Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices, 2302-2307 [06-340]
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Federal Register / Vol. 71, No. 9 / Friday, January 13, 2006 / Notices
hsrobinson on PROD1PC70 with NOTICES
service of a decision granting the
petition for exemption. Each OFA must
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See 49 CFR 1002.2(f)(25).
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1002.2(f)(27).
All filings in response to this notice
must refer to STB Docket No. AB–1067
(Sub-No. 1X) and must be sent to: (1)
Surface Transportation Board, 1925 K
Street, NW., Washington, DC 20423–
0001; and (2) John F. Larkin, General
Railway Corp. d/b/a Iowa Northwestern
Railroad, 4814 Douglas St., Omaha, NE
68132.
Persons seeking further information
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Questions concerning environmental
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An environmental assessment (EA) (or
environmental impact statement (EIS), if
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Decided: January 5, 2006.
By the Board, David M. Konschnik,
Director, Office of Proceedings.
Vernon A. Williams,
Secretary.
[FR Doc. 06–234 Filed 1–12–06; 8:45 am]
BILLING CODE 4915–01–P
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DEPARTMENT OF THE TREASURY
Departmental Offices; Debt
Management Advisory Committee
Meeting
Notice is hereby given, pursuant to 5
U.S.C. App. 2 § 10(a)(2), that a meeting
will be held at the Hay-Adams Hotel,
16th Street and Pennsylvania Avenue,
NW., Washington, DC, on January 31,
2006 at 3 p.m. of the following debt
management advisory committee:
Treasury Borrowing Advisory
Committee of The Bond Market
Association (‘‘Committee’’)
The agenda for the meeting provides
for a charge by the Secretary of the
Treasury or his designate that the
Committee discuss particular issues,
and a working session. Following the
working session, the Commission will
present a written report of its
recommendations. The meeting will be
closed to the public, pursuant to 5
U.S.C. App. 2 § 10(d) and Pub. L. 103–
202, § 202(c)(1)(B) (31 U.S.C. § 3121
note).
This notice shall constitute my
determination, pursuant to the authority
placed in heads of agencies by 5 U.S.C.
App. 2, § 10(d) and vested in me by
Treasury Department Order No. 101–05,
that the meeting will consist of
discussions and debates of the issues
presented to the Committee by the
Secretary of the Treasury and the
making of recommendations of the
Committee to the Secretary, pursuant to
Pub. L. 103–202, § 202(c)(1)(B). Thus,
this information is exempt from
disclosure under that provision and 5
U.S.C. 552b(c)(3)(B). In addition, the
meeting is concerned with information
that is exempt from disclosure under 5
U.S.C. 552b(c)(9)(A). The public interest
requires that such meetings be closed to
the public because the Treasury
Department requires frank and full
advice from representatives of the
financial community prior to making its
final decisions on major financing
operations. Historically, this advice has
been offered by debt management
advisory committee established by the
several major segments of the financial
community. When so utilized, such a
committee is recognized to be an
advisory committee under 5 U.S.C. App.
2, § 3.
Although the Treasury’s final
announcement of financing plans may
not reflect the recommendations
provided in reports of the Committee,
premature disclosure of the Committee’s
deliberations and reports would be
likely to lead to significant financial
speculation in the securities market.
Thus, this meeting falls within the
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exemption covered by 5 U.S.C.
552b(c)(9)(A).
Treasury staff will provide a technical
briefing to the press on the day before
the Committee meeting, following the
release of a statement of economic
conditions, financing estimates and
technical charts. This briefing will give
the press an opportunity to ask
questions about financing projections
and technical charts. The day after the
Committee meeting, Treasury will
release the minutes of the meeting, any
charts that were discussed at the
meeting, and the Committee’s report to
the Secretary.
The Office of Debt Management is
responsible for maintaining records of
debt management advisory committee
meetings and for providing annual
reports setting forth a summary of
Committee activities and such other
matters as may be informative to the
public consistent with the policy 5
U.S.C. 552(c). The Designated Federal
Officer or other responsible agency
official who may be contacted for
additional information is Jeff Huther,
Director, Office of Debt Management, at
(202) 622–1868.
Dated: Janaury 6, 2006.
Emil W. Henry, Jr.,
Assistant Secretary, Financial Institutions.
[FR Doc. 06–297 Filed 1–12–06; 8:45 am]
BILLING CODE 4810–25–M
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
[Docket No. 06–01]
BOARD OF THE GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
[Docket No. OP–1248]
FEDERAL DEPOSIT INSURANCE
CORPORATION
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
[No. 2006–01]
Concentrations in Commercial Real
Estate Lending, Sound Risk
Management Practices
Office of the Comptroller of
the Currency, Treasury (OCC); Board of
Governors of the Federal Reserve
System (Board); Federal Deposit
Insurance Corporation (FDIC); and
Office of Thrift Supervision, Treasury
(OTS).
AGENCIES:
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Proposed guidance with request
for comment.
hsrobinson on PROD1PC70 with NOTICES
ACTION:
SUMMARY: The OCC, Board, FDIC, and
OTS (the Agencies), request comment
on this proposed guidance entitled,
Concentrations in Commercial Real
Estate Lending, Sound Risk
Management Practices (Guidance). The
Agencies have observed that some
institutions have high and increasing
concentrations of commercial real estate
loans on their balance sheets and are
concerned that these concentrations
may make the institutions more
vulnerable to cyclical commercial real
estate markets. This proposed Guidance
helps identify institutions with
commercial real estate loan
concentrations that may be subject to
greater supervisory scrutiny. As
provided in the proposed Guidance,
such institutions should have in place
risk management practices and capital
levels appropriate to the risk associated
with these concentrations.
DATES: Comments must be submitted on
or before March 14, 2006.
ADDRESSES: The Agencies will jointly
review all of the comments submitted.
Therefore, interested parties may send
comments to any of the Agencies and
need not send comments (or copies) to
all of the Agencies. Please consider
submitting your comments by e-mail or
fax since paper mail in the Washington
area and at the Agencies is subject to
delay. Interested parties are invited to
submit comments to:
OCC: You should include ‘‘OCC’’ and
Docket Number 06–01 in your comment.
You may submit your comment by any
of the following methods:
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• OCC Web site: https://
www.occ.treas.gov. Click on ‘‘Contact
the OCC,’’ scroll down and click on
‘‘Comments on Proposed Regulations.’’
• E-Mail Address:
regs.comments@occ.treas.gov.
• Fax: (202) 874–4448.
• Mail: Office of the Comptroller of
the Currency, 250 E Street, SW., Mail
Stop 1–5, Washington, DC 20219.
• Hand Delivery/Courier: 250 E
Street, SW., Attn: Public Information
Room, Mail Stop 1–5, Washington, DC
20219.
Instructions: All submissions received
must include the agency name (OCC)
and docket number for this notice. In
general, the OCC will enter all
comments received into the docket
without change, including any business
or personal information that you
provide. You may review comments and
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other related materials by any of the
following methods:
• Viewing Comments in person: You
may inspect and photocopy comments
at the OCC’s Public Information Room,
250 E Street, SW., Washington, DC. You
can make an appointment to inspect
comments by calling (202) 874–5043.
• Viewing Comments Electronically:
You may request that we send you an
electronic copy of comments via e-mail
or mail you a CD–ROM containing
electronic copies by contacting the OCC
at regs.comments@occ.treas.gov.
• Docket Information: You may also
request available background
documents and project summaries using
the methods described above.
Board: You may submit comments,
identified by Docket No. OP–1248, by
any of the following methods:
• Agency Web site: https://
www.federalreserve.gov. Follow the
instructions for submitting comments at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• E-mail:
regs.comments@federalreserve.gov.
Include the docket number in the
subject line of the message.
• FAX: 202/452–3819 or 202/452–
3102.
• Mail: Jennifer J. Johnson, Secretary,
Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue, NW., Washington,
DC 20551.
All public comments are available
from the Board’s Web site at https://
www.federalreserve.gov/generalinfo/
foia/ProposedRegs.cfm as submitted,
unless modified for technical reasons.
Accordingly, your comments will not be
edited to remove any identifying or
contact information. Public comments
may also be viewed in electronic or
paper form in Room MP–500 of the
Board’s Martin Building (20th and C
Streets, NW.) between 9 a.m. and 5 p.m.
on weekdays.
FDIC: You may submit comments by
any of the following methods:
• Agency Web site: https://
www.fdic.gov/regulations/laws/federal/
propose.html. Follow the instructions
for submitting comments on the Agency
Web site.
• E-Mail: Comments@FDIC.gov.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments, Federal
Deposit Insurance Corporation, 550 17th
Street, NW., Washington, DC 20429.
• Hand Delivery/Courier: Guard
station at the rear of the 550 17th Street
Building (located on F Street) on
business days between 7 a.m. and 5 p.m.
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Instructions: All submissions received
must include the agency name. All
comments received will be posted
without change to https://www.fdic.gov/
regulations/laws/federal/propose.html
including any personal information
provided.
• Public Inspection: Comments may
be inspected and photocopied in the
FDIC Public Information Center, Room
100, 801 17th Street, NW., Washington,
DC, between 9 a.m. and 4:30 pm. on
business days.
OTS: You may submit comments,
identified by docket number 2006–01,
by any of the following methods:
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• E-mail address:
regs.comments@ots.treas.gov. Please
include docket number 2006–01 in the
subject line of the message and include
your name and telephone number in the
message.
• Fax: (202) 906–6518.
• Mail: Regulation Comments, Chief
Counsel’s Office, Office of Thrift
Supervision, 1700 G Street, NW.,
Washington, DC 20552, Attention: No.
2006–01.
• Hand Delivery/Courier: Guard’s
Desk, East Lobby Entrance, 1700 G
Street, NW., from 9 a.m. to 4 p.m. on
business days. Address envelope as
follows: Attention: Regulation
Comments, Chief Counsel’s Office,
Attention: No. 2006–01.
Instructions: All submissions received
must include the agency name and
docket number for this proposed
Guidance. All comments received will
be posted without change to the OTS
Internet Site at https://www.ots.treas.gov/
pagehtml.cfm?catNumber=67&an=1,
including any personal information
provided.
Docket: For access to the docket to
read background documents or
comments received, go to https://
www.ots.treas.gov/
pagehtml.cfm?catNumber=67&an=1. In
addition, you may inspect comments at
the OTS’s Public Reading Room, 1700 G
Street, NW., by appointment. To make
an appointment for access, call (202)
906–5922, send an e-mail to
public.info@ots.treas.gov, or send a
facsimile transmission to (202) 906–
7755. (Prior notice identifying the
materials you will be requesting will
assist us in serving you.) We schedule
appointments on business days between
10 a.m. and 4 p.m. In most cases,
appointments will be available the next
business day following the date we
receive a request.
FOR FURTHER INFORMATION CONTACT:
OCC: Daniel Bailey, National Bank
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Federal Register / Vol. 71, No. 9 / Friday, January 13, 2006 / Notices
Examiner, Credit Risk Division, (202)
874–5170, Office of the Comptroller of
the Currency, 250 E Street, SW.,
Washington, DC 20219.
Board: Denise Dittrich, Supervisory
Financial Analyst, (202) 452–2783; or
Virginia Gibbs, Senior Supervisory
Financial Analyst, (202) 452–2521; or
Sabeth I. Siddique, Assistant Director,
(202) 452–3861, Division of Banking
Supervision and Regulation; or Mark
Van Der Weide, Senior Counsel, Legal
Division, (202) 452–2263. For users of
Telecommunications Device for the Deaf
(‘‘TDD’’) only, contact (202) 263–4869.
FDIC: James Leitner, Senior
Examination Specialist, Division of
Supervision and Consumer Protection,
(202) 898–6790, or Benjamin W.
McDonough, Attorney, Legal Division,
(202) 898–7411.
OTS: William Magrini, Senior Project
Manger, (202) 906–5744, or Karen
Osterloh, Counsel, (202) 906–6639.
SUPPLEMENTARY INFORMATION:
I. Background
The Agencies have observed that
some institutions have high and
increasing concentrations of commercial
real estate loans on their balance sheets
and are concerned that these
concentrations may make the
institutions more vulnerable to cyclical
commercial real estate markets. The
Agencies have previously issued
regulations and guidelines that outline
supervisory expectations for a safe and
sound commercial real estate lending
program. This proposed statement is
intended to reinforce that guidance as it
relates to institutions with
concentrations in commercial real estate
loans.
hsrobinson on PROD1PC70 with NOTICES
II. Principal Elements of the Guidance
For the purposes of the proposed
Guidance, the Agencies are focusing on
concentrations in those types of
commercial real estate (CRE) loans that
are particularly vulnerable to cyclical
commercial real estate markets. These
include CRE exposures where the
source of repayment primarily depends
upon rental income or the sale,
refinancing, or permanent financing of
the property. Loans to REITs and
unsecured loans to developers that
closely correlate to the inherent risk in
CRE markets would also be considered
CRE loans for purposes of the proposed
Guidance.
The proposed Guidance sets forth
thresholds for assessing whether an
institution has a CRE concentration and
should employ heightened risk
management practices. This Guidance is
based upon the principles contained in
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the Agencies’ real estate lending
standards regulations and guidelines.
The proposed Guidance also reminds
institutions with CRE concentrations
that they should hold capital higher
than regulatory minimums and
commensurate with the level of risk in
their CRE lending portfolios. In
assessing the adequacy of an
institution’s capital, the proposed
Guidance states that the Agencies will
take into account the level of inherent
risk in its CRE portfolio and the quality
of its risk management practices.
III. Request for Comment
The Agencies are requesting public
comment on all aspects of the proposed
Guidance. In particular, the Agencies
request comment on the scope of the
definition of CRE and on the
appropriateness of the thresholds for
determining elevated concentration risk.
The text of the proposed Guidance
entitled, Concentrations in Commercial
Real Estate Lending, Sound Risk
Management Practices follows:
Purpose
The Office of the Comptroller of the
Currency, the Board of Governors of the
Federal Reserve System, the Federal
Deposit Insurance Corporation, and the
Office of Thrift Supervision (the
Agencies) are jointly issuing this
Guidance to address the increasing
concentrations of commercial real estate
loans at many institutions. The
Agencies are concerned that
concentrations in commercial real estate
loans where repayment is primarily
dependent on rental income or from the
proceeds of the sale, refinancing or
permanent financing of the property
may expose institutions to
unanticipated earnings and capital
volatility due to adverse changes in the
general commercial real estate market.
This Guidance reinforces the
Agencies’ existing guidelines for real
estate lending and safety and
soundness.1 This Guidance also
provides criteria for identifying
institutions with commercial real estate
loan concentrations that may be subject
to greater supervisory scrutiny. As
provided in the Guidance, such
institutions should have in place risk
1 Refer to the Agencies’ regulations on real estate
lending standards and the Interagency Guidelines
for Real Estate Lending Policies: 12 CFR part 34,
subpart D and appendix A (OCC); 12 CFR part 208,
subpart E and appendix C (FRB); 12 CFR part 365
and appendix A (FDIC); and 12 CFR 560.100–101
(OTS). Refer to the Interagency Guidelines
Establishing Standards for Safety and Soundness:
12 CFR part 30, appendix A (OCC); 12 CFR part
208, Appendix D–1 (FRB); 12 CFR part 364,
appendix A (FDIC); and 12 CFR part 570, appendix
A (OTS).
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management practices and capital levels
appropriate to the risk associated with
these concentrations.
For purposes of this Guidance,
commercial real estate (CRE) loans are
exposures secured by raw land, land
development and construction
(including 1–4 family residential
construction), multi-family property,
and non-farm nonresidential property
where the primary or a significant
source of repayment is derived from
rental income associated with the
property (that is, loans for which 50
percent or more of the source of
repayment comes from third party, nonaffiliated, rental income) or the proceeds
of the sale, refinancing, or permanent
financing of the property. Loans to
REITs and unsecured loans to
developers that closely correlate to the
inherent risk in CRE markets would also
be considered CRE loans for purposes of
this Guidance.
Background
In the past, weak CRE loan
underwriting and depressed CRE
markets have contributed to significant
bank failures and instability in the
banking system. While underwriting
standards are generally stronger than
those during previous CRE cycles, the
Agencies have observed high
concentrations in CRE loans at some
institutions. The Agencies are
concerned that these concentrations
may make the institutions more
vulnerable to cyclical CRE markets.
Accordingly, institutions with such CRE
concentrations should have both
heightened risk management practices
and levels of capital that are higher than
the regulatory minimums and
appropriate to the risk in their CRE
lending portfolios.
Recent examinations have indicated
that the risk management practices and
capital levels of some institutions are
not keeping pace with their increasing
CRE concentrations. In some cases, the
Agencies have observed that institutions
have rapidly expanded their CRE
lending operations into new markets
without establishing adequate control
and reporting processes, including the
preparation of market analyses. The
Agencies are also concerned when
institutions with high CRE
concentrations maintain capital levels
near regulatory minimums. Minimum
levels of regulatory capital do not
provide institutions with an adequate
cushion to absorb unexpected losses
arising from loan concentrations and are
inconsistent with the Agencies’ capital
adequacy guidelines. Institutions with a
concentration in CRE loans should
ensure the maintenance of capital levels
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Federal Register / Vol. 71, No. 9 / Friday, January 13, 2006 / Notices
that are commensurate with the risk of
such concentrations.
Identification of Institutions With CRE
Concentrations
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Institutions with CRE concentrations
should have in place risk management
practices consistent with this Guidance
to mitigate the increased risks
associated with such concentrations. To
determine whether it has a
concentration in CRE lending that
warrants the use of heightened risk
management practices, an institution, as
a preliminary step, should use
regulatory reports to determine whether
it exceeds or is rapidly approaching the
following thresholds:
(1) Total reported loans for
construction, land development, and
other land 2 represent one hundred
percent (100%) or more of the
institution’s total capital; 3 or
(2) Total reported loans secured by
multifamily and nonfarm nonresidential
properties and loans for construction,
land development, and other land 4
represent three hundred percent (300%)
or more of the institution’s total capital.
Institutions exceeding threshold (1)
would be deemed to have a
concentration in CRE construction and
development loans and should have
heightened risk management practices
appropriate to the degree of CRE
concentration risk of these loans in their
portfolios and consistent with the
Guidance set forth below. If an
institution exceeds threshold (2), the
institution should further analyze its
loans and quantify the dollar amount of
those that meet the definition of a CRE
loan contained in this Guidance. If the
institution has a level of CRE loans
meeting the CRE definition of 300
percent or more of total capital, it
should have heightened risk
management practices that are
consistent with the Guidance set forth
below. The Agencies have excluded
loans secured by owner-occupied
properties from the CRE definition
because their risk profiles are less
2 For commercial banks as reported in the Call
Report FFIEC 031 and 041 schedule RC–C item 1a.
For Savings associations as reported in the Thrift
Financial Report, schedule SC lines SC230, SC235,
SC240, and SC265.
3 For purposes of this Guidance, the term ‘‘total
capital’’ means the total risk-based capital as
reported for commercial banks in the Call Report
(FFIEC 031 and 041 schedule RC–R—Regulatory
Capital, line 21). For savings associations as
reported in the Thrift Financial Report, CCR, Line
CCR39.
4 For commercial banks as reported in the Call
Report FFIEC 031 and 041 schedule RC–C items 1a,
1d, and 1e. For savings associations as reported in
the Thrift Financial Report Schedule SC lines
SC230, SC235, SC240, SC256, SC260, and SC 265.
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influenced by the condition of the
general CRE market.
This Guidance may be applied on a
case-by-case basis to any institution that
has had a sharp increase in CRE lending
over a short period of time or has a
significant concentration in CRE loans
secured by a particular property type.
Risk Management Principles
The Agencies have previously issued
regulations and guidance that outline
supervisory expectations for a safe and
sound real estate lending program. This
statement is intended to reinforce that
guidance as it relates to institutions
with concentrations in CRE loans. The
risk management and capital adequacy
principles contained in this guidance
are broadly prudent for all institutions
involved in CRE lending.
Board and Management Oversight.
The board of directors has ultimate
responsibility for the level of risk taken
by its institution. Directors, or a
committee thereof, should explicitly
approve the overall CRE lending
strategy and policies of the institution.
They should receive reports on changes
in CRE market conditions and the
institution’s CRE lending activity that
identify the size, significance, and risks
related to CRE concentrations. Directors
should use this information to provide
clear guidance to management regarding
the level of CRE exposures acceptable to
the institution. The board also has the
responsibility to ensure that senior
management implements the procedures
and controls necessary to comply with
adopted policies. The board should
periodically review and approve CRE
aggregate risk exposure limits and
appropriate sublimits (for example, by
property type and geographic area) to
conform to any changes in the
institution’s strategies and to respond to
changes in market conditions. Directors
should also ensure that management
compensation policies are compatible
with the institution’s strategy and do
not create incentives to assume
unintended risks.
Management is responsible for
implementing the CRE strategy in a
manner that is consistent with the
institution’s stated risk tolerance.
Management should develop and
implement policies, procedures, and
limits that provide for adequate
identification, measurement,
monitoring, and control of the CRE
risks. The Agencies’ real estate lending
regulations require that each institution
adopt and maintain a written policy that
establishes appropriate limits and
standards for all extensions of credit
that are secured by liens on or interests
in real estate, including CRE loans. The
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Interagency Guidelines for Real Estate
Lending Policies state that loans
exceeding the interagency loan-to-value
(LTV) guidelines should be recorded in
the bank’s records and the aggregate
amount of loans exceeding the LTV
guidelines reported to the board at least
quarterly. Examiners will continue to
review these reports to determine
whether the institution’s exceptions are
adequately documented and are
appropriate in view of all relevant credit
considerations. Further, the Agencies’
appraisal regulations and related
guidance require that each institution
have an effective real estate appraisal
and evaluation program that adequately
supports its CRE lending activity.5
Strategic Planning. An institution’s
strategic plan should address the
rationale for its CRE concentration
levels relative to the institution’s overall
growth objectives and financial targets
and capital levels. In developing its
strategy as well as in continuous
monitoring of CRE exposure, an
institution should perform an analysis
of the potential effect of a downturn in
real estate markets on both earnings and
capital. The strategy should also include
a contingency plan for responding to
adverse market conditions. The
contingency plan should address
possible actions for mitigating CRE
concentration risk and ensuring the
adequacy of capital and reserves. If
management believes the institution
could reduce its CRE exposure by
selling exposures, it should assess the
marketability of the portfolio. This
should include an evaluation of the
institution’s capabilities in accessing the
secondary market and a comparison of
its underwriting standards with those
that exist in the secondary market.
Underwriting. An institution’s lending
policies should define the level of risk
that is acceptable to its board of
directors. Therefore, lending policies
should provide clear and measurable
underwriting standards and be
consistent with the Agencies’ real estate
lending regulations and guidelines.
Policy guidelines should be based on a
careful review of internal and external
factors that affect the institution, such as
its market position, historical
experience, present and prospective
trade area, probable future loan and
funding trends, staff capabilities, and
technology.
Consistent with the Agencies’ real
estate lending standards, underwriting
standards should include standards for:
5 Refer to the Agencies’ appraisal regulations: 12
CFR part 34, subpart C (OCC); 12 CFR part 208,
subpart E and 12 CFR part 225, subpart G (FRB);
12 CFR part 323 (FDIC); and 12 CFR part 564 (OTS).
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Federal Register / Vol. 71, No. 9 / Friday, January 13, 2006 / Notices
• Maximum loan amount by type of
property,
• Loan terms,
• Pricing structures,
• LTV limits by property type,
• Requirements for feasibility studies
and sensitivity analysis or stress-testing,
• Minimum requirements for initial
investment and maintenance of hard
equity by the borrower, and
• Minimum standards for borrower
net worth, property cash flow, and debt
service coverage for the property.
Credit analysis should reflect both the
borrower’s overall creditworthiness and
project-specific considerations.6
Management should also compare the
institution’s underwriting standards for
individual property types with those
that exist in the secondary market.
When an institution’s standards are
substantially more lenient, management
should justify the reasons why the
institution’s risk criteria deviate from
those of the secondary market and
should document their long-term plans
for these credits. Additionally, for
development and construction loans,
the institution should have sound
policies and procedures governing loan
disbursements to ensure that
disbursements do not exceed actual
development and construction costs.
Prudent controls should include an
inspection process, documentation on
construction progress, tracking presales
and preleasing, and exception reporting.
An institution’s lending policies
should permit exceptions to
underwriting standards only on a
limited basis. When an institution does
permit an exception, it should
document how the transaction does not
conform to the institution’s policy or
underwriting standards, obtain
appropriate management approvals, and
provide reports to the board of directors
detailing the number, nature,
justifications, and trends for exceptions
in a timely manner. Exceptions to both
the institution’s internal lending
standards and the Agencies’ supervisory
LTV limits should be monitored and
reported on a regular basis. Further,
institutions should analyze trends in
exceptions to ensure that risk remains
within the institution’s established risk
tolerance limits.
Risk Assessment and Monitoring of
CRE Loans. Institutions should establish
and maintain thoroughly articulated
policies that specify requirements and
criteria for risk rating CRE exposures,
ongoing account monitoring, identifying
6 Refer to the Interagency Guidelines for Real
Estate Lending Policies: 12 CFR part 34, appendix
A (OCC); 12 CFR part 208, appendix C (FRB); 12
CFR part 365, appendix A (FDIC); and 12 CFR
560.100–101 (OTS).
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Jkt 208001
loan impairment, and recognizing
losses. Risk ratings should be risk
sensitive, objective, and tailored to the
CRE exposure types underwritten by the
institution. A strong risk rating system
is important for maintaining the
integrity of an institution’s risk
management system and in providing an
early warning of emerging weaknesses.
An institution’s internal rating systems
should consider an assessment of a
borrower’s creditworthiness and of an
exposure’s estimated loss severity to
ensure that both the risk of the obligor
and the transaction itself are clearly
evaluated. When assigning risk ratings
to CRE loans, an institution should
consider the property’s sensitivity to
changes in macro and project-specific
factors including variations in vacancy
and rental rates, interest rates, and
inflation rates.
Policies should address the ongoing
monitoring of individual loans,
including the frequency of account
reviews, updating of borrower credit
information, and status of leasing.
Policies should require periodic
comparisons of actual property
performance information with
projections at the time of original
underwriting and the appraisal
assumptions (for example, lease-up
assumptions) to determine if any credit
deterioration or value impairment has
occurred. In addition, policies should
specify the frequency with which
transaction risk ratings should be
reviewed to ensure they appropriately
reflect the transaction’s level of credit
risk.
Portfolio Risk Management. Even
when individual CRE loans are
underwritten conservatively, large
aggregate exposures to related sectors
can expose an institution to an
unacceptable level of risk. Therefore, an
institution should measure and control
CRE credit risk on a portfolio basis by
identifying and managing
concentrations, performing market
analysis, and stress testing. A strong
management information system is key
to the successful implementation of a
portfolio management system.
Management Information System
(MIS). To accurately assess and manage
portfolio concentration risk, the MIS
should provide meaningful information
on CRE portfolio characteristics that are
relevant to the institution’s lending
strategy, underwriting standards, and
risk tolerances. Institutions are
encouraged, on either an automated or
manual basis, to stratify the portfolio by
property type, geographic area, tenant
concentrations, tenant industries,
developer concentrations, and risk
rating. Institutions should be able to
PO 00000
Frm 00129
Fmt 4703
Sfmt 4703
aggregate total exposure to a borrower
including their credit exposure related
to derivatives, such as interest rate
swaps. MIS should maintain the
appraised value at origination and
subsequent valuations. Other useful
stratifications include loan structure (for
example, fixed rate or adjustable), loan
type (for example, construction, mini
perm, or permanent), loan-to-value
limits, debt service coverage, policy
exceptions on newly underwritten
credit facilities, and related loans (for
example, loans to tenants). Management
reporting should be timely and in a
format that clearly shows changes in the
portfolio’s risk profile, including riskrating migrations. In addition, the MIS
should provide management with the
ability to conduct stress test analysis of
the CRE portfolio for varying scenarios.
There should also be a well-defined,
formal process through which
management reviews and evaluates
concentration and risk management
reports, as well as special ad hoc
analyses in response to market events.
Identifying and Managing
Concentrations. Active oversight and
monitoring by management is an
important component of the
management of CRE concentration risk.
Management should continually
evaluate the degree of potential
correlation between related sectors and
establish internal lending guidelines
and limits that control the institution’s
overall risk exposure. An institution
should combine and view as
concentrations any groups or classes of
CRE loans sharing significant common
characteristics and similar sensitivity to
adverse economic, financial, or business
developments. Using established limits
relevant to its lending strategy and
portfolio characteristics, an institution
should monitor and control its CRE
concentrations.
Management should have strategies
for managing concentration levels. The
use of secondary market sales to
institutional investors or securitizations
is one example of a strategy for actively
managing concentration levels without
curtailing new originations. In addition,
executing market sales provides
corroboration that the institution’s
underwriting and pricing are consistent
with market standards. Moreover, as
firm take-out commitments have
become rare, many institutions require
that commercial construction loans be
written to secondary market standards.
Institutions with high levels of
construction and development loans
should closely monitor market
conditions particularly when relying on
permanent loan take-outs as a way of
managing concentration levels.
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In managing CRE concentration
levels, institutions are also encouraged
to consider other credit exposures
correlated to the CRE market such as
commercial mortgage-backed securities.
Market Analysis. Institutions should
perform ongoing evaluations of the
market conditions for the various
property types and geographic areas or
markets represented in their portfolio.
Market analysis is particularly
important as an institution expands its
geographic scope of operations into new
markets. In making decisions about new
markets and new originations, market
analysis should be an important
evaluation criterion for individual
credits as well as for the portfolio.
Institutions should utilize multiple
sources for obtaining market
information such as published research
data, monitoring new building permits,
and maintaining contacts with local
contractors, builders, real estate agents,
and community development groups.
Management should ensure that the
institution’s CRE lending strategy and
portfolio risk assessments integrate the
findings of its market analysis and
evaluation. Moreover, market
information should provide
management with sufficient information
to determine whether revisions to its
CRE lending strategy and policies are
necessary to respond to identified
market trends, and to form the basis for
its stress testing.
Portfolio Stress Testing. Institutions
should consider performing portfolio
level stress tests of their CRE exposures
to quantify the impact of changing
economic scenarios on asset quality,
earnings, and capital. The Agencies
recognize that portfolio level stress
testing is an evolving process and
encourage institutions to consider its
use as a risk management tool and to
review periodically the adequacy of
stress testing practices relative to their
CRE exposures. The sophistication of
stress testing practices should be
consistent with the size and complexity
of the institution’s CRE loan portfolio.
Portfolio stress testing does not
necessarily require the use of a
sophisticated portfolio model.
Depending on the risk characteristics of
the CRE portfolio, it may be appropriate
for a stress test to be as simple as an
aggregation of the results of individual
loan stress tests, testing the impact of
ratings migration, or applying stressed
historical loss rates to the portfolio.
Stress tests should focus on the more
vulnerable segments of an institution’s
CRE portfolio, given the prevailing
market environment and the
institution’s business strategy.
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Allowance for Loan Losses.
Institutions also should consider CRE
concentrations in their assessment of
the adequacy of the allowance for loan
and lease losses. The Interagency Policy
Statement on Allowance for Loan and
Lease Losses Methodologies and
Documentation for Banks and Savings
Institutions provides guidance on
criteria that institutions should consider
when evaluating groups of loans with
common risk characteristics.
Capital Adequacy
The Agencies’ capital adequacy
guidelines note that institutions should
hold capital commensurate with the
level and nature of the risks to which
they are exposed and that institutions
with high or inordinate levels of risk are
expected to operate well above
minimum regulatory capital
requirements. Minimum levels of
regulatory capital 7 do not provide
institutions with sufficient buffer to
absorb unexpected losses arising from
loan concentrations.8 Failure to
maintain an appropriate cushion for
concentrations is inconsistent with the
Agencies’ capital adequacy guidelines.
Moreover, an institution with a CRE
concentration should recognize the need
for additional capital support for CRE
concentrations in its strategic, financial,
and capital planning, including an
assessment of the potential for future
losses on CRE exposures.
In performing its internal capital
analysis, an institution should make use
of the results of any stress testing and
other quantitative and qualitative
analysis. The internal capital analysis
should also reflect the possibility that
any historical correlations used might
not remain stable under stress
conditions. For larger, more complex
institutions that employ formal
quantitative economic capital systems,
the analysis of concentrations should
provide for an adequate ‘‘cushion’’
above model outputs to compensate for
7 Most CRE exposures are risk-weighted at 100
percent. By statute, however, certain loans made for
the construction of single-family housing and
certain multifamily housing loans are risk-weighted
at 50 percent. See 12 U.S.C. 1831n note (RiskWeighting of Housing Loans for Purposes of Capital
Requirements). The Agencies have codified these
statutory risk-weighting requirements in their
regulations at 12 CFR Part 3, Appendix A, Section
3 (OCC); 12 CFR Part 208, Appendix A, Section III.
C. (FRB); 12 CFR Part 325, Appendix A, Section
II.C. (FDIC); and 12 CFR 567.6(a)(1)(iii) (50% riskweights for ‘‘qualifying multifamily mortgage loan’’
and ‘‘qualifying residential construction loan’’ as
defined in 12 CFR 567.1) (OTS).
8 Depending upon the level and nature of the CRE
concentration, an institution may need to maintain
capital at levels exceeding the ‘‘well capitalized’’
standard to ensure the overall sound financial
condition of the institution.
PO 00000
Frm 00130
Fmt 4703
Sfmt 4703
2307
potential uncertainties in risk
measurement.
In assessing the adequacy of an
institution’s capital, the Agencies will
take into account analysis provided by
the institution as well as an evaluation
of the level of inherent risk in the CRE
portfolio and the quality of risk
management based on the sound
practices set forth in this Guidance.
Supervisory Evaluation and Action
The CRE sound practices set forth in
this Guidance are effective methods for
addressing the increased risks
associated with CRE concentrations, and
illustrate the types of practices that the
Agencies consider important elements
of sound risk management and adequate
capital. An institution that is unable to
adequately assess and meet its capital
needs may be required to develop a plan
for reducing its concentrations or for
achieving higher capital ratios.
This concludes the text of the
proposed Guidance entitled,
Concentrations in Commercial Real
Estate Lending, Sound Risk
Management Practices.
Dated: January 6, 2006.
John C. Dugan,
Comptroller of the Currency.
By order of the Board of Governors of the
Federal Reserve System, January 10, 2006.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, this 9th day of
January, 2006.
By order of the Federal Deposit Insurance
Corporation.
Robert E. Feldman,
Executive Secretary.
Dated: January 9, 2006.
By the Office of Thrift Supervision.
John M. Reich,
Director.
[FR Doc. 06–340 Filed 1–12–06; 8:45 am]
BILLING CODE 4810–33–U; 6210–01–U; 6714–01–U;
6720–01–U
DEPARTMENT OF VETERANS
AFFAIRS
Health Services Research and
Development Service Scientific Merit
Review Board; Notice of Meeting
The Department of Veterans Affairs
(VA) gives notice under Public Law 92–
463, Federal Advisory Committee Act,
that a meeting of the Health Services
Research and Development Service
Scientific Merit Review Board will be
held March 7–9, 2006, at the Crowne
Plaza Hotel (Atlanta-Ravinia), 4355
Ashford Dunwoody Road, Atlanta,
E:\FR\FM\13JAN1.SGM
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]]>Agencies
[Federal Register Volume 71, Number 9 (Friday, January 13, 2006)]
[Notices]
[Pages 2302-2307]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-340]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
[Docket No. 06-01]
BOARD OF THE GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[Docket No. OP-1248]
FEDERAL DEPOSIT INSURANCE CORPORATION
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
[No. 2006-01]
Concentrations in Commercial Real Estate Lending, Sound Risk
Management Practices
AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (Board); Federal
Deposit Insurance Corporation (FDIC); and Office of Thrift Supervision,
Treasury (OTS).
[[Page 2303]]
ACTION: Proposed guidance with request for comment.
-----------------------------------------------------------------------
SUMMARY: The OCC, Board, FDIC, and OTS (the Agencies), request comment
on this proposed guidance entitled, Concentrations in Commercial Real
Estate Lending, Sound Risk Management Practices (Guidance). The
Agencies have observed that some institutions have high and increasing
concentrations of commercial real estate loans on their balance sheets
and are concerned that these concentrations may make the institutions
more vulnerable to cyclical commercial real estate markets. This
proposed Guidance helps identify institutions with commercial real
estate loan concentrations that may be subject to greater supervisory
scrutiny. As provided in the proposed Guidance, such institutions
should have in place risk management practices and capital levels
appropriate to the risk associated with these concentrations.
DATES: Comments must be submitted on or before March 14, 2006.
ADDRESSES: The Agencies will jointly review all of the comments
submitted. Therefore, interested parties may send comments to any of
the Agencies and need not send comments (or copies) to all of the
Agencies. Please consider submitting your comments by e-mail or fax
since paper mail in the Washington area and at the Agencies is subject
to delay. Interested parties are invited to submit comments to:
OCC: You should include ``OCC'' and Docket Number 06-01 in your
comment. You may submit your comment by any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
OCC Web site: https://www.occ.treas.gov. Click on ``Contact
the OCC,'' scroll down and click on ``Comments on Proposed
Regulations.''
E-Mail Address: regs.comments@occ.treas.gov.
Fax: (202) 874-4448.
Mail: Office of the Comptroller of the Currency, 250 E
Street, SW., Mail Stop 1-5, Washington, DC 20219.
Hand Delivery/Courier: 250 E Street, SW., Attn: Public
Information Room, Mail Stop 1-5, Washington, DC 20219.
Instructions: All submissions received must include the agency name
(OCC) and docket number for this notice. In general, the OCC will enter
all comments received into the docket without change, including any
business or personal information that you provide. You may review
comments and other related materials by any of the following methods:
Viewing Comments in person: You may inspect and photocopy
comments at the OCC's Public Information Room, 250 E Street, SW.,
Washington, DC. You can make an appointment to inspect comments by
calling (202) 874-5043.
Viewing Comments Electronically: You may request that we
send you an electronic copy of comments via e-mail or mail you a CD-ROM
containing electronic copies by contacting the OCC at
regs.comments@occ.treas.gov.
Docket Information: You may also request available
background documents and project summaries using the methods described
above.
Board: You may submit comments, identified by Docket No. OP-1248,
by any of the following methods:
Agency Web site: https://www.federalreserve.gov. Follow the
instructions for submitting comments at https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regs.comments@federalreserve.gov. Include the
docket number in the subject line of the message.
FAX: 202/452-3819 or 202/452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at
https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed in electronic or paper
form in Room MP-500 of the Board's Martin Building (20th and C Streets,
NW.) between 9 a.m. and 5 p.m. on weekdays.
FDIC: You may submit comments by any of the following methods:
Agency Web site: https://www.fdic.gov/regulations/laws/
federal/propose.html. Follow the instructions for submitting comments
on the Agency Web site.
E-Mail: Comments@FDIC.gov.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
Hand Delivery/Courier: Guard station at the rear of the
550 17th Street Building (located on F Street) on business days between
7 a.m. and 5 p.m.
Instructions: All submissions received must include the agency
name. All comments received will be posted without change to https://
www.fdic.gov/regulations/laws/federal/propose.html including any
personal information provided.
Public Inspection: Comments may be inspected and
photocopied in the FDIC Public Information Center, Room 100, 801 17th
Street, NW., Washington, DC, between 9 a.m. and 4:30 pm. on business
days.
OTS: You may submit comments, identified by docket number 2006-01,
by any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail address: regs.comments@ots.treas.gov. Please
include docket number 2006-01 in the subject line of the message and
include your name and telephone number in the message.
Fax: (202) 906-6518.
Mail: Regulation Comments, Chief Counsel's Office, Office
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552,
Attention: No. 2006-01.
Hand Delivery/Courier: Guard's Desk, East Lobby Entrance,
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days. Address
envelope as follows: Attention: Regulation Comments, Chief Counsel's
Office, Attention: No. 2006-01.
Instructions: All submissions received must include the agency name
and docket number for this proposed Guidance. All comments received
will be posted without change to the OTS Internet Site at https://
www.ots.treas.gov/pagehtml.cfm?catNumber=67&an=1, including any
personal information provided.
Docket: For access to the docket to read background documents or
comments received, go to https://www.ots.treas.gov/
pagehtml.cfm?catNumber=67&an=1. In addition, you may inspect comments
at the OTS's Public Reading Room, 1700 G Street, NW., by appointment.
To make an appointment for access, call (202) 906-5922, send an e-mail
to public.info@ots.treas.gov, or send a facsimile transmission to (202)
906-7755. (Prior notice identifying the materials you will be
requesting will assist us in serving you.) We schedule appointments on
business days between 10 a.m. and 4 p.m. In most cases, appointments
will be available the next business day following the date we receive a
request.
FOR FURTHER INFORMATION CONTACT: OCC: Daniel Bailey, National Bank
[[Page 2304]]
Examiner, Credit Risk Division, (202) 874-5170, Office of the
Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219.
Board: Denise Dittrich, Supervisory Financial Analyst, (202) 452-
2783; or Virginia Gibbs, Senior Supervisory Financial Analyst, (202)
452-2521; or Sabeth I. Siddique, Assistant Director, (202) 452-3861,
Division of Banking Supervision and Regulation; or Mark Van Der Weide,
Senior Counsel, Legal Division, (202) 452-2263. For users of
Telecommunications Device for the Deaf (``TDD'') only, contact (202)
263-4869.
FDIC: James Leitner, Senior Examination Specialist, Division of
Supervision and Consumer Protection, (202) 898-6790, or Benjamin W.
McDonough, Attorney, Legal Division, (202) 898-7411.
OTS: William Magrini, Senior Project Manger, (202) 906-5744, or
Karen Osterloh, Counsel, (202) 906-6639.
SUPPLEMENTARY INFORMATION:
I. Background
The Agencies have observed that some institutions have high and
increasing concentrations of commercial real estate loans on their
balance sheets and are concerned that these concentrations may make the
institutions more vulnerable to cyclical commercial real estate
markets. The Agencies have previously issued regulations and guidelines
that outline supervisory expectations for a safe and sound commercial
real estate lending program. This proposed statement is intended to
reinforce that guidance as it relates to institutions with
concentrations in commercial real estate loans.
II. Principal Elements of the Guidance
For the purposes of the proposed Guidance, the Agencies are
focusing on concentrations in those types of commercial real estate
(CRE) loans that are particularly vulnerable to cyclical commercial
real estate markets. These include CRE exposures where the source of
repayment primarily depends upon rental income or the sale,
refinancing, or permanent financing of the property. Loans to REITs and
unsecured loans to developers that closely correlate to the inherent
risk in CRE markets would also be considered CRE loans for purposes of
the proposed Guidance.
The proposed Guidance sets forth thresholds for assessing whether
an institution has a CRE concentration and should employ heightened
risk management practices. This Guidance is based upon the principles
contained in the Agencies' real estate lending standards regulations
and guidelines.
The proposed Guidance also reminds institutions with CRE
concentrations that they should hold capital higher than regulatory
minimums and commensurate with the level of risk in their CRE lending
portfolios. In assessing the adequacy of an institution's capital, the
proposed Guidance states that the Agencies will take into account the
level of inherent risk in its CRE portfolio and the quality of its risk
management practices.
III. Request for Comment
The Agencies are requesting public comment on all aspects of the
proposed Guidance. In particular, the Agencies request comment on the
scope of the definition of CRE and on the appropriateness of the
thresholds for determining elevated concentration risk.
The text of the proposed Guidance entitled, Concentrations in
Commercial Real Estate Lending, Sound Risk Management Practices
follows:
Purpose
The Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, and the Office of Thrift Supervision (the Agencies) are
jointly issuing this Guidance to address the increasing concentrations
of commercial real estate loans at many institutions. The Agencies are
concerned that concentrations in commercial real estate loans where
repayment is primarily dependent on rental income or from the proceeds
of the sale, refinancing or permanent financing of the property may
expose institutions to unanticipated earnings and capital volatility
due to adverse changes in the general commercial real estate market.
This Guidance reinforces the Agencies' existing guidelines for real
estate lending and safety and soundness.\1\ This Guidance also provides
criteria for identifying institutions with commercial real estate loan
concentrations that may be subject to greater supervisory scrutiny. As
provided in the Guidance, such institutions should have in place risk
management practices and capital levels appropriate to the risk
associated with these concentrations.
---------------------------------------------------------------------------
\1\ Refer to the Agencies' regulations on real estate lending
standards and the Interagency Guidelines for Real Estate Lending
Policies: 12 CFR part 34, subpart D and appendix A (OCC); 12 CFR
part 208, subpart E and appendix C (FRB); 12 CFR part 365 and
appendix A (FDIC); and 12 CFR 560.100-101 (OTS). Refer to the
Interagency Guidelines Establishing Standards for Safety and
Soundness: 12 CFR part 30, appendix A (OCC); 12 CFR part 208,
Appendix D-1 (FRB); 12 CFR part 364, appendix A (FDIC); and 12 CFR
part 570, appendix A (OTS).
---------------------------------------------------------------------------
For purposes of this Guidance, commercial real estate (CRE) loans
are exposures secured by raw land, land development and construction
(including 1-4 family residential construction), multi-family property,
and non-farm nonresidential property where the primary or a significant
source of repayment is derived from rental income associated with the
property (that is, loans for which 50 percent or more of the source of
repayment comes from third party, non-affiliated, rental income) or the
proceeds of the sale, refinancing, or permanent financing of the
property. Loans to REITs and unsecured loans to developers that closely
correlate to the inherent risk in CRE markets would also be considered
CRE loans for purposes of this Guidance.
Background
In the past, weak CRE loan underwriting and depressed CRE markets
have contributed to significant bank failures and instability in the
banking system. While underwriting standards are generally stronger
than those during previous CRE cycles, the Agencies have observed high
concentrations in CRE loans at some institutions. The Agencies are
concerned that these concentrations may make the institutions more
vulnerable to cyclical CRE markets. Accordingly, institutions with such
CRE concentrations should have both heightened risk management
practices and levels of capital that are higher than the regulatory
minimums and appropriate to the risk in their CRE lending portfolios.
Recent examinations have indicated that the risk management
practices and capital levels of some institutions are not keeping pace
with their increasing CRE concentrations. In some cases, the Agencies
have observed that institutions have rapidly expanded their CRE lending
operations into new markets without establishing adequate control and
reporting processes, including the preparation of market analyses. The
Agencies are also concerned when institutions with high CRE
concentrations maintain capital levels near regulatory minimums.
Minimum levels of regulatory capital do not provide institutions with
an adequate cushion to absorb unexpected losses arising from loan
concentrations and are inconsistent with the Agencies' capital adequacy
guidelines. Institutions with a concentration in CRE loans should
ensure the maintenance of capital levels
[[Page 2305]]
that are commensurate with the risk of such concentrations.
Identification of Institutions With CRE Concentrations
Institutions with CRE concentrations should have in place risk
management practices consistent with this Guidance to mitigate the
increased risks associated with such concentrations. To determine
whether it has a concentration in CRE lending that warrants the use of
heightened risk management practices, an institution, as a preliminary
step, should use regulatory reports to determine whether it exceeds or
is rapidly approaching the following thresholds:
(1) Total reported loans for construction, land development, and
other land \2\ represent one hundred percent (100%) or more of the
institution's total capital; \3\ or
---------------------------------------------------------------------------
\2\ For commercial banks as reported in the Call Report FFIEC
031 and 041 schedule RC-C item 1a. For Savings associations as
reported in the Thrift Financial Report, schedule SC lines SC230,
SC235, SC240, and SC265.
\3\ For purposes of this Guidance, the term ``total capital''
means the total risk-based capital as reported for commercial banks
in the Call Report (FFIEC 031 and 041 schedule RC-R--Regulatory
Capital, line 21). For savings associations as reported in the
Thrift Financial Report, CCR, Line CCR39.
---------------------------------------------------------------------------
(2) Total reported loans secured by multifamily and nonfarm
nonresidential properties and loans for construction, land development,
and other land \4\ represent three hundred percent (300%) or more of
the institution's total capital.
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\4\ For commercial banks as reported in the Call Report FFIEC
031 and 041 schedule RC-C items 1a, 1d, and 1e. For savings
associations as reported in the Thrift Financial Report Schedule SC
lines SC230, SC235, SC240, SC256, SC260, and SC 265.
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Institutions exceeding threshold (1) would be deemed to have a
concentration in CRE construction and development loans and should have
heightened risk management practices appropriate to the degree of CRE
concentration risk of these loans in their portfolios and consistent
with the Guidance set forth below. If an institution exceeds threshold
(2), the institution should further analyze its loans and quantify the
dollar amount of those that meet the definition of a CRE loan contained
in this Guidance. If the institution has a level of CRE loans meeting
the CRE definition of 300 percent or more of total capital, it should
have heightened risk management practices that are consistent with the
Guidance set forth below. The Agencies have excluded loans secured by
owner-occupied properties from the CRE definition because their risk
profiles are less influenced by the condition of the general CRE
market.
This Guidance may be applied on a case-by-case basis to any
institution that has had a sharp increase in CRE lending over a short
period of time or has a significant concentration in CRE loans secured
by a particular property type.
Risk Management Principles
The Agencies have previously issued regulations and guidance that
outline supervisory expectations for a safe and sound real estate
lending program. This statement is intended to reinforce that guidance
as it relates to institutions with concentrations in CRE loans. The
risk management and capital adequacy principles contained in this
guidance are broadly prudent for all institutions involved in CRE
lending.
Board and Management Oversight. The board of directors has ultimate
responsibility for the level of risk taken by its institution.
Directors, or a committee thereof, should explicitly approve the
overall CRE lending strategy and policies of the institution. They
should receive reports on changes in CRE market conditions and the
institution's CRE lending activity that identify the size,
significance, and risks related to CRE concentrations. Directors should
use this information to provide clear guidance to management regarding
the level of CRE exposures acceptable to the institution. The board
also has the responsibility to ensure that senior management implements
the procedures and controls necessary to comply with adopted policies.
The board should periodically review and approve CRE aggregate risk
exposure limits and appropriate sublimits (for example, by property
type and geographic area) to conform to any changes in the
institution's strategies and to respond to changes in market
conditions. Directors should also ensure that management compensation
policies are compatible with the institution's strategy and do not
create incentives to assume unintended risks.
Management is responsible for implementing the CRE strategy in a
manner that is consistent with the institution's stated risk tolerance.
Management should develop and implement policies, procedures, and
limits that provide for adequate identification, measurement,
monitoring, and control of the CRE risks. The Agencies' real estate
lending regulations require that each institution adopt and maintain a
written policy that establishes appropriate limits and standards for
all extensions of credit that are secured by liens on or interests in
real estate, including CRE loans. The Interagency Guidelines for Real
Estate Lending Policies state that loans exceeding the interagency
loan-to-value (LTV) guidelines should be recorded in the bank's records
and the aggregate amount of loans exceeding the LTV guidelines reported
to the board at least quarterly. Examiners will continue to review
these reports to determine whether the institution's exceptions are
adequately documented and are appropriate in view of all relevant
credit considerations. Further, the Agencies' appraisal regulations and
related guidance require that each institution have an effective real
estate appraisal and evaluation program that adequately supports its
CRE lending activity.\5\
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\5\ Refer to the Agencies' appraisal regulations: 12 CFR part
34, subpart C (OCC); 12 CFR part 208, subpart E and 12 CFR part 225,
subpart G (FRB); 12 CFR part 323 (FDIC); and 12 CFR part 564 (OTS).
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Strategic Planning. An institution's strategic plan should address
the rationale for its CRE concentration levels relative to the
institution's overall growth objectives and financial targets and
capital levels. In developing its strategy as well as in continuous
monitoring of CRE exposure, an institution should perform an analysis
of the potential effect of a downturn in real estate markets on both
earnings and capital. The strategy should also include a contingency
plan for responding to adverse market conditions. The contingency plan
should address possible actions for mitigating CRE concentration risk
and ensuring the adequacy of capital and reserves. If management
believes the institution could reduce its CRE exposure by selling
exposures, it should assess the marketability of the portfolio. This
should include an evaluation of the institution's capabilities in
accessing the secondary market and a comparison of its underwriting
standards with those that exist in the secondary market.
Underwriting. An institution's lending policies should define the
level of risk that is acceptable to its board of directors. Therefore,
lending policies should provide clear and measurable underwriting
standards and be consistent with the Agencies' real estate lending
regulations and guidelines. Policy guidelines should be based on a
careful review of internal and external factors that affect the
institution, such as its market position, historical experience,
present and prospective trade area, probable future loan and funding
trends, staff capabilities, and technology.
Consistent with the Agencies' real estate lending standards,
underwriting standards should include standards for:
[[Page 2306]]
Maximum loan amount by type of property,
Loan terms,
Pricing structures,
LTV limits by property type,
Requirements for feasibility studies and sensitivity
analysis or stress-testing,
Minimum requirements for initial investment and
maintenance of hard equity by the borrower, and
Minimum standards for borrower net worth, property cash
flow, and debt service coverage for the property.
Credit analysis should reflect both the borrower's overall
creditworthiness and project-specific considerations.\6\ Management
should also compare the institution's underwriting standards for
individual property types with those that exist in the secondary
market. When an institution's standards are substantially more lenient,
management should justify the reasons why the institution's risk
criteria deviate from those of the secondary market and should document
their long-term plans for these credits. Additionally, for development
and construction loans, the institution should have sound policies and
procedures governing loan disbursements to ensure that disbursements do
not exceed actual development and construction costs. Prudent controls
should include an inspection process, documentation on construction
progress, tracking presales and preleasing, and exception reporting.
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\6\ Refer to the Interagency Guidelines for Real Estate Lending
Policies: 12 CFR part 34, appendix A (OCC); 12 CFR part 208,
appendix C (FRB); 12 CFR part 365, appendix A (FDIC); and 12 CFR
560.100-101 (OTS).
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An institution's lending policies should permit exceptions to
underwriting standards only on a limited basis. When an institution
does permit an exception, it should document how the transaction does
not conform to the institution's policy or underwriting standards,
obtain appropriate management approvals, and provide reports to the
board of directors detailing the number, nature, justifications, and
trends for exceptions in a timely manner. Exceptions to both the
institution's internal lending standards and the Agencies' supervisory
LTV limits should be monitored and reported on a regular basis.
Further, institutions should analyze trends in exceptions to ensure
that risk remains within the institution's established risk tolerance
limits.
Risk Assessment and Monitoring of CRE Loans. Institutions should
establish and maintain thoroughly articulated policies that specify
requirements and criteria for risk rating CRE exposures, ongoing
account monitoring, identifying loan impairment, and recognizing
losses. Risk ratings should be risk sensitive, objective, and tailored
to the CRE exposure types underwritten by the institution. A strong
risk rating system is important for maintaining the integrity of an
institution's risk management system and in providing an early warning
of emerging weaknesses. An institution's internal rating systems should
consider an assessment of a borrower's creditworthiness and of an
exposure's estimated loss severity to ensure that both the risk of the
obligor and the transaction itself are clearly evaluated. When
assigning risk ratings to CRE loans, an institution should consider the
property's sensitivity to changes in macro and project-specific factors
including variations in vacancy and rental rates, interest rates, and
inflation rates.
Policies should address the ongoing monitoring of individual loans,
including the frequency of account reviews, updating of borrower credit
information, and status of leasing. Policies should require periodic
comparisons of actual property performance information with projections
at the time of original underwriting and the appraisal assumptions (for
example, lease-up assumptions) to determine if any credit deterioration
or value impairment has occurred. In addition, policies should specify
the frequency with which transaction risk ratings should be reviewed to
ensure they appropriately reflect the transaction's level of credit
risk.
Portfolio Risk Management. Even when individual CRE loans are
underwritten conservatively, large aggregate exposures to related
sectors can expose an institution to an unacceptable level of risk.
Therefore, an institution should measure and control CRE credit risk on
a portfolio basis by identifying and managing concentrations,
performing market analysis, and stress testing. A strong management
information system is key to the successful implementation of a
portfolio management system.
Management Information System (MIS). To accurately assess and
manage portfolio concentration risk, the MIS should provide meaningful
information on CRE portfolio characteristics that are relevant to the
institution's lending strategy, underwriting standards, and risk
tolerances. Institutions are encouraged, on either an automated or
manual basis, to stratify the portfolio by property type, geographic
area, tenant concentrations, tenant industries, developer
concentrations, and risk rating. Institutions should be able to
aggregate total exposure to a borrower including their credit exposure
related to derivatives, such as interest rate swaps. MIS should
maintain the appraised value at origination and subsequent valuations.
Other useful stratifications include loan structure (for example, fixed
rate or adjustable), loan type (for example, construction, mini perm,
or permanent), loan-to-value limits, debt service coverage, policy
exceptions on newly underwritten credit facilities, and related loans
(for example, loans to tenants). Management reporting should be timely
and in a format that clearly shows changes in the portfolio's risk
profile, including risk-rating migrations. In addition, the MIS should
provide management with the ability to conduct stress test analysis of
the CRE portfolio for varying scenarios. There should also be a well-
defined, formal process through which management reviews and evaluates
concentration and risk management reports, as well as special ad hoc
analyses in response to market events.
Identifying and Managing Concentrations. Active oversight and
monitoring by management is an important component of the management of
CRE concentration risk. Management should continually evaluate the
degree of potential correlation between related sectors and establish
internal lending guidelines and limits that control the institution's
overall risk exposure. An institution should combine and view as
concentrations any groups or classes of CRE loans sharing significant
common characteristics and similar sensitivity to adverse economic,
financial, or business developments. Using established limits relevant
to its lending strategy and portfolio characteristics, an institution
should monitor and control its CRE concentrations.
Management should have strategies for managing concentration
levels. The use of secondary market sales to institutional investors or
securitizations is one example of a strategy for actively managing
concentration levels without curtailing new originations. In addition,
executing market sales provides corroboration that the institution's
underwriting and pricing are consistent with market standards.
Moreover, as firm take-out commitments have become rare, many
institutions require that commercial construction loans be written to
secondary market standards. Institutions with high levels of
construction and development loans should closely monitor market
conditions particularly when relying on permanent loan take-outs as a
way of managing concentration levels.
[[Page 2307]]
In managing CRE concentration levels, institutions are also
encouraged to consider other credit exposures correlated to the CRE
market such as commercial mortgage-backed securities.
Market Analysis. Institutions should perform ongoing evaluations of
the market conditions for the various property types and geographic
areas or markets represented in their portfolio. Market analysis is
particularly important as an institution expands its geographic scope
of operations into new markets. In making decisions about new markets
and new originations, market analysis should be an important evaluation
criterion for individual credits as well as for the portfolio.
Institutions should utilize multiple sources for obtaining market
information such as published research data, monitoring new building
permits, and maintaining contacts with local contractors, builders,
real estate agents, and community development groups.
Management should ensure that the institution's CRE lending
strategy and portfolio risk assessments integrate the findings of its
market analysis and evaluation. Moreover, market information should
provide management with sufficient information to determine whether
revisions to its CRE lending strategy and policies are necessary to
respond to identified market trends, and to form the basis for its
stress testing.
Portfolio Stress Testing. Institutions should consider performing
portfolio level stress tests of their CRE exposures to quantify the
impact of changing economic scenarios on asset quality, earnings, and
capital. The Agencies recognize that portfolio level stress testing is
an evolving process and encourage institutions to consider its use as a
risk management tool and to review periodically the adequacy of stress
testing practices relative to their CRE exposures. The sophistication
of stress testing practices should be consistent with the size and
complexity of the institution's CRE loan portfolio.
Portfolio stress testing does not necessarily require the use of a
sophisticated portfolio model. Depending on the risk characteristics of
the CRE portfolio, it may be appropriate for a stress test to be as
simple as an aggregation of the results of individual loan stress
tests, testing the impact of ratings migration, or applying stressed
historical loss rates to the portfolio. Stress tests should focus on
the more vulnerable segments of an institution's CRE portfolio, given
the prevailing market environment and the institution's business
strategy.
Allowance for Loan Losses. Institutions also should consider CRE
concentrations in their assessment of the adequacy of the allowance for
loan and lease losses. The Interagency Policy Statement on Allowance
for Loan and Lease Losses Methodologies and Documentation for Banks and
Savings Institutions provides guidance on criteria that institutions
should consider when evaluating groups of loans with common risk
characteristics.
Capital Adequacy
The Agencies' capital adequacy guidelines note that institutions
should hold capital commensurate with the level and nature of the risks
to which they are exposed and that institutions with high or inordinate
levels of risk are expected to operate well above minimum regulatory
capital requirements. Minimum levels of regulatory capital \7\ do not
provide institutions with sufficient buffer to absorb unexpected losses
arising from loan concentrations.\8\ Failure to maintain an appropriate
cushion for concentrations is inconsistent with the Agencies' capital
adequacy guidelines. Moreover, an institution with a CRE concentration
should recognize the need for additional capital support for CRE
concentrations in its strategic, financial, and capital planning,
including an assessment of the potential for future losses on CRE
exposures.
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\7\ Most CRE exposures are risk-weighted at 100 percent. By
statute, however, certain loans made for the construction of single-
family housing and certain multifamily housing loans are risk-
weighted at 50 percent. See 12 U.S.C. 1831n note (Risk-Weighting of
Housing Loans for Purposes of Capital Requirements). The Agencies
have codified these statutory risk-weighting requirements in their
regulations at 12 CFR Part 3, Appendix A, Section 3 (OCC); 12 CFR
Part 208, Appendix A, Section III. C. (FRB); 12 CFR Part 325,
Appendix A, Section II.C. (FDIC); and 12 CFR 567.6(a)(1)(iii) (50%
risk-weights for ``qualifying multifamily mortgage loan'' and
``qualifying residential construction loan'' as defined in 12 CFR
567.1) (OTS).
\8\ Depending upon the level and nature of the CRE
concentration, an institution may need to maintain capital at levels
exceeding the ``well capitalized'' standard to ensure the overall
sound financial condition of the institution.
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In performing its internal capital analysis, an institution should
make use of the results of any stress testing and other quantitative
and qualitative analysis. The internal capital analysis should also
reflect the possibility that any historical correlations used might not
remain stable under stress conditions. For larger, more complex
institutions that employ formal quantitative economic capital systems,
the analysis of concentrations should provide for an adequate
``cushion'' above model outputs to compensate for potential
uncertainties in risk measurement.
In assessing the adequacy of an institution's capital, the Agencies
will take into account analysis provided by the institution as well as
an evaluation of the level of inherent risk in the CRE portfolio and
the quality of risk management based on the sound practices set forth
in this Guidance.
Supervisory Evaluation and Action
The CRE sound practices set forth in this Guidance are effective
methods for addressing the increased risks associated with CRE
concentrations, and illustrate the types of practices that the Agencies
consider important elements of sound risk management and adequate
capital. An institution that is unable to adequately assess and meet
its capital needs may be required to develop a plan for reducing its
concentrations or for achieving higher capital ratios.
This concludes the text of the proposed Guidance entitled,
Concentrations in Commercial Real Estate Lending, Sound Risk Management
Practices.
Dated: January 6, 2006.
John C. Dugan,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, January 10, 2006.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, this 9th day of January, 2006.
By order of the Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Dated: January 9, 2006.
By the Office of Thrift Supervision.
John M. Reich,
Director.
[FR Doc. 06-340 Filed 1-12-06; 8:45 am]
BILLING CODE 4810-33-U; 6210-01-U; 6714-01-U; 6720-01-U
