Banks Already Relapsing to Pre-Crisis Ways, OCC Says

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WASHINGTON — Lenders are moving too quickly to return to the loose underwriting standards that caused the housing crisis, according to a report released Tuesday by the Office of the Comptroller of the Currency.

The report, which looked at $4.9 trillion in loans for the year ended June 30, found that lenders continued to loosen underwriting standards for the third consecutive year across all types of loans but especially in the commercial lending, including leveraged loans.

Examiners are increasingly concerned about the risk banks are taking on, particularly the largest banks, in an effort to compete in a low interest rate environment.

"This year's survey showed a continued easing in underwriting standards, with trends very similar to those seen from 2004 through 2006," said Jennifer Kelly, senior deputy comptroller for bank supervision policy and chief national bank examiner, in a press release. "As banks continue to reach for volume and yield to improve margins and compete for limited loan demand, supervisors will focus on banks' efforts to maintain prudent underwriting standards, monitor portfolio credit risk, and reduce exceptions to policy."

The report looked at 91 banks and thrifts with at least $3 billion in assets but noted that the largest banks have eased underwriting standards the most. Standards were also notably looser with leveraged loans, indirect consumer loans, credit cards, large corporate and international loans, as well as some commercial real estate loans.

"Examiners also noted increasing policy exceptions centered in commercial products. The combination of increasing policy exceptions and easing underwriting standards can layer risk into loan portfolios that only surfaces during times of stress," the OCC said. "Boards of directors and senior management should consider carefully the impact of the changing mix of more aggressively underwritten loans on the quality and volatility of performance in their loan portfolios."

Within commercial lending, the study said 34% of banks surveyed had eased underwriting standards. It was the highest level seen in recent years when compared to 14% and 28% of the banks loosening standards in 2012 and 2013, respectively. A mere 5% of the banks surveyed had tightened commercial standards this year, which was the lowest level since 2006.

Pricing was the biggest way lenders loosened standards in commercial loans, "indicating that competition for yield in the current low-rate environment contributes to eased standards," the OCC said in its study. Risk in commercial lending was also up by 27% compared to 19% in 2013.

"Over the next 12 months, examiners expect credit risk will increase for almost half (46 percent) of commercial loan products," the report said.

As for retail loans, 22% of the banks surveyed had loosened standards in 2014, which was the same level as 2013. Lenders were largely changing collateral requirements in credit cards and indirect consumer loans as a means to loosen underwriting. Lower pricing and debt service requirements were a secondary factor used to loosen standards. OCC examiners identified credit risk in 14% of the retail loans in 2014, which was level with the previous year.

However, the OCC said it expects credit risk to increase in 27% of the retail products during the next year because of continued loan growth, competition and changes in interest rates, among other factors.

"In light of loosened standards, supervisory efforts will continue to focus on new product portfolios and those with increasing loan volumes," the report said.

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