December 9, 2015 / 7:07 PM / 4 years ago

U.S. banks ease underwriting standards, increase risky loans: federal survey

WASHINGTON (Reuters) - U.S. banks loosened their loan underwriting standards and took on more credit risk this year, the Office of the Comptroller of the Currency said in a report on Wednesday that revealed lending trends similar to those in the years leading up to the financial crisis of 2007 through 2009.

A picture illustration shows U.S. 100 dollar bank notes taken in Tokyo August 2, 2011. REUTERS/Yuriko Nakao

“Similar to pre-crisis surveys, the 2015 survey reflects that many banks are pursuing portfolio growth and yield by loosening underwriting standards. Credit risk is increasing because of these trends,” according to the report, which covered the 12 months ending on June 30.

Specifically, the report found that underwriting standards for retail loans eased in 27 percent of the major banks surveyed, the highest level since 2006 and the third year in a row of banks loosening their standards.

The less stringent standards were mostly tied to indirect loans and credit cards and could be seen in changes to credit lines, pricing, fees, debt-to-income ratios, scorecard cutoffs and documentation requirements, according to the OCC.

Commercial underwriting standards eased in 30 percent of the 95 major banks surveyed and only tightened in 6 percent. The weaker standards were mainly for commercial real estate, construction, asset-based, leveraged and large corporate debt.

Real estate is also affecting the risks that banks take in commercial lending.

The OCC found credit risk increased primarily on the commercial side, with 30 percent of commercial loan products showing higher risk as banks confront growth in construction loans, uncertain collateral valuations, and slow recovery in some residential markets. The office’s examiners expect credit risk to increase in 50 percent of commercial loan products over the next 12 months.

“Examiners reported similar year-over-year increases in commercial and retail credit risk in the 2006 survey despite the relatively low level of problem assets and losses at that time,” according to the OCC.

Credit risk rose in only 16 percent of retail products in this year’s survey.

Overall, banks’ primary reasons for making riskier loans included growth in lending along with easing underwriting standards, strong competition, expected changes in interest rates, and other economic factors, the OCC found.

Each year, the office assesses the underwriting standards at banks with assets of $3 billion or more and the survey covered loans totaling $5.1 trillion, representing 94 percent of total loans in the federal banking system.

Reporting by Lisa Lambert; Editing by Diane Craft

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