Banking is getting to be a riskier business.
With lenders flooding consumers with credit card solicitations and offering exotic mortgage products that let consumers pay little or no interest for extended periods, the banking industry is making "a marked shift in relaxing credit terms," a top federal banking regulator said Wednesday.
That change is creating challenges for regulators charged with protecting consumers from deceptive and unfair practices and maintaining a safe and sound banking industry, said Julie L. Williams, the acting comptroller in the Office of the Comptroller of the Currency, which oversees the nation's nationally-chartered banks.
While banks are making more credit available to customers in many different forms, consumers also are becoming more willing to take on debt and view the borrowings not as something to be paid back quickly but as an acceptable ongoing expense, Williams said.
"There definitely is a culture shift in how people think about using money," Williams told about 50 people during a talk at Canisius College. "It presents new risk issues for the industry, but they're not unmanageable as long as they're recognized and contained."
Yet Williams conceded that regulators struggle to keep up with the new innovations and products offered by banks. "Change is occurring so fast, it is almost impossible to regulate to catch up to it, much less legislate for it," she said. "Some of the most controversial things that lenders do aren't covered by regulation because regulators can't keep up."
That, in turn, forces regulators to use their supervisory powers to steer the industry to take steps to manage and reduce their credit risks on more controversial products, Williams said.
Part of the change stems from the banking industry's increasing reliance on fees and other income streams generated by their lending activity, rather than the traditional pattern of customers borrowing and paying back their loans. "Some of us call it renting money," Williams said.
"Qualifying credit scores are going down. Acceptable debt-to-income ratios are going up. All of this points to a greater level of credit risk," she said.
Williams cited interest-only mortgages, which are popular in many high-priced housing markets, as a risky product that could snare customers who don't fully understand the terms of their loans, as well as banks that may be too lenient in granting those loans.
A $300,000 adjustable-rate mortgage with a three-year grace period on principal payments and an interest rate that adjusts annually from 4.25 percent in the first year to 6.25 percent in the third year would start out with a monthly payment of $1,000. But that payment would rise to $1,900 after the third year, potentially straining the homeowners' budget.
"What concerns us is, do customers understand all this?" she asked. "Do banks look at whether the customer can repay based only on the lowest amount they'd have to repay? Or do they qualify borrowers based on the higher amounts they might face in later years?"
"We have concerns that some lenders aren't doing that," she said.