Lenders are loosening underwriting standards for nearly every type of credit except for some home equity lines, according to a report issued Thursday by the Office of the Comptroller of the Currency.
The agency said that underwriting eased partly because banks are willing to take on more risk in light of increased competition and high liquidity. Examiners found that among the nation's 86 largest federally-chartered banks and thrifts, standards were tighter for home equity lines but looser for most other products, including credit cards, asset-based lending and leverage loans.
All three of those areas have been cited recently by the OCC in risk reports.
"This year's survey showed a progression toward easing underwriting standards as the economic environment stabilizes," said John Lyons, the OCC's senior deputy comptroller and chief national bank examiner, in a press release. "As banks ease standards to improve margins and compete for limited loan demand, examiners will continue to monitor underwriting standards to ensure they are prudent and are applied consistently regardless of whether loans are underwritten to hold or distribute."
The survey said banks are commonly loosening standards by reducing the collateral requirements on loans as well as covenants and lowering credit score cutoffs.
While most banks reported underwriting standards were unchanged (64% for commercial credit and 68% for retail), about 28% of the banks said they eased standards for commercial credits, which was double that of the responses received in the prior year. That could be a growing concern for the examiners.
"Although traditional credit-risk indicators are stabilizing, loosening underwriting standards in a competitive market generally adds risk back into the system," the study said. "The most important credit-related issue identified by examiners for banks of all sizes is the easing of underwriting standards in response to competitive pressures and a desire to achieve loan growth and increase earnings."
Still, the OCC said in its report "that most banks maintained good or satisfactory adherence to underwriting standards."
The survey reflects on loan portfolios for the 18 months ended June 30 so it does not capture the impact of the new mortgage rules that went into effect this January. Many lenders have argued that mortgage credit will tighten as those rules are fully implemented.
So far, the OCC's survey showed that 76% of the banks reported their underwriting standards for residential real estate did not change from 2012 and only two banks exited the business last year. Examiners also reported that no banks plan to exit the business in the coming year.
Standards have tightened more in 2013 for home equity lines of credit likely because of the aftereffects from the housing market collapse and heightened regulation on such loans, though the survey did not provide a detailed explanation. Two of the four banks that originated high loan-to-value HELOCs in 2012 left the business in 2013 while a third bank told examiners it plans to exit the business this year, the survey said.
"The remaining banks are equally reflecting unchanged or tightened underwriting standards, with no banks easing standards" for high loan-to-value HELOCs, the report said. "Examiners expect the level of risk over the next 12 months to decline or remain unchanged at all banks."
While 70% of examiners said in the report that they expect credit risk overall to remain unchanged or increase in the next year, it is a decline from the 77% of examiners who said the same thing in 2013.
The survey looked at $4.5 trillion in loans, which represents about 87% of the total loans of federally chartered banks and thrifts with assets of more than $3 billion.