Time period: These results cover reports filed between April 1, 1996 and September 30, 1996
Charter-types: 89 percent of the institutions were state-chartered commercial banks and 11 percent were state-chartered savings banks.
Size distribution of institutions included: 3 percent over $1 billion in assets, 29 percent with assets greater than $100 million but less than $1 billion, and 68 percent with assets less than $100 million.
Proportion of the industry covered (as of March 31, 1996): for BIF-insured members -- 6 percent of assets and 13 percent of institutions; for SAIF-insured members -- 3 percent of assets and 4 percent of institutions.
During the six months ending September 30, 1996, 90 percent of the
reports from examination sites showed no material change in
underwriting practices. The remaining reports were balanced
between 5 percent reporting tighter practices and 5 percent
reporting looser practices.
The overall level of riskiness of current lending practices was
rated as above average at 12 percent of the banks examined.
The effects of farm subsidy phaseouts were raised as a potential
concern at many banks active in agricultural lending; among banks
active in credit-card lending, few potential problems were noted.
Purpose and Design of the Report
Beginning in early 1995, the FDIC instituted a system to report
on the riskiness of current underwriting practices at the
conclusion of each bank examination it conducts. Those banks
examined are primarily small, state-chartered depository
institutions. The first results were published in April 1996.
This report covers responses during the six-month period from
April through September 1996.
By systematically collecting observations from examination sites,
the survey is designed to provide an "early-warning" mechanism
for identifying potential lending problems. The primary source
of information on trends in credit quality problems--the
institutions' "Call Reports"--only provides information after
loans become troubled. Another goal of the survey is to
establish a benchmark, during a period of relative economic
stability, against which to compare future reports about
The survey focuses on three topics: material changes in
underwriting standards, the degree of risk in current practices,
and some specifics of the underwriting process for major loan
categories. Questions about the latter topic focus on weaknesses
that have caused problems in the past at banks nationwide. Loan
types covered include business credits, construction lending,
commercial real-estate loans, general consumer lending,
credit-card loans, home-equity loans, and agricultural credits.
Examiners evaluate underwriting practices based on both their
experience and generally-accepted industry standards. In
some cases, they rate the risk associated with underwriting
practices at the institution just examined as above, below,
or at normal or average levels. In other cases,
examiners classify the frequency of specific practices as
"common" or "frequent enough to warrant notice."
Results: General Underwriting Trends and Practices
Most reports received during the six months ending September 30,
1996 showed neither widespread tightening nor loosening in
underwriting practices. Nationwide, examiners noted no material
change in overall underwriting practices since the prior exam
at 90 percent of the almost 1,400 examination sites reporting.
Of the 10 percent of reports citing a change, just under 5
percent (70 reports) showed a loosening in recent lending
practices; just over 5 percent (77) showed practices had
tightened. Where standards were relaxed, examiners most
frequently attributed the change to loan growth goals or increased
These results were little different from the earlier report
released last April in which 89 percent of the responses had no
change in underwriting practices. The results from the six-month
report, however, showed a slightly lower percentage of responses
with tighter standards, and a small increase with looser
When asked to rate the overall level of riskiness of current
lending practices, examiners indicated that underwriting
standards showed "more-than-normal" or "high" risk in 12 percent
of the examination sites nationwide. The proportion also was
about the same as in the earlier report. Higher-than-normal risk
in current practices occurred most frequently at institutions
with assets less than $25 million (18 percent). At depository
institutions with more than $300 million in assets, only 7
percent of the responses revealed underwriting was
Although the report focuses on the underwriting of new credits,
examiners also were asked to characterize the level of risk of
the entire loan portfolio at the institution they reviewed.
Thirteen percent of responses nationwide showed "above-average"
levels of risk in existing loan portfolios.
Several follow-up questions were asked concerning general
underwriting practices. One focused on the role of competition
on the institution's underwriting standards. Examiners reported
that the degree of competitive pressures was "above average" at
just under 20 percent of the banks.
The failure to adjust current loan pricing based on loan
quality continued to be a commonly-observed weakness. Almost 5
percent of responses had inadequate pricing as a
"common" problem, and an additional 28 percent were noted with
failure to adjust pricing to loan quality "frequently enough to
warrant notice." Among the institutions that were reported to
have higher-than-average risk profiles for new underwriting,
almost 60 percent also were characterized as having pricing
Individual Loan Types
Reports on the quality of underwriting were received for a wide
array of loan categories. Approximately 93 percent of the
institutions were active consumer lenders, and 90 percent were
making business loans. A majority of institutions also were
active lenders in other loan areas: commercial real-estate loans
(73 percent), new construction loans (62 percent), and
agricultural loans (59 percent). Only 46 percent were active
Examiners were asked to comment on specific questionable
practices at institutions actively lending in each loan type. A
few questionable practices were commonly noted by
examiners in a number of institutions. However, examiners
did not suggest that any loan type was particularly risky due to
multiple deficiencies in underwriting practices.
Business loans represent a large percentage of
the loan portfolio of most commercial banks. The strength of the
borrower and the quality of the collateral pledged are both
important elements in business lending.
The lack of a clear and reasonably predictable
repayment source was cited as a "common" problem in only ten of
the 1,227 institutions actively making business loans. An
additional 10 percent of institutions examined exhibited this
weakness "frequent enough to warrant notice." While still the
most common weakness cited, the incidence of this practice was
somewhat less frequent for the institutions examined during the
six months ending in September than for those included in the
earlier results. This practice was detected most frequently in
smaller banks (14 percent compared with 5 percent in banks
with assets greater than $300 million).
Weakness in the monitoring of collateral for asset-based business
loans also was noted by a number of examiners. The 11 percent of
responses with monitoring designated as "inadequate" was up from
8 percent reported earlier.
Construction Loans. Construction credits can be particularly
risky as a project typically does not generate funds to repay the
loan fully until its completion. Lenders have inserted a variety
of terms into such loans to reduce the risk involved. Still,
examiners cited a number of practices that have led to problems
in construction lending in the past. For every practice
surveyed, the percentage of responses showing problems was down
during this six-month period from the earlier period.
Just over 11 percent of responses indicated that "speculative
lending" which lacks meaningful take-out financing or occupancy
commitments was standard practice or "frequent enough to warrant
notice." This was the weakness cited most often during the six
Examiners in 8 percent of the examination sites indicated that
construction loans were being made without consideration of
alternative repayment sources. Additionally, when
alternative repayment sources are required, examiners in 10
percent of the cases reported that loans were being made without
verification of required alternative repayment sources.
The practice of funding, or deferring,
interest payments during the term of the loan was reported as a
common or frequent practice in just under 7 percent of the
cases. This practice was particularly prevalent in California
where in 28 percent of the institutions this weakness was
characterized as standard procedure or "frequent enough to
warrant notice." Still, the California result was much
improved from first results when nearly one-half of the
institutions examined made loans on this basis.
Commercial Real-Estate Loans. In commercial real-estate lending,
the income generated from the property is the primary source of
repayment. However, because such income often is subject to
uncertainty, underwriting practices generally include providing
for alternative sources of repayment. As was the case in the
earlier results, no widespread weaknesses were detected at
examinations conducted during the six-month period.
While the use of short-term loans having minimal amortization and
large balloon payments continued to be the most common concern,
only 8 percent of the institutions examined were cited for such
practices "frequently enough to warrant notice." Another 2
percent were cited as using this practice as standard procedure.
Another potential weakness observed by examiners was lack of
consideration of secondary repayment sources. This practice was
considered to be "frequent enough to warrant notice" in only 7
percent of the responses, and a "common" problem in less than 1
percent. These results comport with practices in banks examined
The use of appraisal values that seem
unrealistic relative to current economic conditions was not
widely cited as a weakness.
Agricultural Credits. Many FDIC- supervised depository
institutions are active agricultural lenders, and such credits
often comprise a large portion of the lender's loan portfolio.
Earlier results suggested that examiners had some concerns
regarding the phasing out of farm subsidies and its subsequent
impact on banks with large agricultural loan portfolios.
Accordingly, after the Congress passed legislation to implement
such phaseouts, the survey was revised to evaluate the effect
specifically of the new legislation.
Over 40 percent of responses from active agricultural lenders
indicated significant concern over banks' exposure to the farm
subsidy reductions. This was a major concern in banks across the
mid-West. For institutions making agricultural loans in the
Kansas City region, 58 percent had significant concern.
Examiners reported little evidence of
lending based on artificially-inflated land values, but lending
based on unrealistic cash-flow projections was identified as a
weakness in just under 10 percent of institutions examined
during the six months.
Examiners were asked about both the level of risk
in general consumer lending and more specifically about
credit-card lending. No major problems were reported in either
aspect of consumer lending.
For consumer loans in general, the most frequently cited concern
continued to be the lack of demonstrable repayment ability. This
practice was considered to be "frequent enough to warrant notice"
in 9 percent of responses, and a "common" problem in 2 percent.
Almost as many responses showed weakness
in collateral quality (7 percent "frequent enough to
warrant notice and 2 percent with a "common" problem).
Beginning in April 1996, the survey included
revised questions regarding credit-card lending. Just over 20
percent of the institutions examined during the six months ending
in September 1996 were reported to be active in such lending. Of
these institutions, six were credit-card specialty banks. (None
of the six showed "above-average" risk in their current
underwriting practices for new credit-card loans). The remaining
institutions were not major players in the credit-card area,
holding, on average, just 1 percent of total assets in such
Ninety-five percent of all institutions active in credit-card
loans showed stable underwriting practices for new credit-card
lending. The remaining responses were balanced between 2 percent
with looser practices and 3 percent with tighter practices.
Ninety-nine percent of responses
indicated "average" or "below-average" risk
in underwriting practices for new credit-card loans.
Reports on the underwriting of home-equity
loans continued to reveal few deficiencies among the
approximately 650 institutions actively making home-equity lines
Only 21 banks were extending credit in excess of 90
percent of collateral value.
Thirteen banks were making loans in
areas marked by rapidly escalating collateral appraisal values;
additionally, six were qualifying borrowers based on
initially-discounted "teaser" loan rates.
Regional Differences:General Underwriting Trends
The specific insured depositories for which reports are received
in any given period depends on examination scheduling
requirements that reflect such factors as the financial condition
of the banks, coordination with state regulators, and the
availability of staff. Thus, regional differences can vary from
period to period and must be interpreted cautiously.
Nonetheless, the most recent results suggest no widespread
changes in underwriting standards nor any serious concentration
of risky practices in any given region during the six months
ending in September 1996. These patterns are consistent with the
For this reporting period, the institutions examined in the San
Francisco region stood out as having tightened underwriting more
frequently and loosened less frequently than other regions. With
regard to the overall riskiness of current practices, banks
examined in the Boston and New York regions were rated as having
less risky underwriting than elsewhere. At the same time,
examiners in the San Francisco region continued to find a
disproportionate number of institutions with above-average risk.