Wednesday, May 18, 2005

New Credit Risk Guidelines (from Calculated Risk)

Calculated Risk recently posted a piece on new credit risk guidance given by regulatory agencies, including the Office of the Comptroller of the Currency, the FDIC, and the FED:

In the guidance, the agencies point to several "product, risk management, and underwriting risk factors and trends that have attracted scrutiny":
· Interest-only features that require no amortization of principal for a protracted period;

· Limited or no documentation of a borrower’s assets, employment, and income (known as "low doc" or "no doc" lending);

· Higher loan-to-value (LTV) and debt-to- income (DTI) ratios;

· Lower credit risk scores for underwriting home equity loans;

· Greater use of automated valuation models (AVMs) and other collateral evaluation tools for the development of appraisals and evaluations; and

· An increase in the number of transactions generated through a loan broker or other third party.
All of these areas of concern are addressed with tighter lending requirements in the various provisions of the new guideline. These include tighter controls to detect mortgage fraud, better controls on third party originations, more stringent appraisal guidelines and more.

There's also a fair bit of material on home equity loans and high loan-to-value lending - well worth reading. Click here for the whole piece.

It's good information to use when talking about credit risk with your classes. It could spark a good discussion in class on how recent market forces have changed the level of risk exposure of banks nowadays, and on how banks can better manage that risk.

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