OCC: Underwriting Standards Relax as Credit Risk Increases

Underwriting standards for both retail and commercial loan products have eased for the fourth consecutive year as banks continue to respond to competitive pressure, grow their portfolios and increase their appetite for risk, the OCC said in its 22nd annual Survey of Credit Underwriting Practices.

While underwriting practices remain generally satisfactory, the OCC found that underwriting eased in 28 percent of banks offering commercial loans and 28 percent of banks offering retail loans. For commercial loans, easing was observed in pricing (with 62 percent reporting easing in that area) and guarantor requirements (42 percent). Banks also relaxed loan covenants for commercial loans, with 40 percent reporting easing, up significantly from 14 percent in 2015. For retail credit products, banks said they eased collateral requirements most — with a net 53 percent reporting easing, compared with 39 percent last year.

Double-digit increases in easing were seen in several loan categories, including consumer, home equity, commercial construction and residential real estate loans, and continued expansion in these product lines could accelerate the credit risk increase, the OCC noted.

Along with the relaxing of underwriting standards, credit risk has also increased since the previous year’s survey, and is likely to continue rising over the next year. The OCC identified several factors contributing to the rise, including growing concentrations in CRE, C&I and indirect consumer lending portfolios, volatile commodity prices, increasing competition, and quality of the administration of leveraged lending portfolios.

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