the current economic environment and some banks' significant concentrations in this product relative to their capital.  A majority of banks underwriting standards remain unchanged for CRE; tightening continued in residential construction and commercial (21 percent and 20 percent respectively).  Examiners site cited the distressed real estate market, poor product performance, reduced risk appetite and changing market strategy as the main reasons for the banks net tightening.

Nineteen banks (22 percent) offered residential construction loan products but recent performance of these loans has been poor and many banks have either exited the product or significantly curtailed new originations.

Of the loan products surveyed 17% were originated to sell, mostly large corporate loans, leveraged loans, international credits, and asset based loans.  Examiners noted different standards for loans originated to hold vs. loans originated to sell in only one or two of the banks offering each product.  There has been continued improvement since 2008 in reducing the differences in hold vs. sell underwriting standards and OCC continues to monitor and assess any differences.