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HEL Underwriting Easing at Banks

Banks surveyed about retail, commercial lending

June 29, 2012

By staff

A survey of U.S. banks found that residential mortgages are the most popular type of retail loan that banks like to originate for sale, while home-equity loans wind in their investment portfolios more often than any other retail loan type. The share of banks to ease their HEL standards doubled from the prior year, while the share that tightened home-equity requirements was down by more than half. Indirect retail lending saw similar trends.

All of the banks surveyed underwrote at least one retail loan product. Of the seven retail products included in the survey -- residential loans were the largest. A distant second were HELs.

While there was little change in overall retail underwriting, the 15 percent of respondents that eased retail underwriting did so because of "improving economic trends, problem asset resolution, changes in the competitive environment and product performance."

The report, Survey of Credit Underwriting Practices 2012, was released Thursday by the Office of the Comptroller of the Currency.

The survey reflects data for the 12 months ended Feb. 29 collected from 87 national banks and federal savings associations with assets of at least $3 billion. The surveyed banks included the 18 largest banks.

Residential loans were originated by 97 percent of the banks. Standards were eased by 10 percent of the banks, a little better than the 8 percent that loosened standards in 2011, while a quarter tightened their underwriting requirements, also better than the prior year when 40 percent tightened.

Home-equity lending has become much less stringent, with 18 percent of banks easing their standards versus 9 percent that did so in 2011. The share of institutions that tightened the HEL standards fell to 14 percent from 36 percent.

Lenders that make high loan-to-value HELs were mixed, with 17 percent easing their standards compared to none in 2011 and two-thirds tightening guidelines, up from half.

On direct originations for all types of retail loans, 12 percent of banks eased their lending standards, not much different than in the previous report. No banks tightened direct lending standards, an improvement from 15 percent in 2011.

But on indirect consumer lending, 60 percent of the banks eased lending standards, a much bigger share than the 37 percent that eased standards in 2011. The share of banks that tightened indirect lending standards fell to 5 percent from 16 percent.

More than three quarters of retail products were originated to hold, with HELs at the forefront of this category. The 24 percent originated to sell was dominated by residential real estate loans.

With commercial lending, commercial real estate loans were among loan types that saw the most tightening of underwriting standards. Residential and commercial construction saw the most tightening, while other commercial mortgage standards eased.

"CRE remains a primary concern of examiners given the current economic environment and some banks' significant concentrations in this product relative to their capital," the report stated.

The OCC noted a continued narrowing of the difference in underwriting commercial loans originated for sale versus originated to hold. Originated-to-sell loans accounted for 17 percent of bank commercial loans.

Some easing in overall commercial underwriting standards was noted as a result of changes in the economic outlook, competitive environment and risk appetite.

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