Banks told easing of loan standards adding to loss risk

Banking regulators are worried that "aggressive" mortgage underwriting could make banks' loan portfolios vulnerable to losses if interest rates rise or property values decline, Federal Reserve Governor Susan Bies says.

Home-equity lending increased 40 percent last year to $398 billion, Bies told an American Bankers Association meeting in Chicago last week. Banking regulators, including the Fed, have seen banks reduce credit standards as they compete for that business.

"Given this easing of standards, there is concern that banks' home-equity loan portfolios may be vulnerable to a rise in interest rates and a decline in home values," Bies said. "More aggressive underwriting may set the stage for future deterioration in credit quality."

Last month the Fed and other bank regulators issued new guidelines to strengthen home-equity lending standards.

Bloomberg News

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