In its semiannual report last month, the Office of the Comptroller of the Currency (OCC) noted that the banking industry has loosened its standards for underwriting loans, bolstering the credit risk for financial institutions. While an increase in risk might be a red flag to the regulatory agencies, the reason many banks, particularly smaller institutions, have lowered their underwriting standards for auto, home or commercial real estate loans is simply to be able to compete in the changing industry. The rise of online lenders paired with low interest rates nationally has left some financial institutions hungry to bring in new loan customers.
Regardless of the rationale for loosening loan underwriting standards, this remains an area in which federal examiners are watching closely. Results from the 2015 Sageworks Bank & Credit Union Examination survey cited that given the role of credit underwriting and administration in maintaining asset quality and in ensuring the bank’s sound ﬁnancial condition, these areas received scrutiny from examiners from each regulatory agency.
Of the 175+ financial institutions polled, one out of every five institutions polled received criticism for their credit underwriting practices, including four percent that were required to take some action in advance of their next exam. Respondents mentioned risk-rating criteria and the analysis of cash ﬂow as areas that were most criticized by their respective regulatory agencies.
Credit administration practices were criticized slightly more frequently than credit underwriting. Almost one-quarter of institutions reported being criticized, but only 6 percent of those were required to take action related to credit administration practices. Documentation and organization came up repeatedly in respondents’ open-ended comments about exams and advice for their peers.
One NCUA-regulated credit union noted how important it is to instill a solid credit risk culture during the entire loan process. “Have a good policy and if a loan officer goes outside the policy, make sure he/she has approval and documentation from supervisor.”
A Federal Reserve-regulated institution also commented that specific loan areas were of importance in their most recent exam. “Concentration and CRE risk is still important to the regulators. Make sure you understand the risks in your portfolio and are able to articulate your processes and procedures to measure, monitor and control these risks,” the bank remarked.
Documentation was also noted as a primary reason for criticism. One OCC-regulated bank offered this blunt word of advice: “Be sure to fully document your files. If it’s not in the file or documented, it did not happen.”
If your institution was like those that Sageworks surveyed and received some criticism on loan underwriting or administration, transitioning to an automated solution may be beneficial in advance of your next exam. The value of automating the loan administration process extends beyond process efficiencies, and can even have lasting impacts by improving institutional risk management.
To learn more about the survey or to take a peek at peer institutions’ latest examination experience, download the full survey report.