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OCC: Loose CRE underwriting standards still a risk for banks

Increased commercial real estate lending with loose underwritingstandards at banks continues to be a risk, the OCC reported in its spring 2016 SemiannualRisk Perspective.

"At the same time we are seeing this high growth, our examsfound looser underwriting standards with less-restrictive covenants, extended maturities,longer interest-only periods, limited guarantor requirements and deficient stress-testingpractices," Comptroller of the Currency Thomas Curry said on a press call.

The agency stated that while the SeniorLoan Officer Opinion Survey from the Federal Reserve Board found a net tighteningof underwriting for CRE and commercial and industrial loans for the fourth quarterof 2015 and the first quarter of 2016, the OCC has not seen any evidence to supportthose findings. The difference could be due to a timing issue or exceptions to bankpolicies, OCC staff said on a call.

Regulators have increasedfocus on CRE risk as many financial institutions continue to exceedthe recommended thresholds of certain riskier loan types as a percent of risk-basedcapital.

Other concerns in the report are consistent with the agency'sfall 2015 report, including strategic, credit, operational and compliance risk.

The regulator also noted that marketplace lending grew in 2015.Increased partnerships between banks and marketplace lending firms could raise compliance,operational, market, credit and other risks. Curry said that while the OCC encouragesinnovation, "Banks should have effective risk management to ensure such innovationaligns to their long-term business strategies." The regulator is specificallylooking at the compliance of the underwriting standards of firms and if changesin underwriting by financial technology firms are adaptable to banks, Curry said.

Complying with the Bank Secrecy Act and anti-money launderingrules is also a continued risk for banks, Curry said. The increase of technologycreates cybersecurity threats while traditional concerns, such as cash smuggling,continue. In addition, compliance with the Military Lending Act and Truth in LendingAct are "key risks for the federal banking system." In 2017, the OCC willincorporate compliance assessments of these rules in their examinations, Curry said.

The OCC said in its report that its priorities for large banksincluded compliance with BSA/AML, operational risk, credit risk management and cyberthreats.At community banks, the agency will focus on strategic planning and governance,operational risk, interest rate risk and credit risk management, among other issues.

The agency noted it was also monitoring low energy prices andits impact on regional areas.