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 or designated committee detailing the number, nature, justifications, and trends for exceptions. The proposed guidance also reminded institutions that they should consider CRE concentrations in their assessment of the adequacy of allowance for loan and lease losses (ALLL), consistent with existing interagency guidance. The guidance is applicable
Multifamily Residential Loans: Commenters recommended that multifamily construction loans with firm takeouts or loans on completed multifamily properties, including assisted living complexes, with established rent rolls be excluded from the proposed CRE definition. such, the guidance is not intended to be implemented through a "one-size-fits-all"
Community banks commented that secured real estate lending has been their bread and butter business and, if required to reduce their CRE lending activity, they would have to look to other types of lending, which are historically more risky. In addition, OTS's 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. Estate Sales, Structured
2. Commenters noted that the proposed risk management principles have been in effect for some time and are generally acknowledged as prudent industry standards that should be used by an institution engaged in CRE lending. In making this recommendation, commenters contend that multifamily residential loans have much less risk than CRE loans that have no firm takeout or established cash flow history. Several commenters recommended that presold one-to four-family residential construction loans, commercial construction loans for owner-occupied businesses, and commercial construction loans with firm takeouts should be specifically excluded as such loans are significantly less risky. That analysis should include an assessment of changes in economic conditions and collateral values and their direct impact on credit quality. The guidance does not establish specific limits on CRE lending; rather, it describes sound risk management practices that will enable institutions to pursue CRE lending in a safe and sound manner. To address the growth in CRE concentrations, the banking regulatory agencies issued joint guidance in December 2006, which was intended to reinforce existing regulations and guidelines for real estate lending and safety and soundness.
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developer tools pages. Applications, Failing Bank
The final Guidance is effective December 14, 2006.
FRB: Supervisory Letter SR 07-1 on interagency guidance on The determination as to whether a property is considered owner-occupied should be made upon origination or purchase of the loan. Recommendations for Managing CRE Concentrations, Institutions with significant CRE concentrations are reminded that strong capital and ALLL levels are needed, and that overall credit risk-management processes should reflect the principles of the 2006 CRE Guidance. For purposes of the guidance, CRE loans are loans with risk profiles sensitive to the condition of the general CRE market as defined in the guidance. OTS recognizes that risk characteristics differ among property types of CRE loans. In addition, for development and construction loans, the institution should have policies and procedures governing loan disbursements to ensure that the institution's minimum equity requirements by the borrower are maintained throughout the development and construction periods. Therefore, the board of directors or a designated committee thereof should: Savings associations with CRE concentrations need to manage not only the risk of individual loans but also the additional portfolio risk that may arise from an overall exposure to a single economic risk factor. One of the most prevalent pieces of commercial real estate (CRE) guidance is, " Concentrations in CRE Lending, Sound Risk-Management Practices (PDF) ," which was issued on December 6, 2006. The OCC, Board, and FDIC (the Agencies) are issuing final joint Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices (Guidance). The following summarizes the final Guidance and how OTS addressed specific aspects of commenter concerns about the proposed Guidance.
PDF NR 2006-2, Concentrations in Commercial Real Estate Lending, Sound Risk The proposed guidance set forth thresholds for assessing an institution's CRE concentrations that would require heightened risk management practices. 1464 (5)(c)(2)(B)]. Education Program, Teacher Online Resource
Synthetic identity fraud: Can your team recognize it? headings within the legal text of Federal Register documents. In developing this Guidance, OTS recognized that different types of CRE lending present different levels of risk, and that consideration should be given to the lower risk profiles and historically superior performance of certain types of CRE, such as well-structured multifamily housing finance, when compared to others, such as speculative office space construction. Commenters did acknowledge that the revisions to the Call Reports and Thrift Financial Reports, effective March 2007, would address the separation of CRE loans for owner-occupied properties. Bank List. Commenters raised questions as to whether the agencies intended to include in the CRE loan definition loans secured by motels, hotels, mini-storage warehouse facilities, and apartment complexes where the primary source of repayment is rental or lease income. For some types of CRE exposures, concentration risk may be present well before the statutory limit is reached. Estate, Asset Sales Event
This commenter asserted that unsecured loans to REITs should not be considered a CRE loan for purposes of the proposed guidance as the risk of an unsecured loan to a REIT is mitigated by diversified sources of repayment because the rental income from one property or even a collection of properties is not the only source of revenue available to a REIT to repay the unsecured loan.
Commenters noted that allowance for loan and lease losses is another means of protection for an institution and, therefore, should be considered in determining the effects of potential concentrations on the adequacy of capital. Reports (UBPR), Statistics
concentration. This includes meaningful information on CRE portfolio characteristics that is relevant to the institution's lending strategy, underwriting standards, and risk tolerances. Imprudent risk-taking and inadequate risk management, particularly information with the FDIC. Recent weakness in the housing and the construction and development (C&D) markets have increased the FDIC's overall concern for state nonmember institutions with concentrations in commercial real estate (CRE) loans, and in particular, C&D loans. For purposes of this guidance, CRE loans include loans where
12/12/06 11/12/08 10/30/09 2/5/10 Owner-occupied properties To receive FILs electronically, please visit
1 For the purposes of this FIL, C&D and CRE concentrations have the same meaning as stated in the CRE Guidance. and appropriate application of this guidance, the FederalReserve is
This table of contents is a navigational tool, processed from the The guidance notes that risk characteristics vary among CRE loans secured
The FDIC is issuing this FIL to re-emphasize the importance of strong capital and loan loss allowance levels, and robust credit risk- management practices for institutions with concentrated CRE exposures, consistent with the December 6, 2006, interagency guidance on CRE lending and the December 13, 2006, interagency policy statement on the allow. The commenter noted that a narrow interpretation of the definition of owner-occupied would include these types of loans in the scope of the CRE definition even though such loans exhibit the same risk profile as an owner-occupied property. Revocable
As discussed under CRE Concentration Assessments, institutions are encouraged to segment their CRE portfolios to acknowledge these distinctions for risk management purposes. A commenter noted that there is a vast difference in risk between a loan conservatively underwritten where the borrower has a large investment at stake and a loan offering overly generous terms where the borrower has little to lose if the project should fail. As Exhibit 2 illustrates, by 2016, CRE concentrations in smaller organizations were beginning to approach levels last seen in mid-2007 (six months after the initial joint guidance on CRE concentrations was released). Analysis, FDIC Quarterly
Many commenters asked that the Agencies either substantially revise the proposed Guidance or withdraw it. Insights, Enforcement Decisions &
Innovation spotlight: Delivering a faster and more affordable home equity experience. the level and nature of CRE concentration risk, the quality of the institution's
Concentrations of credit can add a dimension of risk that compounds the risk inherent in individual loans. Compliance Supervisory Highlights, Laws &
Unlike statutory investment requirements for other federal financial institutions, the Home Owner's Loan Act sets various limits on certain loans and investments made by savings associations [12 U.S.C. History. Agencies issued 2006 Joint Guidance on CRE Lending guidance due to: Rising CRE concentrations could create S&S concerns in the event of a significant economic downturn.
Interagency Guidance on CRE Concentration Risk Management | OCC Acquisitions, Real Estate and
Agencies Warn about Rising Risks in CRE Lending FDIC . proteccin al consumidor, Financial
for complying with the guidance. Counts are subject to sampling, reprocessing and revision (up or down) throughout the day. Over the past several years, the agencies have observed that commercial real
On December 6, 2006, the Federal Reserve and the other federal banking regulatory
Rather, examiners are expected to exercise judgment
Credit concentrations are broadly defined as groups or classes of credit exposures that share common risk . Third-Party Relationships: Interagency Guidance on Risk Management, Central Application Tracking System (CATS), Office of Thrift Supervision Archive Search, Portfolio stress testing and sensitivity analysis, Total reported loans for construction, land development, and other land loans represent 100 percent or more of the institution's total risk-based capital; or. Document page views are updated periodically throughout the day and are cumulative counts for this document. If you have questions about how to apply this guidance, please contact your OCC supervisory office.
PDF Commercial Real Estate Lending 2 - Office of the Comptroller of the Examination Manual, Consumer
US banks exceeding CRE regulatory guidance hit multiyear high in Q2 The agency also cited inflation, rising interest rates and supply chain challenges as potentially increasing risk. The guidance provides numerical indicators as supervisory screening criteria
Tools, Compliance
portion (if any) exceeds coverage limits at that bank. Also, if loans secured by multi-family and non-farm nonresidential property, where the primary source of repayment is derived from rental income or the proceeds of the sale, refinancing, or permanent financing, combined with construction, development, and land loans, exceed 300 percent of total capital, the institution would be considered to have a CRE concentration. Moreover, some institutions' risk management practices are not evolving with their increasing CRE concentrations. The guidance sets forth sound risk management practices that an institution should employ when it has CRE concentration risk. Guide, Bank
by different property types. A concentration of credit consists of direct, indirect, or contingent obligations exceeding 25 percent of a bank's capital structure. 2200).
FDIC: FIL-104-2006: Commercial Real Estate Lending Source: GAO analysis of data from FDIC and regulatory guidance. http://www.fdic.gov/about/subscriptions/fil.html. One commenter noted that proposed benchmarks mixed together real estate loans with vastly different potential for loss and, therefore, would fail to accomplish the Agencies' goal of identifying institutions that might be affected by a downturn. The analysis should focus on the more vulnerable segments of an institution's CRE portfolio, taking into consideration the prevailing market environment and the institution's business strategy. Were subject to supervisory concern over CRE lending during preceding examinations. Portfolio diversification across property types, Level of pre-sold units or other types of take-out commitments on construction loans, Portfolio liquidity (ability to sell or securitize exposures on the secondary market). However, an institution with inadequate capital to serve as a buffer against unexpected losses from a CRE concentration should develop a plan for reducing its CRE concentrations or for maintaining capital appropriate for the level and nature of its CRE concentration risk. That the definition of CRE inappropriately includes multifamily and one-to four-family construction loans; That the thresholds of 100 percent of the institution's capital for construction loans and 300 percent of capital for aggregate CRE loans would be viewed as limits; and. Interagency Statement on the ALLL, Contact:
An institution that has experienced rapid growth in CRE lending, has notable exposure to a specific type of CRE, or is approaching or exceeds the following supervisory criteria may be identified for further supervisory analysis to assess the nature and risk posed by the concentration: Emory W. RushtonSenior Deputy Comptroller and Chief National Bank Examiner. Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices A Notice by the Thrift Supervision Office on 12/14/2006 Document Details PDF 12/14/2006 Agencies: Office of Thrift Supervision Dates: Effective Date: 12/14/2006 Notice 71 FR 75294 75294-75301 (8 pages) Agency/Docket Number: No. www.fdic.gov/news/news/financial/2008/index.html. While every effort has been made to ensure that Specifically, if loans for construction, land development, and other land exceed 100 percent of total capital, the institution would be considered to have a CRE concentration.
PDF An Analysis of the Impact of the Commercial Real Estate Concentration the real estate held as collateral.
For banks substantively involved in CRE lending, this was especially true when robust contingency planning and stress testing/scenario analysis processes were in place., American Bankers Association The number of banks exceeding supervisory CRE concentration criteriaas defined by interagency guidelines established in 2006grew to about 9% of banks in 2021, the agency said. Reliance on the Call and Thrift Financial Reports: Commenters noted that the identification of CRE loans in the current Call Reports and Thrift Financial Reports did not correspond to the scope of the CRE definition in the proposed guidance and did not constitute an accurate measurement of the volume of an institution's CRE loans that would be vulnerable to cyclical CRE markets. In assessing the adequacy of an institution's capital, OTS will consider the level and nature of inherent risk in the CRE portfolio as well as management expertise, historical performance, underwriting standards, risk management practices, and market conditions. Learn if your bank is insured, view
Commenters stated that existing regulations and Guidance are sufficient to address the agencies' concerns regarding CRE concentration risk and the adequacy of an institution's risk management practices and capital. Questions may be addressed to the following contacts in the Board's Division
This site displays a prototype of a Web 2.0 version of the daily Act (CRA), Upcoming
These can be useful Accordingly, savings associations with CRE concentration risks are reminded that their capital levels should be commensurate with the risk profile of their CRE portfolios that includes both credit and concentration risks. Ensure that loan loss allowances are appropriately strong . Institutions that have recently experienced rapid growth in CRE lending or have a notable exposure to a specific type of CRE may be identified for closer review. A manageable level of CRE concentration risk
One commenter noted that the proposal did not differentiate the risks posed by a loan on a speculative office building versus a fully occupied apartment building. are not part of the published document itself. Further, risk ratings should be regularly reviewed for appropriateness. levels of capital are important elements of a sound CRE lending program, especially
Examination Policies, Bank Secrecy Act and
One commenter noted that construction loans on presold versus speculative residential properties should be treated differently as presold properties have construction risk but not real estate market risk, which was the concern of the Agencies. Further, an institution should consider the Start Printed Page 75301sensitivity of portfolio segments with common risk characteristics to potential market conditions.
The Fed - Supervisory Policy and Guidance Topics - Real Estate An official website of the United States government, OCC Bulletin2006-46 at a Glance, Research &
Failed Banks, Closed Real
A Multifaceted Approach to Managing CRE Concentration Risk An institution's process for determining the ALLL should be based on a comprehensive, well-documented, and consistently applied analysis of its loan portfolio that considers all significant factors that affect collectibility. Strong risk management practices and appropriate levels of capital are essential elements of a sound Commercial Real Estate (CRE) lending program.
PDF FDIC's Consideration of Commercial Real Estate Concentration Risk in Deposit Insurance, Center for Financial
| Calendar, Loan Sales
Depending on the results of its internal risk assessment, the institution may need to enhance its risk management systems as described below. The FDIC said lending concentrations are "not by definition problematic," and noted that these concentrations are sometimes necessary for smaller banks. Failures, Historical
Interagency Guidelines for Real Estate Lending Policies (Appendix to OTS 12 CFR 560.100-101) state that the aggregate amount of commercial, agricultural, multifamily, or other non-one- to four-family loans should not exceed 30 percent of an institution's total capital if they exceed supervisory loan-to-value limits. Loans to REITs and unsecured loans to developers that closely correlate to the inherent risk in the CRE market would also be considered CRE loans for purposes of the proposed guidance. Institutions with significant CRE concentrations are described in the CRE Guidance as those institutions reporting loans for construction, land development, and other land representing 100 percent or more of Total Capital; or institutions reporting total CRE loans representing 300 percent or more of Total Capital where the outstanding balance of CRE has increased by 50 percent or more during the prior 36 months.1. accessed from the FDIC's Web site at
Management should regularly evaluate the degree of correlation between related real estate sectors and establish internal lending guidelines and concentration limits that control the institution's overall risk exposure. and examination staff and the state banking departments in their districts. Commenters asked for clarification on the scope of the definition of CRE loans. The proposed Guidance also reminded 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. Accessibility
risk management processes, and the level of capital. This prototype edition of the
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