The vast number of poorly underwritten mortgage loans leading up to the crisis caused banks to tighten up their standards and generally make loans only to those borrowers with pristine credit.
In the last few years, however, those tight post-crisis underwriting standards put in place by banks are beginning to relax a bit. The Office of the Comptroller of the Currency’s 22nd Annual Survey of Credit Underwriting Practices, released Tuesday, found that underwriting standards had relaxed for banks and federal savings associations for the fourth consecutive year.
Much like in 2015, residential real estate loans, conventional home equity, commercial real estate loans, and direct consumer loans were among the areas that experienced the greatest amount of change, according to the OCC.
The survey covered the 12-month period ending June 30, 2016, and covers aggregate total assets of $10.2 trillion and $5.2 trillion in gross loans—approximately 90 percent of the loans in the federal banking system (across 93 national banks and federal savings associations), the OCC reported.
“During the 12-month survey period, underwriting practices remained satisfactory. But an increasing tolerance for looser underwriting has resulted in a continued movement from more conservative to more moderate underwriting practices,” said Grace Dailey, Senior Deputy Comptroller and Chief National Bank Examiner. “While this movement is consistent with past credit cycles at a similar stage, credit risk is expected to increase if the trends we see today continue.”
According to the OCC, the easing underwriting standards indicate that banks have a greater risk appetite and a greater desire for loan growth.
“Examiners reported that the leading reasons for eased underwriting practices since the 2015 survey are increased competition, higher credit risk appetites, and perceived improvements in general economic conditions,” the report stated. “Banks generally tighten underwriting practices when the economy contracts and ease underwriting practices when the economy expands. Since 2012, examiners have cited these reasons, along with the existence of abundant market liquidity, for the eased underwriting practices.”
Click here to view the OCC’s complete survey.