Bank Regulators Divided on Commercial Loan Guidance

Federal bank regulators released two sets of new guidance on commercial real estate loans December 6, both of which included the use of thresholds, but to varying degrees. One set – issued jointly by the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency – included numerical thresholds to gauge whether lenders hold too much CRE exposure. But the Office of Thrift Supervision released its own version of the guidance, which, except for limits already enacted by Congress, includes none of the tripwires approved by the bank regulators. Instead, the thrift regulatory agency said it will consider a closer review if particular institutions take on too much CRE lending, or if they do so too rapidly.

The joint report drew immediate fire from incoming House Financial Services Committee Chairman Barney Frank, D-Mass., who said the guidelines may discourage multi-unit home loans. Frank and committee member Rep. Spencer Bachus, R-Ala., blasted the joint agency version, explicitly criticizing inclusion of the thresholds, which the three regulators said will be used as "a supervisory monitoring tool."

"Our committee's hearing on this topic earlier this fall showed that there was no real basis for the approach they are taking, which we believe may unduly discourage lending, including multifamily lending that plays an important social role," the statement said.

As proposed, the guidelines set two different screening thresholds. Under the proposed guidelines, institutions would be considered too concentrated in CRE holdings (and subject to additional risk management requirements) if:

• loans for construction, land development and other land equaled at least 100 percent or more of the institution's total capital (the so-called 100 percent screen), or; 
• loans for construction, land development and other land and loans secured by multifamily and nonfarm nonresidential property (except for loans secured by owner-occupied properties) came to 300 percent or more of total capital (the "300 percent screen").

By contrast, the OTS said a savings institution may have too much CRE concentration if it:

• is approaching HOLA investment limits;
• has experienced rapid growth in CRE lending;
• has "notable exposure" to a particular type of CRE loans, or any "high-risk" CRE loan;
• has already heard supervisory concerns about CRE lending in prior examinations, or;
• has experienced significant delinquencies or charge-offs in its CRE loan portfolio.

A link to the joint Fed, FDIC, and OCC version of the guidance may be found at www.federalreserve.gov. A link to the OTS guidance may be found at www.ots.treas.gov/docs/7/776055.html.

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