Lending standards slip, risk increasing according to OCC

Lending standards continue to relax, according to data from the OCC’s 2014 Survey of Credit Underwriting Practices. This type of easing is similar to that experienced between 2004 and 2006, the time period leading up to the financial crisis, which many attribute to inadequate lending standards.

Source: OCC 2014 Survey of Credit Underwriting Practices, December 2014.

This is the third year in a row the OCC has reported a decrease in underwriting standards for commercial and retail loans. The report suggested this easing is in large part due to banks’ interest in increasing both volume of loans in their portfolios as well as yield on those loans.

The survey assessed 91 banks and their lending standards and credit risk for the most common types of commercial and retail credits.
Concentrations that showed the most significant signs of easing include leveraged loans, indirect consumer, credit cards, large corporate, and international loans, cited the report. The survey also showed an increase in policy exceptions for commercial and retail portfolios.

In addition to standards, the survey also captured credit risk levels at the institutions to show relation between risk and standards. The OCC found that commercial loans evaluated within the survey had an increased risk level, compared to 2013. Twenty-seven percent of loans, compared to 2013’s 19 percent, showed signs of increasing risk.

While the survey results may seem like a clear sign we are heading into dangerous lending territory, it is also possible that the “easing” is the result of credit tightening or over-regulation immediately following and because of the recession.

To prevent this easing from going too far, the OCC acknowledged in the report that they will continue to focus supervisory efforts, including examination time, to “new product portfolios” – instances where banks are offering new loan types or industry concentrations – and portfolios that are growing significantly in size.

Given the cautionary tone of the report, banks can take precautionary measures to ensure they avoid the crisis of 2008. To continue growing the portfolio, banks may need to expand into new product lines. But they can avoid some of the growing pains through proper credit procedures, training and prudent business development practices.

For more information on growing the portfolio while enhancing credit quality, download this whitepaper: Enhancing Credit Quality.