OCC: Underwriting Standards Ease, Credit Risk Grows

Credit risk for both retail and commercial loan products has increased over the past three years and is expected to continue rising in 2016, according to the OCC’s annual Survey of Credit Underwriting Practices. The increase was seen primarily in commercial loan products — 30 percent of commercial loans reflected increased risk, up from 27 percent in 2014 — with retail loan products also seeing a 2 percent increase in risk from 2014.

The increase in credit risk has been accompanied by a steady easing of underwriting standards over the past several years for both commercial and retail products, the report said, adding that the current environment reflects trends in underwriting standards similar to those seen just prior to the financial crisis in 2008.

However, rising credit risk in the commercial portfolio appears to have slowed the trend toward easing standards. A net 24 percent of examiners reported easing, down from the net 29 percent in 2014. Easing of underwriting standards for retail loans accelerated — a net 26 percent of examiners reported more relaxed standards compared to 12 percent in 2013 and 2014.

While net easing was reported across most loan categories, it was significantly less pronounced in leveraged lending — a focus of regulatory scrutiny. For the third straight year, no examiners reported easing on high loan-to-value home equity loans. Underwriting standards on commercial real estate loans for residential construction remained unchanged.

Increased competition was overwhelmingly cited as the main reason for relaxed underwriting standards — more than 90 percent of examiners cited competitive pressure as a reason for easing on commercial loans and more than 70 percent said the same for retail loans. The OCC also said that its examiners “largely noted good or acceptable adherence to underwriting standards,” with policy exemptions “adequately documented and approved for most products.”


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