INTRODUCTION

GENERAL UNDERWRITING TRENDS

OCTOBER 2001 THROUGH MARCH 2002

HIGHLIGHTS

 O ( 8 -8

 a W W W w

 W W ( 8 -6

Proportion of FDIC-Supervised Banks with “Medium”

or “High” Risk Associated with Loan Administration

OCTOBER 2001 THROUGH MARCH 2002€

HIGHLIGHTS 

For the six months ending March 31, 2002, compared with the six months ending September 

30, 2001, examiners noted the following changes in underwriting practices at FDIC-supervised 

banks: 

 • Increases in risks associated with current underwriting practices and with purchased loan participations.

 Increases in risks associated with loan administration and in the potential credit risk in institutions’ loan 

portfolios. 

 A substantial increase in the occurrence of institutions that funded, or deferred, interest payments during the term of the commercial construction loans. 

 A substantial increase in the occurrence of institutions that made short-term commercial real estate 

loans with minimal amortization terms and large “balloon” payments at maturity. 

INTRODUCTION 

At the end of each FDIC-supervised bank examination, the examiner in charge responds to a questionnaire on the bank’s underwriting practices. This 

Report on Underwriting Practices covers the responses submitted during the six months beginning October 

1, 2001, and ending March 31, 2002. The number of 

responses received during this six months was 

1,149—which represents approximately 21 percent of 

the number and 21 percent of the assets of all FDICsupervised banks. The results reported here refer to 

weighted responses and are estimates of the underwriting practices of all FDIC-supervised banks. An 

explanation of the use of weights appears in “Purpose 

and Design of the Report,” and all weighted responses appear in the table at the end of this document. For 

ease of exposition, the response rates throughout have 

been rounded to the nearest 1 percent. 

GENERAL UNDERWRITING TRENDS 

During the six months ending March 31, 2002, compared with the six months ending September 30, 2001, 

risks associated with general underwriting practices 

increased. For example, the proportion of banks with 

high risk associated with current underwriting practices 

rose from 5 percent to 6 percent, and the proportion 

with medium risk rose from 32 percent to 34 percent. 

The proportion of banks with medium risk associated 

with underwriting practices for purchased loan participations increased from 22 percent to 26 percent. And 

the risk associated with loan growth and/or significant 

changes in lending activities since the previous examination also increased: the proportion of banks with high 

risk rose from 4 percent to 5 percent. 

Risks associated with loan administration and the 

potential credit risk in institutions’ loan portfolios also 

increased. The proportion of banks with medium risk 

in loan administration rose from 34 percent to 36 percent, while the proportion of banks with medium potential credit risk in their loan portfolios rose from 32 

percent to 34 percent. (The proportions of banks with 

high risk for each was unchanged during both periods.) 

Proportion of FDIC-Supervised Banks with “Medium” 

or “High” Risk Associated with Loan Administration 

Proportion 

50 

40 

30 

20 

10 

0 

34 

40 38 37 

High 42 Medium 

3/31/00 9/30/00 3/31/01 9/30/01 3/31/02 

Six months ending . . . 

DivisionofResearchandStatistics DivisionofSupervision 

Virginia Olin (202) 898 8711 

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

Robert W. Walsh (202) 898 6911 

Federal Deposit Insurance Corporation Donald E. Powell, Chairman

Report on Underwriting Practices Report on Underwriting Practices

 •

 •

 •
INDIVIDUAL LOAN CATEGORIES

Number of FDIC-Supervised Banks Actively

Making Loans, by Loan Type

Proportion of FDIC-Supervised Banks That

Materially Changed Underwriting Practices since the

Previous Examination, by Direction of Change

Proportion of FDIC-Supervised Banks with “Medium” or

 2 2

Proportion of FDIC-Supervised Banks with “Medium” or 

Medium High 

38 

Six months ending . . . 

During the six months ending March 31, 2002, 

examiners commented about the increases in banks’ 

loan portfolios of adverse loan classifications, past due 

and non-accrual status, technical exceptions, and other 

troubled loans. They were also concerned with consistently inadequate underwriting standards in some banks 

and loans made to borrowers without adequate cash 

flow, proper financial and/or credit analyses, and without a clear and reasonably predictable repayment 

source. 

These concerns reflected the uptick in some occurrences of risky underwriting practices, both in general 

and by loan type. For example, the proportion of banks 

that either “frequently enough to warrant notice” (hereinafter, “frequently”) or “commonly or as standard procedure” (hereinafter, “commonly”) made loans in 

which the institution failed to adjust loan pricing on different-quality loans to reflect differences in risk 

increased from 10 percent to 13 percent; and the proportion of banks that either “frequently” or “commonly” made loans that failed to require a material principal 

reduction before renewing term loans rose from 24 percent to 25 percent. 

During the six months ending March 31, 2002, 

examiners indicated that 9 percent of FDIC-supervised 

banks showed a material change in underwriting practices since the previous examination: 5 percent had 

tightened their underwriting practices and 5 percent had 

loosened them.1 During the previous six months, the 

corresponding proportions were 6 percent and 5 percent. 

According to examiners, the main reasons for the 

loosening of underwriting practices were competition 

and/or growth goals; the main reasons for the tightening were a need to respond to regulatory observations 

and/or a change in management. 

1 Because of rounding, the sum of these two percentages may not

add up to the proportion that materially changed underwriting practices. 

Proportion of FDIC-Supervised Banks That 

Materially Changed Underwriting Practices since the 

Previous Examination, by Direction of Change 

Proportion 

15 

10 

5 

0 

3/31/00 9/30/00 3/31/01 9/30/01 3/31/02 

Six months ending . . . 

10 

12 

11 11 

10 

Looser Tighter 

Note: Because of rounding, the sum of the two percentages may 

not add up to the proportion that materially changed underwriting 

practices. 

INDIVIDUAL LOAN CATEGORIES 

Of the 1,149 banks examined during the six months 

ending March 31, 2002, 999 were active in business 

lending, 914 in consumer lending (excluding credit 

cards), and 864 in commercial (nonresidential) real 

estate lending. Eleven banks were not active in any of 

the major loan categories covered. The accompanying 

chart shows the number of banks for each major loan 

category. 

Number of FDIC-Supervised Banks Actively€

Making Loans, by Loan Type€

Responses Received 10/1/01–3/31/02€

Business 

Consumer 

Nonresidential 

Construction 

Agricultural 

Home Equity 

Credit Card 

None of the Above 

Total 

999 

654 

11 

914 

864 

527 

498 

160 

1149 

0 200 400 600 800 1000 1200 1400 

During the period covered by the report, increases in 

the frequency of two risky underwriting practices—one 

in construction lending and one in commercial (nonresidential) real estate lending—were noteworthy. One of 

the two risky practices was funding, or deferring, interest payments during the terms of construction loans; the 

other was making short-term commercial real estate 

loans with minimal amortization terms and large “balloon” payments at maturity. In all major lending categories, the frequency of risky practices in general rose 

slightly. 

ReportonUnderwritingPractices 2 March 2002 

Proportion of FDIC-Supervised Banks with “Medium” or

“High” Credit Risk in Their Overall Loan Portfolios

Report on Underwriting Practices 2 March 2002

32 34 34

40

3/31/00 9/30/00 3/31/01 9/30/01 3/31/02

0

10

20

30

40

50

Proportion
Construction Loans Commercial (Nonresidential) Real Estate

Loans

Business Loans

 2

Loans Made with Minimal Amortization Terms

and Large “Balloon” Payments at Maturity

Construction Loans

Loans Made in Which the Institution Funded, or Deferred,

Interest Payments During the Loan Term

Construction Loans 

As just noted, for banks active in making construction loans during the period covered, the increase in the 

frequency of one risky practice was noteworthy; the 

proportion of banks that either “frequently” or “commonly” funded, or deferred, interest payments during 

the terms of their commercial construction loans 

jumped from 15 percent to 20 percent. 

Construction Loans 

Loans Made in Which the Institution Funded, or Deferred, 

Interest Payments During the Loan Term 

(Sum of the proportion of FDIC-supervised banks making 

such loans either “frequently” or “commonly”) 

Proportion

25 

20 

15 

10 

5 

0 

3/31/00 9/30/00 3/31/01 9/30/01 3/31/02 

15

17

15

20

14

Six months ending . . . 

In addition, the proportion of banks that either “frequently” or “commonly” funded 100 percent of the cost 

of construction and land, with no cash equity on the part 

of the borrower/developer inched upward, from 12 percent to 13 percent. 

In contrast, the proportion of banks that either “frequently” or “commonly” made construction loans without consideration of repayment sources other than the 

project being funded inched downward, from 13 percent to 12 percent. 

The proportion of banks that either “frequently” or 

“commonly” failed to use realistic appraisal values relative to the current economic environment and/or to the 

performance observed on similar credits remained the 

same—12 percent. Likewise, the proportion that either 

“frequently” or “commonly” failed to take appropriate 

steps to verify the quality of alternative repayment 

sources when such sources are required remained the 

same—13 percent. 

During the reporting period, the survey was revised 

to separate speculative residential construction lending 

(that is, projects without meaningful pre-sale, pre-lease, 

or take-out commitments) from speculative commercial construction lending. Twenty-seven percent of 

banks either “frequently” or “commonly” made speculative residential construction loans, and 13 percent 

“frequently” or “commonly” made speculative commercial construction loans. 

Commercial (Nonresidential) Real Estate 

Loans 

For commercial (nonresidential) real estate lending, 

occurrences of specific risky underwriting practices 

rose compared with the previous six months. Of the 

FDIC-supervised banks actively making such loans, 18 

percent either “frequently” or “commonly” made shortterm commercial real estate loans with minimal amortization terms and large “balloon” payments at maturity, 

up from 14 percent previously. This increase, combined with the increase in the proportion of banks that 

funded, or deferred, interest payments during the term 

of the commercial construction loan indicates a longer 

construction period, as demand for such structures 

waned and prospective tenants delayed occupancy. 

Loans Made with Minimal Amortization Terms 

and Large “Balloon” Payments at Maturity 

(Sum of the proportion of FDIC-supervised banks making 

such loans either “frequently” or “commonly”) 

Proportion 

20 

15 

10 

5 

0 

3/31/00 9/30/00 3/31/01 9/30/01 3/31/02 

Six months ending . . . 

17 18 

15 

18 

14 

The proportion of banks that either “frequently” or 

“commonly” made commercial real estate loans without consideration of repayment sources other than the 

project being funded rose from 10 percent to 11 percent; the proportion that either “frequently” or “commonly” made loans without using realistic appraisal 

values relative to the current economic environment 

and/or to the performance observed on similar credits 

rose from 9 percent to 11 percent; and the proportion 

that either “frequently” or “commonly” made interestonly, extended-amortization, or negative-amortization 

permanent commercial real estate loans rose from 7 

percent to 8 percent. 

Business Loans 

The frequency of risky underwriting practices in 

business lending increased, but only slightly, during the 

six months ending March 31, 2002, compared with the 

six months ending September 30, 2001. The proportion 

of banks that either “frequently” or “commonly” made 

March 2002 3 ReportonUnderwritingPractices 

Commercial(Nonresidential) Real EstateLoans
Consumer Loans (Excluding Credit Card

Lending)

Agricultural Loans

Home Equity Loans

Credit Card Loans

Agricultural Loans

Proportion of FDIC-Supervised Banks Having a

“Moderate” or a “Sharp” Increase in Carryover Debt

 4 2

Business Loans

Loans Made to Borrowers Who Lacked Documented

Financial Strength to Support Such Lending

Consumer Loans

“Secured” Loans Made without Adequate Collateral Protection

Business Loans 

Loans Made to Borrowers Who Lacked Documented 

Financial Strength to Support Such Lending 

(Sum of the proportion of FDIC-supervised banks making 

such loans either “frequently” or “commonly”) 

Proportion 

25 

20 

15 

10 

5 

0 

3/31/00 9/30/00 3/31/01 9/30/01 3/31/02 

20 

22 22 22 23 

Six months ending . . . 

business loans to borrowers who lacked documented 

financial strength to support such lending rose from 22 

percent to 23 percent. 

The proportion of banks that made asset-based business loans (a subset of business lending) and either 

“frequently” or “commonly” failed to monitor the collateral pledged rose from 23 percent to 24 percent. But 

the proportion that either “frequently” or “commonly” 

made business loans without a clear and reasonably 

predictable repayment source dipped slightly, from 16 

percent to 15 percent. 

Consumer Loans (Excluding Credit Card 

Lending) 

For FDIC-supervised banks active in consumer 

lending (excluding credit card loans), the frequency of 

risky underwriting practices increased. The proportion 

of banks that either “frequently” or “commonly” made 

“secured” consumer loans without adequate collateral 

protection increased from 15 percent to 17 percent, and 

Consumer Loans 

“Secured” Loans Made without Adequate Collateral Protection 

(Proportion of FDIC-supervised banks making 

such loans either “frequently” or “commonly”) 

Proportion 

20 

15 

10 

5 

0 

3/31/00 9/30/00 3/31/01 9/30/01 3/31/02 

15 

17 

14 14 14 

Six months ending . . . 

the proportion that either “frequently” or “commonly” 

made loans to borrowers who lacked demonstrable ability to repay increased from 20 percent to 21 percent. 

Agricultural Loans 

The proportion of agricultural lenders that showed a 

“moderate” or a “sharp” increase in the bank’s level of 

carryover debt increased from 24 percent to 25 percent. 

But, the proportion of agricultural lenders that either 

“frequently” or “commonly” made agricultural loans 

on the basis of land values that cannot be supported by 

farm operations fell slightly, from 15 percent to 14 

percent. Likewise, the proportion of banks that made 

agricultural loans on the basis of unrealistic cash flow 

projections fell slightly, from 15 percent to 14 percent. 

Agricultural Loans 

Proportion of FDIC-Supervised Banks Having a 

“Moderate” or a “Sharp” Increase in Carryover Debt 

Proportion 

40 

30 

20 

10 

0 

3/31/00 9/30/00 3/31/01 9/30/01 3/31/02 

Six months ending . . . 

33 

26 

21 

24 25 

Moderate Sharp 

Home Equity Loans 

Of the FDIC-supervised banks that were active in 

home equity lending, the proportion of banks making 

home equity loans that pushed mortgage indebtedness 

above 90 percent of collateral value remained 

unchanged. Specifically, 11 percent of banks either 

“frequently” or “commonly” made such loans. 

The proportion of banks that “frequently” qualified 

borrowers for home equity credit on the basis of initially discounted (teaser) loan rates dropped from 2 percent 

to 1 percent; and the proportion that did so “commonly” rose from 0 percent to 1 percent. 

Credit Card Loans 

Few FDIC-supervised banks were making new 

credit card loans. Of the banks active in new credit 

card lending, 2 percent (up from 1 percent previously) 

had high risk in current underwriting practices for 

such loans, and 2 percent (up from 1 percent) had high 

risk associated with the bank’s credit card portfolio. 

ReportonUnderwritingPractices 4 March 2002 
 2

Purpose and Design of the Report

 O 1 1

 1 1

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 t r t p p

 t t w r a a m

 u p o l -s

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 o i

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 o a s p

Purpose and Design of the Report 

In early 1995, the FDIC began to require that a supplementary examination questionnaire on current 

underwriting practices at FDIC-supervised banks be 

filled out at the end of each FDIC-supervised bank 

examination. 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 (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 (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 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 

bank’s underwriting practices in relative terms: “above 

average,” “average,” or “below average.” Beginning 

October 1, 1998, examiners began rating the risk associated with a bank’s underwriting practices in absolute 

terms: “low,” “medium,” or “high.”2 New questions 

about underwriting practices were also added to the 

questionnaire. Examiners continue to classify the frequency of specific risky underwriting practices as 

“never or infrequently,” “frequently enough to warrant 

notice,” or, if the risky practice is used more often, 

“commonly or as standard procedure.”3 

The questionnaire is completed at the end 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 bank’s 

financial condition. In addition, the FDIC shares examination authority of state-chartered nonmember banks 

(those that 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, and the latter do not fill 

out 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 report’s results, we 

statistically weight the responses. The weights are 

designed to make questionnaire responses in the aggregate more reflective of the population of FDIC-supervised 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.4 Although these weightings cannot remove all potential bias, they do 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 a l FDIC supervised 

banks in the nation. 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. 

2 Low: 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. 

3 Never 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 pro- cedure: 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. 

4 Anyone who wishes more information about the weights should 

contact Virginia Olin, DRS, 202/898-8711. 

March 2002 5 ReportonUnderwritingPractices 
RESULTS FROM THE REPORT ON UNDERWRITING PRACTICES 

Percent of Respondents 

(Weighted)

Six-Month Period Ending: 

3/00 9/00 3/01 9/01 3/02 

GENERAL UNDERWRITING PRACTICES 

Have the institution’s underwriting practices materially Yes 9.7 11.6 11.6 10.8 9.2 

changed since the last examination: No 90.3 88.4 88.4 89.2 90.8 

If practices have materially changed, are they:1 Substantially tighter

Moderately tighter 

1.1 

3.1 

1.4 

3.6 

1.2 

3.9 

1.5 

4.5 

0.8 

3.8 

Moderately looser 4.4 4.7 5.2 3.3 2.7 

Substantially looser 1.1 1.8 1.2 1.6 1.9 

How would you characterize the risk associated with Low 55.4 52.5 51.3 49.8 52.0 

loan growth and/or significant changes in lending activ - ities since the last examination: Medium 

High

Insignificant 

28.6 

2.3 

13.8 

29.3 

4.8 

13.4 

31.2 

3.3 

14.2 

31.8 

4.4 

14.1 

30.6 

4.8 

12.6 

RISK IN CURRENT PRACTICES 

How would you characterize the potential risk associat- Low 67.7 65.3 64.7 63.3 60.6 

ed with the institution’s current UW practices: Medium 29.7 30.2 31.2 31.8 33.9 

High 2.7 4.6 4.2 4.9 

How would you characterize the potential credit risk of Low 68.3 66.1 65.6 62.6 59.5 

the institution’s overall loan portfolio: Medium 29.0 29.1 30.1 31.8 34.3 

High 2.7 4.7 4.3 5.6 

How would you characterize the potential risk in under- Low 78.5 78.8 74.5 76.2 73.1 

writing practices associated with loan participations pur - Medium 20.2 19.2 23.6 22.4 25.7 

chased by the institution: High 1.3 2.1 2.0 1.4 

To what extent has recent lending been made in amounts 

that resulted in—or contributed to—concentrations of 

credit to one borrower or industry: 

Never or infrequently 79.5 77.0 79.4 76.9 76.9 

Frequently enough to warrant notice 14.1 16.3 14.3 15.5 15.7 

Commonly or standard procedure 6.4 6.7 6.4 7.6 

To what extent is the institution currently engaged in 

out-of-area financing: 

Never or infrequently

Frequently enough to warrant notice 

88.2 

9.5 

85.9 

11.3 

84.6 

12.7 

85.1 

13.0 

86.4 

10.5 

Commonly or standard procedure 2.4 2.9 2.7 1.9 

How would you characterize the risk associated with Low 65.5 62.1 63.4 60.0 58.3 

loan administration: Medium 31.1 32.3 31.0 34.0 35.6 

High 3.4 5.6 5.6 6.0 

To what degree does the institution fail to adjust its loan 

pricing on different quality loans to reflect differences in 

risk:2 

Never or infrequently

Frequently enough to warrant notice 

Commonly or standard procedure 

87.7 

10.5 

1.8 

87.6 

10.2 

2.3 

87.6 

10.0 

2.4 

89.6 

8.1 

2.3 

87.3 

10.3 

To what extent does the institution fail to require a material principal reduction before renewing term loans:2 

To what extent do the institution’s written lending poli­ cies differ from actual practices: 

Never or infrequently

Frequently enough to warrant notice 

76.8 

20.8 

77.4 

19.3 

78.6 

18.8 

76.2 

19.8 

75.1 

21.5 

Commonly or standard procedure 2.5 3.3 2.7 4.0 

Never or infrequently

Frequently enough to warrant notice 

78.2 

19.0 

74.1 

22.2 

77.6 

18.7 

77.0 

20.0 

77.6 

18.8 

Commonly or standard procedure 2.9 3.7 3.7 2.9 3.6 

Never or infrequently 85.1 85.1 86.4 84.5 84.8 

Frequently enough to warrant notice 13.5 13.8 12.4 14.2 12.7 

Commonly or standard procedure 1.4 1.1 1.2 1.4 2.6 

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: 

Never or infrequently 79.9 77.9 78.4 77.9 77.0 

Frequently enough to warrant notice 18.5 20.2 19.8 20.2 20.3 

Commonly or standard procedure 1.6 1.9 1.8 1.9 

Never or infrequently 80.6 79.2 80.0 77.1 75.9 

Frequently enough to warrant notice 17.3 19.4 16.8 19.1 21.9 

Commonly or standard procedure 2.2 1.4 3.2 3.8 2.3 

Never or infrequently

Frequently enough to warrant notice 

NA 

NA 

NA 

NA 

NA 

NA 

NA 

NA 

73.4 

21.0 

Commonly or standard procedure NA NA NA NA 5.5 

CONSTRUCTION LOANS 

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

meaningful pre-sale, pre-lease or take-out commit­ ments): 

To what extent is the institution funding commercial

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 conNever or infrequently NA NA NA NA 87.4 

Frequently enough to warrant notice NA NA NA NA 11.7 

Commonly or standard procedure NA NA NA NA 1.0 

sideration of repayment sources other than the project 

being funded: 

When alternative repayment sources are required, to 

what extent does the institution fail to take appropriate 

Never or infrequently 88.1 87.4 86.7 87.4 88.5 

Frequently enough to warrant notice 10.5 10.7 10.8 10.6 10.3 

Commonly or standard procedure 1.4 2.0 2.5 2.0 1.2 

Never or infrequently 87.7 87.5 87.4 86.9 87.3 

Frequently enough to warrant notice 11.1 10.6 10.5 10.8 11.0 

steps to verify the quality of these sources: Commonly or standard procedure 1.1 1.9 2.1 2.3 1.8 

To what extent does the institution fail to use realistic 

appraisal values relative to the current economic envi­ ronment and/or to the performance observed on similar

credits: 

Never or infrequently 89.5 87.7 88.3 88.2 88.5 

Frequently enough to warrant notice 9.6 10.8 10.6 10.2 10.9 

Commonly or standard procedure 0.9 1.5 1.1 1.6 0.6 

1 Prior to October 1, 1998, responses were either “tighter” or “looser.”

2 Prior to October 1998, responses were “rarely,” “to some degree,” or “commonly.” 

6 March 2002 

5.5 

6.2 

1.2 

7.5 

3.1 

6.1 

2.4 

3.4 

2.8 

ReportonUnderwritingPractices 
RESULTS FROM THE REPORT ON UNDERWRITING PRACTICES 

Percent of Respondents 

Weighted

Six-Month Period Ending: 

3/00 9/00 3/01 9/01 3/02 

CONSTRUCTION LOANS (cont.) 

To what extent doesthe institution fund, or defer, inter - est payments during the term of its commercial construction loans: Never or infrequently 

Frequently enough to warrant notice

Commonly or standard procedure 

86.0 

7.9 

6.1 

85.2 

9.6 

5.2 

83.5 

8.8 

7.8 

85.2 

8.9 

5.9 

80.3 

11.2 

8.5 

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: 

Never or infrequently 

Frequently enough to warrant notice

Commonly or standard procedure 

88.8 

9.7 

1.6 

87.7 

11.0 

1.4 

87.5 

8.8 

3.8 

87.8 

9.5 

2.7 

87.0 

10.8 

2.2 

NONRESIDENTIAL LOANS 

To what extent are commercial real estate loans made 

without consideration of repayment sources other than 

Never or infrequently

Frequently enough to warrant notice 

88.7 

10.2 

87.7 

10.6 

90.3 

8.2 

89.9 

8.8 

88.9 

9.5 

the project being funded: Commonly or standard procedure 1.1 1.7 1.5 1.3 1.6 

To what extent does the institution make interest-only, 

extended amortization, or negative amortization perma - Never or infrequently

Frequently enough to warrant notice 

92.7 

6.9 

92.5 

6.8 

94.0 

5.1 

93.2 

6.0 

92.2 

7.5 

nent commercial real estate loans: Commonly or standard procedure 0.5 0.7 0.9 0.8 0.3 

To what extent does the institution make short-term 

commercial real estate loans (“Mini-perms”) with min- Never or infrequently 83.1 82.2 84.8 86.4 82.4 

imal amortization terms and large “balloon” payments

at maturity: 

Frequently enough to warrant notice 

Commonly or standard procedure 

13.8 

3.1 

15.0 

2.9 

11.4 

3.8 

11.2 

2.4 

14.1 

3.5 

To what extent does the institution fail to use realistic 

appraisal values relative to the current economic envi- ronment and/or to the performance observed on similar 

credits: 

Never or infrequently 

Frequently enough to warrant notice

Commonly or standard procedure 

91.4 

8.2 

0.4 

88.7 

10.1 

1.2 

90.9 

8.5 

0.6 

90.7 

8.4 

0.9 

89.4 

9.9 

0.7 

HOME EQUITY LOANS 

To what extent does the institution make home equity 

loans that push mortgage indebtedness above 90per- Never or infrequently

Frequently enough to warrant notice 

88.3 

9.2 

86.6 

9.9 

90.5 

7.7 

88.8 

10.3 

89.3 

10.0 

cent of collateral value: Commonly or standard procedure 2.5 3.5 1.8 0.9 

To what extent does the institution qualify borrowers 

for home equity credit based on initially-discounted 

Never or infrequently

Frequently enough to warrant notice 

99.0 

0.4 

97.3 

2.1 

98.7 

1.1 

98.4 

1.6 

98.7 

0.6 

loan rates: Commonly or standard procedure 0.6 0.7 0.2 0.0 0.7 

AGRICULTURAL LOANS 

To what extent does the institution make agricultural Never or infrequently 85.8 87.3 90.1 85.5 86.4 

loans on the basis of land values that cannot be sup- ported by farm operations: Frequently enough to warrant notice 

Commonly or standard procedure 

13.1 

1.2 

11.6 

1.1 

8.0 

2.0 

13.2 

1.3 

12.0 

1.7 

To what extent are agricultural loans being made based Never or infrequently 86.3 89.5 88.8 84.8 86.4 

on unrealistic cash flow projections: Frequently enough to warrant notice 12.2 9.8 9.8 13.6 12.0 

Commonly or standard procedure 1.5 0.7 1.4 1.6 1.6 

Sharp decline 3.1 1.9 1.6 1.5 2.0 

Moderate decline 11.3 13.7 14.0 11.9 9.4 How would you characterize the change in the level of 

the institution’s agricultural related carryover debt No change

Moderate increase 

52.7 

31.0 

58.4 

25.1 

63.4 

19.7 

63.2 

21.9 

64.1 

22.7 

since the last examination: 

Sharp increase 2.0 1.0 1.3 1.5 1.8 

CONSUMER LOANS 

To what extent does the institution make ‘secured’ con- Never or infrequently 85.7 86.3 85.4 85.5 83.4 

sumer loans without adequate collateral protection: Frequently enough to warrant notice 12.1 11.9 13.1 12.0 14.2 

To what extent does the institution make consumer 

Commonly or standard procedure 2.2 1.8 1.6 2.6 2.5 

loans to borrowers who lack demonstrable ability to 

Never or infrequently 83.1 82.4 80.0 80.0 79.0 

repay: 

Frequently enough to warrant notice 14.4 15.4 17.5 16.8 18.0 

CREDIT CARD LOANS 

Commonly or standard procedure 2.5 2.2 2.4 3.2 3.0 

Have the institution’s underwriting practices for new 

credit card loans materially changed since the last

examination: 

Yes 2.1 2.1 2.5 5.2 6.4 

Are underwriting practices for new credit cards:1 

No 97.9 97.9 97.5 94.8 93.6 

Substantially tighter 0.7 1.2 1.4 1.1 0.6 

Moderately tighter

Moderately looser 

0.5 

0.9 

0.5 

0.0 

1.1 

0.0 

2.9 

1.2 

3.8 

1.2 

How would you characterize the level of risk associat- ed with the institution’s current underwriting practices 

Substantially looser 

Low 

0.0 

80.2 

0.3 

78.5 

0.0 

77.7 

0.0 

79.2 

0.7 

74.5 

for new credit card loans: 

Medium 18.5 20.0 21.5 20.3 24.0 

How would you characterize the level of risk associat- ed with the institution’s credit card portfolio: 

High 

Low 

1.3 

79.6 

1.5 

78.3 

0.9 

75.5 

0.5 

77.2 

1.5 

74.3 

Medium 19.6 19.8 21.9 21.9 23.5 

For credit card loans in the institution’s portfolio with

risk characterized as high, to what degree does the instiHigh 0.9 1.8 2.7 0.9 2.2 

tution fail to adjust its loan pricing to account for this 

Never or infrequently 100.0 60.0 74.7 50.0 80.8 

risk: 

Frequently enough to warrant notice 0.0 40.0 0.0 50.0 0.0 

Commonly or standard procedure 0.0 0.0 25.3 0.0 19.2 

March 2002 7 

1 Prior to October 1, 1998, responses were either “tighter” or “looser.” 

0.8 

ReportonUnderwritingPractices 
The Report on Underwriting Practices Seeks

Characteristics of Banks Examined in the Report on Underwriting Practices 

 Coverage: 1,149 FDIC-supervised banks. 

 Period: Reports filed between October 1, 2001, and March 31, 2002. 

 Charter types: 100 percent of the examined banks during this period were state-chartered commercial banks. 

 Size distribution of banks: assets of $1 billion or greater, 6 percent; assets between $300 million and $1 billion, 12 percent; assets between $25 million and $300 million, 71 percent; assets less than $25 million, 11 

percent. 

The Report on Underwriting Practices Seeks 

 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. 

 To track emerging issues in underwriting practices of new loans. 

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

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