If banks do not closely watch their home equity lending standards, they could face the same problems as the troubled finance companies in the sector, the OCC says.

"Banks need to grow responsibly, or we'll all be in the subprime business some day," said David D. Gibbons, deputy comptroller for credit risk at the Office of the Comptroller of the Currency. He spoke this week at the Consumer Bankers Association's annual home equity conference here.

A recent OCC survey found that banks have tightened loan standards in all consumer sectors except home equity lending. They have relaxed loan-to- value ratios, reduced prices, and extended the life of loans in the latter category.

There's a risk that banks could be "drifting into subprime lending without knowing it," Mr. Gibbons said.

In addition, banks that have consciously made an effort to extend credit to consumers with poor payment histories "have to ask themselves honestly why they are doing it," he said.

If banks are expanding subprime lending solely to reap high yields or to keep up with the competition, "they are going to be in trouble," Mr. Gibbons said. "Are you trying to help people repair poor credit, or are you just taking product from poor debt managers?" he asked the bankers in attendance.

Nonbank lenders, which suffered this year when Wall Street shied away from the sector, created a "self-fulfilling prophecy" when they "let income drive their underwriting," Mr. Gibbons said.

Overburdened consumers are "not your friend, and they're not good for the nation's economic welfare," he said.

The OCC study found that seven of 10 consumers who take out high-loan- to-value second liens in order to consolidate their credit card debt are "severely" reloading their cards, Mr. Gibbons said.

Several regulatory agencies, including the OCC, are developing subprime lending guidelines for banks, Mr. Gibbons said, and these will be released within months.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.