Banks Making More Risky Building Loans, FDIC Warns

U.S. banks are increasingly making risky loans for commercial real estate and construction projects, the Federal Deposit Insurance Corp. warned.

Of 387 banks actively making construction loans, 31% “frequently funded speculative construction projects,” according to an FDIC survey released Monday.

Last year, the survey found that of 593 banks making construction loans, only 18% were approving loans for speculative construction projects.

“These early signs of adverse trends across the board call for our continued close monitoring of underwriting practices for all major types of loans,” Andrew Hove, chairman of the FDIC, said in a statement.

About 5% of banks said they had tightened their standards for loan underwriting since the last survey, while another 6% said they had loosened them.

The survey also found that 13% of the 612 banks making loans for commercial real estate projects were failing to consider sources of collateral other than the project being funded. In 1997, 8% of the 832 lenders surveyed did the same, according to the survey.

Almost 21% of the 806 banks making business loans as part of their primary lending portfolios often “made them to borrowers who lacked documented financial strength to support such lending,” the FDIC survey found.

The survey covered the six-month period ended March 31.