As banks ease underwriting practices, risk rises

National banks continue to ease underwriting practices – raising their risk — to address competition from other bank and non-bank lenders, while also facing concerns about operational risk (due to cybersecurity threats, and others) and high strategic risk (as they consider new business models), the OCC reported today.

In its Semiannual Risk Perspective for Fall 2016, (which also covers federal savings associations), the OCC noted that eased underwriting practices were evident in a variety of different loans: commercial, commercial real estate and auto. “The level of risk is increasing due to increased risk layering, rising loan policy exceptions, increasing loan-to-value ratios, and weaker covenant protection,” the OCC reported.

At the same time, OCC stated, operational risk remains a concern as banks “face changing cybersecurity threats, increased reliance on third-party relationships, and address the need for sound governance over sales practices.”

On the strategic risk side, the agency report stated, strategic planning remains important as “banks adopt innovative products, services, and processes in response to the evolving demands for financial services and the entrance of new competitors, such as out-of-market banks and financial technology firms.”

“Banks face challenges meeting the integrated mortgage disclosure requirements and amended Military Lending Act regulatory requirements, the latter of which compliance was required by October 3, 2016, and managing Bank Secrecy Act risks,” the report stated.

The report covers risks facing national banks and federal savings associations based on data through June 30, 2016.

OCC Semiannual Risk Perspective for Fall 2016