Ludwig Plans Crackdown On Looser Underwriting

Despite repeated warnings from regulators, banks continue to underprice loans and give borrowers too much leeway, says Comptroller of the Currency Eugene A. Ludwig.

"Over the past year, underwriting standards have continued to loosen in most lending categories," according to a speech Mr. Ludwig was scheduled to deliver Sunday at the annual convention of the American Bankers Association in Boston.

"The trend is particularly pronounced in commercial lending, but there has also been some loosening in segments of the retail market," Mr. Ludwig said in his prepared remarks.

Explaining that he is "uneasy about the near future of the banking system," Mr. Ludwig was to announce that examiners will:

Review underwriting standards with senior management at every national bank.

Discuss with chief executives any loans that demand their personal attention.

Evaluate whether banks have enough staff to handle problem loans.

The comptroller was set to underscore his concern with new data from Loan Pricing Corp. showing unrated and non-investment-grade syndicated credits made up 54% of the market at midyear, up from 35% at yearend 1993.

Further, bankers are charging comparatively less for riskier loans, the data showed. The price spread between BB-rated and AA-rated credits had narrowed to 48 basis points at midyear, from 77 basis points in the first half of 1991-a 40% drop.

The repayment periods for these large syndicated loans are lengthening, too.

Retail trends are similar, with consumer debt on the upswing. For instance, consumer debt service payments as a percentage of personal income are nearing the levels of the 1980s, Mr. Ludwig was to note.

While bankers have tightened credit card lending standards in response to increasing delinquencies and losses, Mr. Ludwig was to say the effort has been undermined by easing the terms for home equity and residential real estate loans.

Mr. Ludwig, along with other regulators, has been harping on sloppy underwriting standards since late 1994.

The OCC in August issued an advisory on the perils of dwindling loan loss reserves. Since last December, Mr. Ludwig at various times has warned about the deteriorating quality of affordable mortgage portfolios, the growing credit risks at community banks, and loose conditions on syndicated loans.

Also in Boston Sunday, Federal Reserve Board Chairman Alan Greenspan was expected to reiterate his plea that the government "move with caution" in removing the legal barriers between commerce and banking. Rapid technological change makes predicting the future of financial services too difficult, according to Mr. Greenspan.

"If we act too quickly, we run the risk of locking in a set of inappropriate rules that could adversely alter the development of market structures," he was to say.

Andrew C. Hove Jr., acting chairman of the Federal Deposit Insurance Corp., planned to dismiss recent calls by large banks and some regulators to scale back deposit insurance.

"Large banks benefit from that safety net along with small banks-money- center banks along with community banks-in fact, everyone in the economy," he said.

Nevertheless, the FDIC will host a symposium in January on deposit insurance reform ideas.

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