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U.S. Comptroller Warns Banks of Risks From Sub-par Underwriting Standards

several-banksCareless underwriting standards is causing an influx of credit risk in bank lending portfolios, which could be a huge mistake for these lenders over the long-term.

The Office of the Comptroller of the Currency (OCC), supervisor of the national banks and federal saving institutions, released its semi-annual Risk Perspective report on Wednesday, pointing out the growing risks among banks.

In a clear warning, Thomas J. Curry, Comptroller of the Currency said, "In the area of credit risk, the warning lights are flashing yellow. Regulators and bank management need to act now to prevent those risks from becoming reality. We can’t afford to wait until the warning lights turn red."

The Comptroller emphasized in his prepared remarks for a conference call about the report  that jeopardizing "sound underwriting" by offering loans to just about anyone is not the route banks should take to grow their business.

"As the economic cycle turns, we see banks and thrifts reaching for yield and growth, sometimes extending their reach at the expense of sound underwriting, strong risk management, and adequate loan loss provisioning. OCC examiners will be paying close attention to each of those areas in the coming months," Curry stated.

He also suggests that banks should compete responsibly in terms of their boosting their business as the pool of creditworthy borrowers shrinks and other investments remain limited in the low-interest rate environment.

In order to fight these adverse conditions, the OCC points out that banks in their entire portfolio have "relaxed underwriting standards, layered risks in consumer and commercial lending products, and accumulated concentrations, particularly in commercial real estate," therefore growing risk.

Underwriting standards have fallen for the third consecutive year, according to the OCC.

"Generally, we are seeing banks continue to make concessions on pricing, weaker or non-existent loan covenants, and maturities lengthening. We have also seen increases in underwriting exceptions and risk layering. All of which combine to introduce risk at origination. Bankers with long memories will remember the worst loans are made in the best of times, and the growing credit risk in their banks should be managed very closely," Curry noted.

The Comptroller also mentioned that they expect banks to assess their own interest rate risk exposure, particularly among the potential-slowing of large deposit growth.

"Where depositors sought shelter from the storm, they may also seek to take advantage of rising rates. Banks should consider the long-term implications to earnings and capital in strategic planning when assessing their exposure to changes in interest rates," he stated.

Nondepository lending has also rose more than 217 percent over the last three years to a total growth amount of $53.8 billion over the last year. The OCC says "risk from these loans can be highly correlated to the banks’ risk and lead to concentrations."

"Banks and thrifts can remain relevant and thrive in meeting the needs of the customers, communities, and businesses that depend upon them, but they must manage change carefully," the OCC said.

Click here to view the complete report.
Click here to view Comptroller of the Currency Thomas J. Curry's Remarks.

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