A survey of 95 national banks and federal savings associations revealed overall on average, those institutions have eased their underwriting standards for the third consecutive year, according to a report from the Office of the Comptroller of the Currency (OCC).
The 21st annual Survey of Credit Underwriting Practices conducted by the OCC showed that underwriting standards at those 95 institutions had not only eased during the period of 2013 to 2015, but reflected trends similar to those seen from 2005 to 2007 immediately prior to the crisis. The survey results cover the 12-month period ending June 30, 2015, and covers loans totaling $5.1 trillion, or about 94 percent of all loans in the federal banking system, according to the OCC.
The survey found that due to the easing underwriting standards, the level of credit risk that came with the loans had increased significantly. A significant share of commercial and real estate loan products reflected increased risk from 2014, according to the OCC—and examiners expect both portfolios to see increased levels of risk over the next 12 months.
“We are seeing trends very similar to those that examiners reported just prior to the most recent financial crisis,” said Jennifer C. Kelly, Senior Deputy Comptroller and Chief National Bank Examiner. “With credit risk on the rise, OCC examiners will remain focused on evaluating new loan originations to assess banks’ and federal savings associations’ efforts to maintain prudent underwriting standards and practices through this stage of the credit cycle.”
Seven categories were included when calculating underwriting standards for retail products: Affordable housing, conventional home equity, credit cards, direct consumer lending, high loan-to-value home equity, indirect consumer lending, and residential first mortgages. From 2014 to 2015, the percentage of banks surveyed that eased their underwriting standards across the seven retail products categories jumped from 22 percent to 27 percent (the highest level since 2006) while the share of banks that tightened underwriting standards tumbled from 10 percent in 2014 to1 percent in 2015, according to the OCC.
In residential real estate lending, the share of banks that eased underwriting standards rose from 10 percent in 2014 up to13 percent in 2015, while the share that tightened underwriting standards plummeted from 20 percent in 2014 to 6 percent in 2015.