Loan underwriting standards at most FDIC-supervised
institutions examined in recent months remain solid and unchanged
from previous reviews, according to a new report from the agency.
However, as with the first FDIC underwriting report, which was
issued in April, about one in 10 institutions was characterized as
having higher-than-normal risk in its underwriting practices.
"Very few of the banks the FDIC examined showed risky
underwriting practices," Chairman Ricki Helfer said today. "Our
supervisory staff will monitor loans closely in those few areas
where weaknesses have been noted."
Underwriting encompasses the terms and conditions of loan
agreements that determine the riskiness of a particular credit.
FDIC examiners give their general assessment of an institution's
underwriting standards and comment on potential problem areas,
such as lending to relatively weak borrowers, relying on
substandard collateral, and funding speculative projects.
The review of loan underwriting practices, obtained
through an examiner reporting system implemented in early 1995,
is one of a number of initiatives launched by the FDIC to provide
early warnings of potential loan problems in the banking system.
The information gathered during examinations also helps allocate
examiner resources and identify potential weaknesses in
underwriting practices that can be addressed during on-site
For the latest period, examiners reported on lending
practices at 1,383 state-chartered institutions for which the FDIC
is the primary federal regulator. The results cover reports
filed during the six months that ended September 1996. Most of
the banks were small, community-based institutions. Overall,
those institutions represented 12 percent of all FDIC-insured
institutions and six percent of the assets.
The FDIC report found that the vast majority (90 percent)
had not changed their practices since their last examination,
although five percent were judged to have looser underwriting
standards. When asked to report on specific practices, FDIC
examiners cited only a few areas of potential concern:
- Twelve percent of the institutions were characterized by
higher-than-normal risk in their lending practices;
- Twenty-eight percent frequently failed to adjust loan
pricing based on loan quality;
- Eleven percent of "active" construction lenders were cited
for funding speculative projects; and
- The phaseout of farm subsidies was identified by examiners
as a problem area at 40 percent of the banks active in
In contrast, almost all institutions active in credit card
lending showed average or below-average underwriting risk for
these loans. Of the six banks that specialized in credit card lending
examined during the period, none showed notable weaknesses in
current underwriting practices.
"Despite these positive findings about credit card lending,"
Chairman Helfer said, "the recent increases in personal
bankruptcies and credit card charge-offs remain a concern." She
noted that the report primarily covered banks whose credit card
loans are only a small percentage of their assets.
Congress created the Federal Deposit Insurance Corporation in 1933
to restore public confidence in the nation's banking system. The
FDIC insures deposits at the nation's 11,670 banks and savings
associations and it promotes the safety and soundness of these
institutions by identifying, monitoring and addressing risks
to which they are exposed.
Copies of the September Report on Underwriting Practices are
available on the Internet (via the World Wide Web at
www.fdic.gov), by fax (dial 804-642-0003 on your fax machine
and follow the voice prompts to request Document No. 230),
or by mail or messenger (contact the FDIC's Public
Information Center at 800-276-6003 or (703) 562-2200).