ractices
Report on Underwriting Practices
Federal Deposit Insurance Corporation
Donna Tanoue, Chairman
HIGHLIGHTS
l
During the six months ending September 30, 1999, the proportion of banks that loosened underwriting prac-
tices since the previous examination was about the same as the proportion that tightened them (5 percent).
l
The frequency in risky underwriting practices for new lending in general was essentially unchanged during the
six months ending September 30, 1999 compared with the six months ending March 31, 1999.
l
In addition, the potential risk associated with current underwriting practices was also about the same during
the two reporting periods.
l
The frequency of specific risky underwriting practices within the major loan category of agriculture increased
during this reporting period compared with the previous reporting period because of a rise in the level of car-
ryover debt since the previous examination.
l
Likewise, the frequency of specific risky underwriting practices within the major loan category of credit cards
also increased during this reporting period compared with the previous reporting period.
GENERAL UNDERWRITING TRENDS
During the reporting period April 1, 1999, through
September 30, 1999, examiners indicated that 89 percent
of FDIC-supervised banks showed no material change in
underwriting practices since the previous examination.
The proportion of banks that loosened underwriting prac-
tices since the previous examination was about the same as
the proportion that tightened them (5 percent). Examiners
indicated that the two main reasons for tighter underwrit-
ing practices were a change in the bank’s management and
a response to examiners/regulators.
During the six months ending September 30, 1999,
examiners reported that the frequency in risky underwrit-
ing practices for new lending in general was essentially
unchanged compared with the previous reporting period of
the six months ending March 31, 1999. In addition, the
potential risk associated with current underwriting prac-
tices was also about the same during the two reporting
periods. For example, the percent of FDIC-supervised
banks with “high” risk in current underwriting practices
equaled 4 percent (up slightly from 3 percent previously).
The table at the back of this report shows the weighted
responses for 5 reporting periods beginning with the six
months ending September 30, 1997 through the current:
the six months ending September 30, 1999. Highlights of
the results for “General Underwriting Practices” and “Risk
in Current Practices” are below:
l
Four percent had “high” risk associated with loan
growth and/or significant changes in lending activities
since the previous examination (unchanged from the
previous period); 29 percent had “medium” risk (also
unchanged); and 54 percent had “low” risk associated
with loan growth and/or significant changes in lend-
ing activities since the previous examination (down
slightly from 55 percent). Thirteen percent showed
insignificant changes in loan growth since the previ-
ous examination.
l
Four percent had “high” potential credit risk in their
current loan portfolios, (up slightly from the 3 percent
during the previous reporting period). Twenty-nine
percent had “medium” risk (down slightly from 30
percent previously); 67 percent had “low” risk during
both periods.
l
There was a slight increase in the potential risk in
underwriting practices associated with loan participa-
tions purchased by the institution. Only 2 percent had
“high” risk (up slightly from 1 percent during the pre-
vious reporting period); 21 percent had “medium”
potential risk (up from 19 percent previously); and 77
percent had “low” (down from 80 percent previously).
One-third of the banks examined during the reporting
period did not purchase loan participations.
l
The proportion of FDIC-supervised banks that made
loans resulting in high concentrations of loans to one
borrower or to one industry “commonly or as standard
procedure” equaled 8 percent (up slightly from 7 per-
cent during the previous reporting period). The pro-
portion that did so “frequently enough to warrant
notice” also inched up to 14 percent from 13 percent
previously and 79 percent did so “never or infre-
quently” (down from 80 percent previously).
l
The potential credit risk associated with loan adminis-
tration worsened slightly compared with the previous
reporting periods. Five percent had “high” potential
credit risk during both periods. But 32 percent had
“medium” (compared with 31 percent previously) and
Division of Research and Statistics
Virginia Olin (202) 898-8711
Internet address: World Wide Web, www.fdic.gov.
Division of Supervision
Robert W. Walsh (202) 898-6911 63 percent had “low” potential credit risk associ-
ated with loan administration (down from 65 per-
cent previously).
Of the 1,227 banks examined, few used a credit
scoring model for credit decisions (204). The model
was used most frequently for consumer installment
lending (125).
INDIVIDUAL LOAN CATEGORIES
Responses during this reporting period show that
1,027 of the 1,227 banks examined were active busi-
ness lenders; 955 banks were actively making con-
sumer loans (excluding credit cards); and 803 banks
were actively making commercial (nonresidential)
real estate loans. Twenty-three banks were not active
in any of the major loan categories covered. The
number for other loan categories is shown in the
accompanying chart. Only 291 banks examined had
activity in additional loan categories, mainly in dealer
paper loans (140).
The frequency of specific risky underwriting prac-
tices increased from the previous reporting period in
two major loan categories: agriculture and credit card.
In the remaining loan categories, the frequency of spe-
cific risky underwriting practices in major loan cate-
gories decreased or remained the same. Examiners
occasionally commented that some lenders lacked
proper loan documentation across loan categories and
that some lenders were making character-based loans
(loans based on the lending officer’s personal knowl-
edge of the borrower). In general, examiners were not
concerned about the quality of such loans.
Agricultural Loans
Examiners noted increases in FDIC-supervised
banks’ level of carryover debt during the reporting
period. They also continued to monitor the extent to
which banks’ agricultural loan portfolios were tied to
major crops affected by the Federal Agricultural
Improvement and Reform Act of 1996.
1
However, in
mid-October, the President signed an emergency
package for farmers (the Agriculture, Rural
Development, Food and Drug Administration, and
Related Agencies Appropriations Act, 2000). As
designed by Congress, within two weeks of the
President’s signature the $8.7 billion aid package will
deliver $5.5 billion to farmers. With these payments,
farmers are expected to repay bank loans.
l
Thirty-seven percent of the FDIC-supervised
banks active in agricultural lending showed a
“moderate” increase in the level of carryover debt
(up from 29 percent during the previous reporting
period) and 5 percent showed a “sharp” increase
(up from 3 percent previously). Examiners com-
mented about continued low crop and livestock
prices that could translate into sharp increases in
the level of future carryover debt.
l
Twenty-three percent of the FDIC-supervised
banks active in agricultural lending had portfolios
tied to crops affected by the phaseouts “frequent-
ly enough to warrant notice” during both report-
ing periods. But, 22 percent were affected by the
phaseouts “commonly or as standard procedure”
(up from 18 percent previously).
Credit-Card Loans
Examiners reported an increase in the frequency of
specific risky underwriting practices in credit-card
lending and credit-card portfolios during the six
months ending September 30, 1999. For example, of
the FDIC-supervised banks active in credit-card lend-
ing,
Report on Underwriting Practices
2
September 1999
Total number of banks: 1227.
Business
Consumer
Nonresidential
Construction
Agricultural
Home Equity
Credit Card
None of
the Above
0
200
400
600
800
1,000
1,027
955
803
598
548
439
182
23
Number of Banks Actively Making Loans by Loan Type
Responses Received: 4/999/99
3/98
9/98
3/99
9/99
0
10
20
30
40
10
24
29
37
Proportion
Agricultural Loans
Proportion of FDIC-Supervised Banks Having a Moderate
Increase in Carryover Debt (Six-Month Period Ending . . . )
1
In contrast to previous law, which allowed traditional subsidies
tied to prices and limits on production, this law allowed declining pay-
ments to farmers until the year 2002 for certain crops. September 1999
3
Report on Underwriting Practices
l
Three percent had “high” risk in current under-
writing practices for new credit card loans (up
from 1 percent during the previous period); 24
percent had “medium” risk (down slightly from
25 percent previously); and 73 percent had “low”
risk (down slightly from 74 percent previously).
l
Three percent had “high” risk in their current loan
portfolios (up from none previously); 23 percent
had “medium” risk (down from 24 percent previ-
ously); and 74 percent had “low” (down from 77
percent previously).
l
Ninety-four percent had no changes in underwrit-
ing practices for new credit-card loans since the
previous examination (up from 91 percent previ-
ously).
l
One percent had “substantially” loosened under-
writing practices since the previous examination,
2 percent had “moderately” loosened them, 1 per-
cent had “substantially” tightened them, and 3
percent had “moderately” tightened them.
Business Loans
Examiners review underwriting practices for busi-
ness loans to ensure that each borrower’s financial
strength and source of repayment are taken into
account. With asset-based loans, examiners review
practices to verify that the bank monitors the collater-
al pledged. Within business len