Underwriting Practices Are Still Too Lax, OCC Warns

American Banker, October 19, 1998 | Go to article overview

Underwriting Practices Are Still Too Lax, OCC Warns


By SEIBERG, JARET

Dismissing fears of a credit crunch, acting Comptroller of the Currency Julie L. Williams said Friday that banks must continue tightening underwriting standards.

"We must not succumb to the temptation to declare victory over lax underwriting of new loans," Ms. Williams said at a risk management conference sponsored by the Federal Financial Institutions Examination Council.

The near collapse of Long-Term Capital Management shows just how far underwriting standards have fallen, she said. Bankers extended billions of dollars of credit based on the reputations of the hedge fund's managers, without regard for its financial health, she said.

"No banker should suspend critical judgment of a loan's riskiness based on assurances that some fancy new computer program or automated gadget makes that judgment superfluous," she said.

The cost of ignoring sound underwriting practices can be enormous, she said, adding that creditors had to put up $3.5 billion to rescue Long-Term Capital. "That's a lot of money that is now unavailable for good loans to productive borrowers," she said.

Though Ms. Williams did not mention him by name, her comments responded to a plea made two weeks earlier by William J. McDonough, president of the Federal Reserve Bank of New York. He said that if regulators went overboard with warnings about credit quality they could spur banks to choke off lending.

"The strength of our economy does not depend upon bankers' making bad loans," Ms. Williams said. "In fact, poorly underwritten loans are one of the best ways that I know of to weaken financial institutions and the communities that depend upon them."

Her comments were well received.

"Now is the time to watch our credit standards," said Robert A. Jung 2d, president of business banking at Norwest Bank, New Mexico. "History has shown that banks that stick close to their underwriting policies have fewer problems when a recession rolls around."

Paul Ulrich, senior vice president for asset quality at Sky Financial Group, Bowling Green, Ohio, said credit quality warnings would not cause him to stop making loans. "I don't associate not overreacting with a credit crunch," he said.

Tom Kramer, chief credit officer at Foothill Independent Bank, Glendora, Calif., said the industry should be criticized for deteriorating underwriting standards, arguing that too many banks are cutting prices and terms to get business. "You have to be a strong bank to stick to your credit-quality guns," he said. …

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