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.