Banks Loosen Standards on Commercial Loans
May 30th, 2018 @ 7:07 PM by Amber Nelson
Large banks are making sweeter deals on their commercial business loans as they compete with one another to bring back loan growth, according to a report from the regulatory Office the Comptroller of the Currency (OCC).
Commercial loan growth fell significantly during the Recession but had come back up to 12% by 2013. Then unexpectedly and without understandable cause, the annual growth rate tanked to just 1.3% by the end of 2017. Banks have been so impatient to restart their profits in that sector that they have been offering lower interest rates and friendlier loan terms and even lending to companies fresh out of bankruptcy, OCC regulators say. They have been making loans with initial interest-only periods and making loans that have worse loan-to-value ratios.
The development of looser standards was even named as one of the top risks in the banking industry right now. “The worst loans are often made in the best of times,” Comptroller of the Currency Joseph Otting said. The OCC’s report noted that it has issued many warnings to big banks during the past year. The number of these warnings – called Matters Requiring Attention (MRAs) – that involved problems with commercial loan underwriting standards jumped 24% in the first quarter of 2018 from the previous year. During that same time, the number of MRAs concerned with banks granting exceptions to their standard commercial loan policies skyrocketed 45%.
Of course “commercial loan delinquencies and losses are at or near historical lows,” the OCC said in its report, but the regulator worries that rising interest rates could make it much more difficult for businesses to repay their loans, creating risk of default. Growing market rates “could affect affordability of current debt service requirements or refinance ability,” the OCC warned.
Banks are seeing the results they desire though. As of mid-May, commercial loan growth had picked up to an annual rate of 3%.
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.