OCC addresses real estate lending calculations, limits
by Mary Beth Guard, BOL Guru
The OCC issued AL-2003-7 to respond to banker inquiries relating to three aspects of real estate lending:
The proper calculation of a loan-to-value (LTV) ratio when multiple properties secure a
loan;
The supervisory LTV limit for a finished lot loan; and
Classifying high loan-to-value (HLTV) loans for reporting purposes.
When multiple properties secure a loan, multiply each property by the appropriate supervisory LTV ratio. The second step is to deduct
any existing senior liens associated with the property. Next, you add the individual results. If the total exceeds the loan
amounts, you're fine under the real estate lending standards. If your total is less than the loan amount, the loan would be a nonconforming High Loan-to-Value Loan. The Advisory Letter provides an example of such a calculation.
In terms of "finished lots" and "buildable lots," those terms mean the same thing as a land development loan, which is
defined under 12 CFR 34, Subpart D as an extension of credit for the purposes of improving unimproved real property
prior to the erection of structures. The improvement may include the laying or placing of sewers, water pipes, utility cables, streets,
and other infrastructure necessary for future development.
Land development loans are subject to a supervisory LTV ratio of 75 percent until construction of a permanent building commences.
If you've made a loan secured by raw land, subject to the 65 percent supervisory LTV, you are allowed to use whatever the higher
appropriate LTV ratio is when actual construction begins on the next phase of development.
You must do four things on all HLTV loans. You must:
identify and record them;
report them to the board of directors no less than quarterly;
continue to designate a loan as an HLTV until the LTV ratio falls below the supervisory
limit; and
limit the aggregate amount of your bank's "basket" of HLTV loans to no more than 100% of your bank's total capital.
The LTV ratio may fall either through principal reduction or collateral appreciation. There are some further restrictions on your
"basket" of nonconforming loans:
the aggregate amount of all
commercial loans within the basket (i.e., those that are NOT 1- to 4-family residential loans) should not exceed 30
percent of total capital; and
include the entire amount of a nonconforming loan in the basket, rather than just the portion that exceeds the supervisory
LTV limit.
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