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Regulator Reports Underwriting Standards Continue to Slip Even as Credit Risks Increase

Comptroller of the Currency Cites Commercial Real Estate Lending as Area of Concern
December 21, 2016
The Office of the Comptroller of the Currency (OCC) is again raising concerns over easing loan underwriting practices among national banks and federal savings associations even as credit risks increase.

The OCC’s 22nd Annual Survey of Credit Underwriting Practices issued this week and covering the 12-month period ending June 30, 2016, found that lenders eased underwriting standards for a fourth consecutive year.

"An increasing tolerance for looser underwriting has resulted in a continued movement from more conservative to more moderate underwriting practices,” notes Grace Dailey, senior deputy comptroller and chief national bank examiner. "While this movement is consistent with past credit cycles at a similar stage, credit risk is expected to increase if the trends we see today continue.”

Examiners viewed the quantity of credit risk as having increased this year in 40% of banks with commercial loan products. That is expected to grow in the next 12 months to 52%.

However, the OCC also noted that excessive credit risk is a concern in only a small number of banks -- just 6% of banks with commercial products.

In identifying slipping underwriting standards, examiners noted more aggressive growth rate assumptions, weaknesses in concentration risk management, deterioration in the credit worthiness of energy-related portfolios, and the continued general easing of underwriting practices among lenders.

Concerns related to aggressive growth were notably prevalent within commercial real estate lending, the OCC report noted.

Banks surveyed for the report appear to be aware of the growing credit risks. Fewer banks eased up this year than in the previous two years. About 26% of banks said they eased CRE lending, a 36% decrease from each of the last two years. About 6% of banks said they tightened up their CRE underwriting, an increase of 2% from the previous year.

About 39% of banks reported risks in CRE lending increased “somewhat” this year, and 58% expected them to increase next year. By way of comparison, those are essentially the same results from the OCC surveys undertaken in 2007 just before loosened lending standards contributed to the Great Recession.

The annual survey is a compilation of examiner observations and assessments of credit underwriting standards and practices at 93 of the largest national banks supervised by the OCC. The survey covers loans totaling $5.2 trillion, representing 90% of all loans in the federal banking system.

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