OCTOBER 1998 THROUGH MARCH 1999

Report on Underwriting Practices Report on Underwriting Practices Report on Underwriting Underwriting Practices Practices

Federal Deposit Insurance Corporation Donna Tanoue, Chairman

HIGHLIGHTS

l During this reporting period, the questionnaire was revised. As a result, both the questions and, in some

cases, the responses to questions have changed from past reports.

l During the six-months ending March 31, 1999, examiners reported that the frequency of risky underwriting

practices decreased for new lending in general compared with the previous six-months ending September 30,

1998.

l Approximately 91 percent of FDIC-supervised banks showed no material change in underwriting practices

since the previous examination. The proportion of banks tightening underwriting practices since the previous

examination was slightly larger than the proportion loosening them5 percent compared with 4 percent.

l In addition, examiners reported that the proportion of banks with an absolute level of high risk in underwriting practices, loan portfolios, and loan administration was small.

l Except in the major loan categories of business and agriculture, the frequency of specific risky underwriting

practices in major loan categories decreased from the previous reporting period. In the category for business

lending, the increase in frequency was slight. In the category for agricultural lending, examiners were mainly

concerned with the level of the institutions carryover debt since the previous examination. Twenty-nine percent of FDIC-supervised banks actively making agricultural loans showed a moderate increase in the level

of carryover debt (up from 24 percent during the previous period). Three percent showed a sharp increase

(up from 2 percent previously).

Purpose and Design of the Report

In early 1995, the FDIC introduced a supplementary

examination questionnaire on current underwriting practices at FDIC-supervised banks. The questionnaire focuses on three topics: material changes in underwriting practices for new loans, the overall degree of risk in

underwriting practices for new loans, and the frequency of

specific risks in underwriting practices within major categories of loans. These categories are business, consumer,

commercial (nonresidential) real estate, agricultural, construction, home equity, and credit card loans. Examiners

are also asked to report whether the institution is active in

additional loan categories that pose more than normal risk.

These categories include unguaranteed portions of Small

Business Administration (SBA) loans, subprime loans

(automobiles, mortgages), dealer paper loans, low/no-document business loans, high loan-to-value ratio home equity loans (up to 125%), or any other category of loan not

mentioned. The systematic collection and analysis of

questionnaire responses provides an early-warning mechanism for identifying potential lending problems.

Examiners evaluate underwriting practices in terms of

FDIC supervisory practices. Until October 1, 1998,

examiners were asked to rate the risk associated with a

banks underwriting practices in relative terms: above

average, average, or below average. Beginning October 1, 1998, examiners began rating the risk associated

with a banks underwriting practices in absolute terms:

low, medium, or high.1 New questions about

underwriting practices were also added to the questionnaire. Examiners continue to classify the frequency with

which specific risky underwriting practices are used as

never or infrequently, frequently enough to warrant

notice, or, if the risky practice is used more often, commonly or as standard procedure.2

The questionnaire is completed at the conclusion of

each bank examination the FDIC conducts. Which banks

are included during a reporting period, therefore, depends

on how the FDIC schedules bank examinations.

Examination schedules are heavily influenced by the

financial condition of a bank, with the examinations generally becoming more frequent the poorer a banks financial condition. In addition, the FDIC shares examination

authority of state-chartered nonmember banks (those that

Division of Research and Statistics

Virginia Olin (202) 898-8711

Internet address: World Wide Web, www.fdic.gov.

Division of Supervision

Robert W. Walsh (202) 898-6911 

1Low: The level of risk imposed on the institution does not warrant

notice by bank supervisors even when factors that might offset the risk are

ignored. Medium: The level of risk should be brought to the attention of

bank supervisors. There may or may not be factors that offset the risk

imposed on the institution; however, the level of risk raises concerns when

considered apart from these offsetting factors. High: The level of risk is

high and therefore should be brought to the immediate attention of bank

supervisors. There may or may not be factors that offset the risk imposed on

the institution; however, the level of risk is high when viewed in isolation.

2Never or infrequently: The institution does not engage in the practice,

or does so only to an extent that does not warrant notice by bank supervisors.

Frequently enough to warrant notice: The institution engages in the practice often enough for it to be brought to the attention of bank supervisors.

There may or may not be factors that offset the risks the practice imposes on

the institution. Commonly or as standard procedure: The practice is

either common or standard at the institution and therefore should be brought

to the attention of bank supervisors. There may or may not be factors that

offset the risks the practice imposes on the institution.
are not members of the Federal Reserve System) with

state bank regulators. To avoid excessive regulatory

burden, the FDIC generally alternates examinations

with state regulators (who do not submit questionnaires). Finally, examination schedules are affected

by the availability of examination staff. For these

reasons the group of banks included in any given

report is not randomly selected and therefore may not

be representative of the population of FDIC-supervised banks.

To address the potential bias that examination

scheduling might introduce into the reports results,

we statistically weight the responses. The weights are

designed to make questionnaire responses in the

aggregate more reflective of the population of FDICsupervised banks. Simply put, when we compute

aggregate questionnaire responses, we give greater

weight to FDIC-supervised banks that are underrepresented in the questionnaire (when compared with

the population of FDIC-supervised banks) and less

weight to overrepresented groups.3 Although these

weightings cannot remove all potential bias, the

weighted responses allow for more meaningful comparisons of results over time. Nevertheless, we advise

readers to interpret trends cautiously, for two reasons:

(1) the lack of random selection of banks for examination, as noted above, and (2) the small number of

responses for some loan categories.

Throughout this report, the proportions presented refer to these weighted responses and are

estimates of the underwriting practices of all

FDIC-supervised banks. In addition, the data used

to weight responses in this report are subject to slight

revisions, so some of the weighted proportions might

be revised in subsequent reports. We expect no substantive changes, however.

GENERAL UNDERWRITING TRENDS

During the reporting period October 1, 1998,

through March 31, 1999, examiners indicated that 91

percent of FDIC-supervised banks showed no material change in underwriting practices since the previous

examination. The proportion of banks tightening

underwriting practices since the previous examination

was slightly larger than the proportion loosening them

5 percent compared with 4 percent. Examiners

indicated that the two main reasons for a change in

underwriting practices were changes in the banks

management and a desire to achieve the banks

growth goals.

During the six months ending March 31, 1999,

examiners reported that the frequency in risky underwriting practices decreased compared with the previous six months ending September 30, 1998. In addition, the proportion of banks with an absolute level of

high risk in underwriting practices, loan portfolios,

and loan administration was small. For example, the

proportion of FDIC-supervised banks characterized

with high risk in current underwriting practices was

3 percent; with medium risk, 32 percent; and with

low risk, 65 percent. 

Other findings for FDIC-supervised banks showed

the following (listed in the order of the questions in

the table on page 6):

l Only 4 percent had high risk associated with

loan growth and/or significant changes in lending

activities since the previous examination; 29 percent had medium risk; and 55 percent had

low risk associated with loan growth and/or

significant changes in lending activities since the

previous examination. Approximately 12 percent

showed insignificant changes in loan growth

since the previous examination.

l Only 3 percent had high potential credit risk in

their current loan portfolios; 31 percent had

medium; and 66 percent had low.

l Only 1 percent had high potential risk in underwriting practices associated with loan participations purchased by the institution; 19 percent had

medium potential risk; and 80 percent had

low potential risk. (Nearly one-third of the

institutions examined during the reporting period

did not purchase loan participations.)

l Approximately 7 percent made loans that resulted

in high concentrations of loans to one borrower or

to one industry commonly or as standard procedure (about the same as during the previous

reporting period). Another 13 percent did so frequently enough to warrant notice (down from 15

percent previously); and 80 percent did so never

or infrequently (up from 78 percent previously).

l Only 3 percent engaged in out-of-area financing

commonly or as standard procedure; 8 percent

engaged frequently enough to warrant notice;

and 89 percent engaged in out-of-area financing

never or infrequently.

l Only 5 percent had high potential credit risk

associated with loan administration; 31 percent

had medium; and 65 percent had low.

l Only 3 percent failed to adjust loan pricing on

different-quality loans to reflect differences in

risk commonly or as standard procedure (down

from 5 percent during the previous reporting period); 8 percent did so frequently enough to warrant notice (down from 22 percent previously);

and 89 percent did so never or infrequently (up

from 73 percent previously).

l Four percent failed to require a material reduction

in principal before renewing term loans commonly or as standard procedure (down from 5

percent during the previous reporting period); 20

percent failed to do so frequently enough to warrant notice (down from 33 percent previously);

and 76 percent failed to do so never or infrequently (up from 63 percent previously).

Report on Underwriting Practices 2 March 1999

3For more information about the weights, please contact Virginia

Olin, DRS, (202) 898-8711.
March 1999 3 Report on Underwriting Practices

l Three percent had written lending policies that

differed from actual practices commonly or as

standard procedure (down from 6 percent during

the previous reporting period); 17 percent had

written lending policies that differed from actual

practices frequently enough to warrant notice

(down from 23 percent previously); and 80 percent had written lending policies that differed

from actual practices never or infrequently (up

from 72 percent previously).

Of the 958 banks examined, few used a credit scoring model for credit decisions (187). The model was

used most frequently for consumer installment lending (86).

INDIVIDUAL LOAN CATEGORIES

Responses during this reporting period show that

773 of the 958 banks examined were active business

lenders; 748 banks were actively making consumer

loans (excluding credit-cards); and 592 banks were

actively making commercial (nonresidential) real

estate loans. The numbers for other loan categories

are shown in the accompanying chart. Only 205

banks examined had activity in additional loan categories, mainly in dealer paper loans (107).

Except in business and agricultural lending, the frequency of specific risky underwriting practices in

major loan categories decreased from the previous

reporting period (the six months ending September

30, 1998). However, examiners occasionally commented that there were documentation deficiencies

across loan categories and that some lenders were

making character-based loans (loans based on the

lending officers personal knowledge of the borrower). In general, examiners were not concerned about

the quality of such loans.

Business Loans

Examiners review underwriting practices for business loans to ensure that each borrowers financial

strength and source of repayment are taken into account. With asset-based loans, examiners review practices to verify that the bank monitors the collateral

pledged. 

Among the FDIC-supervised banks actively making business loans,

l Fourteen percent made business loans without a

clear and reasonably predictable repayment source

frequently enough to warrant notice. Three percent did so commonly or as standard procedure

(up from 13 percent and 2 percent, respectively,

during the previous reporting period).

l Almost 17 percent made business loans to borrowers who lacked documented financial strength

to support such lending frequently enough to

warrant notice. An additional 2 percent did so

commonly or as standard procedure (down

from 19 and 3 percent, respectively).

l Of the banks making asset-based business loans

(a subset of active business lenders), 20 percent

failed to monitor the collateral pledged frequently enough to warrant notice; another 3 percent

did so commonly or as standard procedure (up

from 14 percent and 2 percent, respectively).

Consumer Loans (Excluding

Credit Card Lending)

The frequency of specific risky underwriting practices in consumer lending decreased from the previous

reporting period. Of the FDIC-supervised banks

actively making consumer loans (excluding credit

card lending), 

l Eleven percent made consumer loans without

adequate collateral protection frequently

enough to warrant notice; an additional 3 percent made such loans commonly or as standard

procedure (compared with 14 percent and 4

percent, respectively, during the previous reporting period).

l Fourteen percent made loans to borrowers who

lack a demonstrable ability to repay frequently

enough to warrant notice; an additional 3 percent

did so commonly or as standard procedure.

(Previously the comparable figures were 16 percent and 5 percent, respectively.) 

Total number of banks: 958.

773

748

592

438

437

330

148

19

Business

Consumer

Nonresidential

Agricultural

Construction

Home Equity

Credit Card

None of

the Above

0 200 400 600 800

Number of Banks Actively Making Loans by Loan Type

Responses Received: 10/98–3/99

14

17

15

17

9/97 3/98 9/98 3/99

0

5

10

15

20

Proportion

Proportion of FDIC-supervised banks making such loans either "frequently enough

to warrant notice" or "commonly."

Business Loans

Loans Made without Clear and Predictable Repayment Source

(Six-Month Period Ending . . . )
Commercial (Nonresidential) 

Real Estate Loans

In commercial (nonresidential) real estate lending,

examiners review underwriting practices to ensure

that the income generated from the property is not the

only source of repayment. Because future income is

uncertain, sound underwriting policies generally

require alternative sources of repayment. As with

consumer lending, during this reporting period the frequency of specific risky underwriting practices

decreased compared with the previous period. 

Of the FDIC-supervised banks that were active in

commercial real estate, 

l Nine percent made loans without considering

sources of repayment other than the project being

funded frequently enough to warrant notice

(down from 12 percent during the previous

reporting period); and 2 percent made such loans

commonly or as standard procedure (down

from 3 percent previously).

l Seven percent made interest-only, extendedamortization, or negative-amortization permanent

commercial real estate loans frequently enough

to warrant notice (unchanged from previously);

and almost 0 percent made such loans commonly or as standard procedure (also unchanged).

l Thirteen percent made short-term commercial

real estate loans with minimal amortization and

large balloon payments frequently enough to

warrant notice, and 3 percent did so commonly

or as standard procedure. Both of these proportions were unchanged from previously.

Agricultural Loans

Examiners noted increases in FDIC-supervised

banks level of carryover debt during the reporting

period. They also continued to monitor the extent to

which banks agricultural loan portfolios were tied to

major crops affected by the Federal Agriculture

Improvement and Reform Act of 1996.4

l Twenty-nine percent of the FDIC-supervised

banks active in agricultural lending showed a

moderate increase in the level of carryover debt

(up from 24 percent during the previous reporting

period), and 3 percent showed a sharp increase

(up slightly from previously). Examiners occasionally commented about continued low crop

and livestock prices that could translate into sharp

increases in the level of future carryover debt. 

l Twenty-three percent of the FDIC-supervised

banks active in agricultural lending had portfolios

tied to crops affected by the phaseouts frequently enough to warrant notice (down from 28 percent previously). And 18 percent were affected

by the phaseouts commonly or as standard procedure (compared with 21 percent previously).

Consumer Loans

Loans Made to Borrowers Who Lack Demonstrable Ability

to Repay (Six-Month Period Ending . . . )

Proportion of FDIC-supervised banks making such loans either "frequently enough

to warrant notice" or "commonly."

9/97 3/98 9/98 3/99

0

5

10

15

20

25

18

21 21

16

Proportion

Report on Underwriting Practices 4 March 1999

Proportion of FDIC-supervised banks making such loans either "frequently enough

to warrant notice" or "commonly."

9/97 3/98 9/98 3/99

0

4

8

12

16

11

14

15

11

Proportion

Commercial (Nonresidential) Real Estate

Loans Made with No Consideration of Repayment Source

Other than the Project Being Funded

(Six-Month Period Ending . . . )

Agricultural Loans

Proportion of FDIC-Supervised Banks Having a “Moderate”

Increase in Carryover Debt (Six-Month Period Ending . . . )

9/97 3/98 9/98 3/99

0

10

20

30

14

10

24

29

Proportion

4In contrast to previous law, which allowed traditional subsidies

tied to prices and limits on production, this law allowed declining payments to farmers until the year 2002 for certain crops.
March 1999 5 Report on Underwriting Practices

A few examiners noted peanuts as one of the

major crops affected.

l Only 1 percent of the FDIC-supervised banks

active in agricultural lending made loans on the

basis of unrealistic cash flow projections commonly or as standard procedure, down from 3

percent previously. However, examiners occasionally commented about the potential risk of a

decline in cash flow caused by low commodity

prices.

l Approximately 2 percent of the FDIC-supervised

banks made agricultural loans on the basis of land

values that cannot be supported by farm operations commonly or as standard procedure.

Eleven percent made such loans frequently

enough to warrant notice.

Construction Loans 

During this reporting period the frequency of specific risky underwriting practices in construction lending decreased substantially compared with the previous period. 

Of the FDIC-supervised banks active in construction lending,

l Nineteen percent funded speculative construction

projects (that is, those unaccompanied by refinancing commitments) frequently enough to

warrant notice (down from 30 percent during the

previous reporting period); a little more than 5

percent did so commonly or as standard procedure (down from 7 percent previously).

l Further, 12 percent made construction loans without considering sources of repayment other than

the project being funded frequently enough to

warrant notice. One percent did so commonly

or as standard procedure. (These proportions

were down from 23 percent and 3 percent, respectively.)

l In addition, 11 percent required alternative sources

of repayment but failed to verify the quality of

these sources frequently enough to warrant

notice; approximately 1 percent failed to verify

the quality of these sources commonly or as standard procedure. (These proportions were down

from 14 percent and 2 percent, respectively.)

l Ten percent funded, or deferred, interest payments during the loan term frequently enough to

warrant notice (down from 14 percent previously); an additional 6 percent did so commonly or

as standard procedure (unchanged).

l Approximately 10 percent funded 100 percent of

the cost of construction and land, with no cash

equity on the part of the borrower/developer frequently enough to warrant notice. Only 2 percent did so commonly or as standard procedure.

Home Equity Loans

Of the FDIC-supervised banks active in homeequity lending,

l Five percent made home equity-loans that pushed

mortgage indebtedness above 90 percent of collateral frequently enough to warrant notice

(down from 12 percent previously), but 4 percent

did so commonly or as standard procedure (up

from 2 percent previously).

l Only 2 percent qualified borrowers for home

equity-credit on the basis of initially discounted

loan (teaser) rates frequently enough to warrant

notice, and none did so commonly or as standard procedure. (Both of these proportions were

unchanged from previously.)

Credit Card Loans

Of the FDIC-supervised banks active in credit card

lending,

l Ninety-one percent had no changes in underwriting practices for new credit card loans since the

previous examination (up from 89 percent during

the previous reporting period).

l Approximately 1 percent had substantially

loosened underwriting practices since the previous examination, none had moderately loosened them, 1 percent had substantially tightened them, and 7 percent had moderately

tightened them. Previously, 9 percent had tightened and 2 percent had loosened.

l Only 1 percent had high risk in current underwriting practices; approximately 25 percent had

medium risk, and 74 percent had low risk.

l None had high risk in their current loan portfolios; approximately 24 percent had medium

risk, and 76 percent had low risk. Proportion of FDIC-supervised banks making such loans either "frequently enough

to warrant notice" or "commonly."

9/97 3/98 9/98 3/99

0

10

20

30

40

27

38 37

25

Proportion

Construction Loans

Loans Made on a Speculative Basis

(Six-Month Period Ending . . . )
Report on Underwriting Practices 6 March 1999

GENERAL UNDERWRITING PRACTICES

Have the institutions underwriting practices materially changed since the last examination:

If practices have materially changed, are they:1

How would you characterize the risk associated with

loan growth and/or significant changes in lending

activities since the last examination:

RISK IN CURRENT PRACTICES

How would you characterize the potential risk associated with the institutions current UW practices:

How would you characterize the potential credit risk

of the institutions overall loan portfolio:

How would you characterize the potential risk in

underwriting practices associated with loan participations purchased by the institution:

To what extent has recent lending been made in

amounts that resulted inor contributed toconcentrations of credit to one borrower or industry:

To what extent is the institution currently engaged in

out-of-area financing:

How would you characterize the risk associated with

loan administration:

To what degree does the institution fail to adjust its

loan pricing on different quality loans to reflect differences in risk:

To what extent does the institution fail to require a

material principal reduction before renewing term

loans:

To what extent does the institutions written lending

policies differ from actual practices:

BUSINESS LOANS

To what extent does the institution make business

loans without a clear and reasonably predictable

repayment source:

To what extent does the institution make business

loans to borrowers who lack documented financial

strength to support such lending:

With respect to asset-based business loans, to what

extent does the institution fail to monitor collateral:

CONSTRUCTION LOANS

To what extent is the institution funding construction projects on a speculative basis (i.e., without

meaningful pre-sale, pre-lease or take-out commitments):

To what extent are construction loans made without

consideration or repayment sources other than the

project being funded:

When alternative repayment sources are required,

to what extent does the institution fail to take appropriate steps to verify the quality of these sources:

To what extent does the institution fail to use realistic appraisal values relative to the current economic

environment and/or to the performance observed on

similar credits:

To what extent does the institution fund, or defer,

interest payments during the term of its commercial

construction loans:

Results from the Report on Underwriting Practices

Percent of Respondents

Weighted

Six-Month Period Ending:

3/97 9/97 3/98 9/98 3/99

Yes 8.1% 9.0% 10.7% 11.7% 9.3%

No 91.9 91.0 89.3 88.3 90.7

Substantially tighter NA NA NA NA 0.9

Moderately tighter 5.3 4.8 4.4 5.4 4.2

Moderately looser 2.8 4.2 6.4 6.3 3.1

Substantially looser NA NA NA NA 1.0

Low NA NA NA NA 55.2

Medium NA NA NA NA 28.8

High NA NA NA NA 3.9

Not relevant NA NA NA NA 12.2

Low NA NA NA NA 65.0

Medium NA NA NA NA 31.7

High NA NA NA NA 3.3

Low NA NA NA NA 66.4

Medium NA NA NA NA 30.5

High NA NA NA NA 3.1

Low NA NA NA NA 79.9

Medium NA NA NA NA 19.3

High NA NA NA NA 0.9

Never or infrequently 85.4 81.1 79.1 77.7 79.9

Frequently enough to warrant notice 9.5 12.5 13.9 14.5 13.0

Commonly or standard procedure 5.2 6.4 7.0 7.8 7.1

Never or infrequently NA NA NA NA 89.1

Frequently enough to warrant notice NA NA NA NA 8.4

Commonly or standard procedure NA NA NA NA 2.5

Low NA NA NA NA 64.6

Medium NA NA NA NA 30.7

High NA NA NA NA 4.7

Never or infrequently 69.8 68.3 72.1 73.0 89.4

Frequently enough to warrant notice 26.1 26.6 23.4 22.3 8.0

Commonly or standard procedure 4.2 5.1 4.6 4.7 2.6

Never or infrequently 58.6 60.9 63.1 62.5 76.3

Frequently enough to warrant notice 35.4 33.9 31.3 32.7 20.2

Commonly or standard procedure 5.9 5.2 5.6 4.8 3.6

Never or infrequently 76.6 75.8 72.5 71.5 79.8

Frequently enough to warrant notice 20.4 21.1 23.1 22.7 17.1

Commonly or standard procedure 3.1 3.1 4.4 5.8 3.1

Never or infrequently 90.2 85.9 82.6 85.2 82.9

Frequently enough to warrant notice 9.2 13.0 15.6 12.6 13.8

Commonly or standard procedure 0.7 1.1 1.8 2.3 3.3

Never or infrequently 89.0 79.8 76.7 78.6 81.0

Frequently enough to warrant notice 10.3 18.8 20.6 18.9 16.6

Commonly or standard procedure 0.7 1.4 2.7 2.5 2.3

Never or infrequently 85.8 81.5 79.0 83.6 77.8

Frequently enough to warrant notice 9.4 17.2 18.0 14.4 19.5

Commonly or standard procedure 4.8 1.4 3.0 2.0 2.7

Never or infrequently 79.2 72.6 62.2 63.2 75.4

Frequently enough to warrant notice 17.3 23.8 30.6 29.7 19.3

Commonly or standard procedure 3.5 3.7 7.2 7.2 5.4

Never or infrequently 89.3 81.3 76.4 74.3 87.3

Frequently enough to warrant notice 10.0 16.1 18.7 22.6 11.6

Commonly or standard procedure 0.7 2.5 5.0 3.1 1.1

Never or infrequently 91.0 84.0 79.1 83.6 87.9

Frequently enough to warrant notice 7.6 13.8 16.7 14.1 11.3

Commonly or standard procedure 1.4 2.2 4.1 2.2 0.8

Never or infrequently 93.0 90.2 86.0 86.0 89.8

Frequently enough to warrant notice 6.4 9.2 12.2 11.8 10.0

Commonly or standard procedure 0.6 0.6 1.8 2.2 0.3

Never or infrequently 89.2 85.7 80.3 79.8 84.1

Frequently enough to warrant notice 5.9 10.6 13.9 14.4 10.0

Commonly or standard procedure 4.9 3.7 5.8 5.9 5.9

1Before October 1, 1998, responses were either tighter or looser.
March 1999 7 Report on Underwriting Practices

CONSTRUCTION LOANS (cont.)

To what extent does the institution fund 100% of the

cost of construction and land, with no cash equity on

the part of the borrower/developer:

NONRESIDENTIAL LOANS

To what extent are commercial real estate loans

made without consideration of repayment sources

other than the project being funded:

To what extent does the institution make interestonly, extended amortization, or negative amortization permanent commercial real estate loans:

To what extent does the institution make short-term

commercial real estate loans (Mini-perms) with

minimal amortization terms and large balloon

payments at maturity:

To what extent does the institution fail to use realistic appraisal values relative to the current economic

environment and/or to the performance observed on

similar credits:

HOME EQUITY LOANS

To what extent does the institution make home equity loans that push mortgage indebtedness above 90

percent of collateral value:

To what extent does the institution qualify borrowers for home equity credit based on initially-discounted loan rates:

AGRICULTURAL LOANS

To what extent does the institution make agricultural loans on the basis of land values that cannot be

supported by farm operations:

To what extent is the institutions agricultural loan

portfolio tied to major crops affected by the phase

out of farm subsidies:

To what extent are agricultural loans being made

based on unrealistic cash flow projections:

How would you characterize the change in the level

of the institutions agricultural related carryover

debt since the last examination:

CONSUMER LOANS

To what extent does the institution make secured

consumer loans without adequate collateral protection:

To what extent does the institution make consumer

loans to borrowers who lack demonstrable ability to

repay:

CREDIT CARD LOANS

Have the institutions underwriting practices for

new credit card loans materially changed since the

last examination:

Are underwriting practices for new credit-cards:1

How would you characterize the level of risk associated with the institutions current underwriting

practices for new credit card loans:

How would you characterize the level of risk associated with the institutions credit card portfolio:

For credit card loans in the institutions portfolio

with risk characterized as high, to what degree does

the institution fail to adjust its loan pricing to

account for this risk:

Results from the Report on Underwriting Practices

Percent of Respondents

Weighted

Six-Month Period Ending:

3/97 9/97 3/98 9/98 3/99

Never or infrequently NA NA NA NA 88.4%

Frequently enough to warrant notice NA NA NA NA 9.7

Commonly or standard procedure NA NA NA NA 1.9

Never or infrequently 92.9 89.5 86.1 85.1 88.8

Frequently enough to warrant notice 7.0 9.6 12.5 12.3 9.0

Commonly or standard procedure 0.2 0.9 1.4 2.6 2.2

Never or infrequently 95.8 93.6 93.0 92.8 93.3

Frequently enough to warrant notice 3.6 6.1 6.3 7.2 6.5

Commonly or standard procedure 0.5 0.2 0.7 0.0 0.1

Never or infrequently 87.9 84.7 80.6 84.7 83.9

Frequently enough to warrant notice 9.8 12.5 15.0 12.7 12.9

Commonly or standard procedure 2.3 2.8 4.4 2.7 3.2

Never or infrequently 95.3 91.8 90.0 89.6 92.1

Frequently enough to warrant notice 4.3 7.5 9.2 9.9 7.7

Commonly or standard procedure 0.4 0.7 0.8 0.6 0.1

Never or infrequently 92.7 88.0 88.1 86.8 91.3

Frequently enough to warrant notice 5.0 7.9 9.9 11.5 5.2

Commonly or standard procedure 2.3 4.1 2.0 1.7 3.5

Never or infrequently 99.1 97.1 99.0 98.3 98.0

Frequently enough to warrant notice 0.8 1.6 1.0 1.7 1.8

Commonly or standard procedure 0.2 1.4 0.0 0.0 0.2

Never or infrequently NA NA NA NA 87.7

Frequently enough to warrant notice NA NA NA NA 10.6

Commonly or standard procedure NA NA NA NA 1.7

Never or infrequently 66.2 54.9 59.2 51.2 58.6

Frequently enough to warrant notice 27.0 30.3 27.1 27.7 23.0

Commonly or standard procedure 6.9 14.8 13.7 21.1 18.4

Never or infrequently 93.0 89.3 88.1 84.3 85.7

Frequently enough to warrant notice 6.1 8.7 9.4 12.6 13.0

Commonly or standard procedure 0.9 2.0 2.5 3.1 1.3

Sharp decline 2.5 4.7 2.4 0.8 1.6

Moderate decline 26.1 30.3 25.5 17.6 9.6

No change 51.1 50.1 60.5 55.8 56.4

Moderate increase 18.7 13.5 10.4 23.5 29.0

Sharp increase 1.6 1.5 1.2 2.4 3.4

Never or infrequently 86.4 82.4 83.0 82.6 86.5

Frequently enough to warrant notice 11.6 14.7 14.2 13.5 10.9

Commonly or standard procedure 2.0 3.0 2.8 3.9 2.6

Never or infrequently 85.8 82.3 78.9 79.5 83.6

Frequently enough to warrant notice 12.9 15.6 18.0 16.0 13.9

Commonly or standard procedure 1.3 2.2 3.1 4.5 2.5

Yes 10.2 17.9 15.7 10.9 9.2

No 89.9 82.0 84.3 89.1 90.9

Substantially tighter NA NA NA NA 1.3

Moderately tighter 7.6 14.0 13.7 9.4 7.2

Moderately looser 2.6 3.9 2.0 1.5 0.0

Substantially looser NA NA NA NA 0.7

Low NA NA NA NA 74.3

Medium NA NA NA NA 24.8

High NA NA NA NA 0.9

Low NA NA NA NA 76.4

Medium NA NA NA NA 23.6

High NA NA NA NA 0.0

Never or infrequently NA NA NA NA 0.0

Frequently enough to warrant notice NA NA NA NA 0.0

Commonly or standard procedure NA NA NA NA 0.0

1Before October 1, 1998, responses were either tighter or looser.
Characteristics of Banks Examined in the

Report on Underwriting Practices

l Coverage: 958 FDIC-supervised banks.

l Period: Reports filed between October 1, 1998 and March 31, 1999.

l Charter types: state-chartered commercial banks, 89 percent; state-chartered savings banks, 11 percent;

branches of foreign banks on U.S. soil, less than 1 percent (3 banks).

l Size distribution of banks: assets of $1 billion or greater, 5 percent; assets between $300 million and $1 billion, 11 percent; assets between $25 million and $300 million, 69 percent; assets less than $25 million, 16

percent.

l Proportion of all FDIC-supervised banks (as of December 31, 1998): 29 percent of assets and 16 percent of

the number of banks.

The Report on Underwriting Practices Seeks

l To identify (1) material changes in underwriting practices, (2) overall risk in new lending practices, and (3)

specific risks in underwriting practices for major loan categories.

l To track emerging issues in underwriting practices of new loans.

l To provide an early-warning mechanism for identifying potential problems.