Appendix C to Part 208--Interagency Guidelines for Real Estate Lending Policies
The agencies' regulations require that each insured depository
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 or made for the purpose
of financing the construction of a building or other improvements.5
These guidelines are intended to assist institutions in the formulation
and maintenance of a real estate lending policy that is appropriate to
the size of the institution and the nature and scope of its individual
operations, as well as satisfies the requirements of the regulation.
5 The agencies have adopted a uniform rule on real estate lending.
See 12 CFR part 365 (FDIC); 12 CFR part 208, subpart C (FRB); 12 CFR
part 34, subpart D (OCC); and 12 CFR 563.100-101 (OTS).
Each institution's policies must be comprehensive, and consistent
with safe and sound lending practices, and must ensure that the
institution operates within limits and according to standards that are
reviewed and approved at least annually by the board of directors. Real
estate lending is an integral part of many institutions' business plans
and, when undertaken in a prudent manner, will not be subject to
examiner criticism.
Loan Portfolio Management Considerations
The lending policy should contain a general outline of the scope and
distribution of the institution's credit facilities and the manner in
which real estate loans are made, serviced, and collected. In
particular, the institution's policies on real estate lending should:
Identify the geographic areas in which the institution will
consider lending.
Establish a loan portfolio diversification policy and set
limits for real estate loans by type and geographic market (e.g., limits
on higher risk loans).
Identify appropriate terms and conditions by type of real
estate loan.
Establish loan origination and approval procedures, both
generally and by size and type of loan.
Establish prudent underwriting standards that are clear and
measurable, including loan-to-value limits, that are consistent with
these supervisory guidelines.
Establish review and approval procedures for exception
loans, including loans with loan-to-value percentages in excess of
supervisory limits.
Establish loan administration procedures, including
documentation, disbursement, collateral inspection, collection, and loan
review.
Establish real estate appraisal and evaluation programs.
Require that management monitor the loan portfolio and
provide timely and adequate reports to the board of directors.
The institution should consider both internal and external factors
in the formulation of its loan policies and strategic plan. Factors that
should be considered include:
The size and financial condition of the institution.
The expertise and size of the lending staff.
The need to avoid undue concentrations of risk.
Compliance with all real estate related laws and
regulations, including the Community Reinvestment Act, anti-
discrimination laws, and for savings associations, the Qualified Thrift
Lender test.
Market conditions.
The institution should monitor conditions in the real estate markets
in its lending area so that it can react quickly to changes in market
conditions that are relevant to its lending decisions. Market supply and
demand factors that should be considered include:
Demographic indicators, including population and employment
trends.
Zoning requirements.
Current and projected vacancy, construction, and absorption
rates.
Current and projected lease terms, rental rates, and sales
prices, including concessions.
Current and projected operating expenses for different
types of projects.
Economic indicators, including trends and diversification
of the lending area.
Valuation trends, including discount and direct
capitalization rates.
Underwriting Standards
Prudently underwritten real estate loans should reflect all relevant
credit factors, including:
The capacity of the borrower, or income from the underlying
property, to adequately service the debt.
The value of the mortgaged property.
The overall creditworthiness of the borrower.
The level of equity invested in the property.
Any secondary sources of repayment.
Any additional collateral or credit enhancements (such as
guarantees, mortgage insurance or takeout commitments).
The lending policies should reflect the level of risk that is
acceptable to the board of directors and provide clear and measurable
underwriting standards that enable the institution's lending staff to
evaluate these credit factors. The underwriting standards should
address:
The maximum loan amount by type of property.
Maximum loan maturities by type of property.
Amortization schedules.
Pricing structure for different types of real estate loans.
Loan-to-value limits by type of property.
For development and construction projects, and completed commercial
properties, the policy should also establish, commensurate with the size
and type of the project or property:
Requirements for feasibility studies and sensitivity and
risk analyses (e.g., sensitivity of income projections to changes in
economic variables such as interest rates, vacancy rates, or operating
expenses).
Minimum requirements for initial investment and maintenance
of hard equity by the borrower (e.g., cash or unencumbered investment in
the underlying property).
Minimum standards for net worth, cash flow, and debt
service coverage of the borrower or underlying property.
Standards for the acceptability of and limits on non-
amortizing loans.
Standards for the acceptability of and limits on the use of
interest reserves.
Pre-leasing and pre-sale requirements for income-producing
property.
Pre-sale and minimum unit release requirements for non-
income-producing property loans.
Limits on partial recourse or nonrecourse loans and
requirements for guarantor support.
Requirements for takeout commitments.
Minimum covenants for loan agreements.
Loan Administration
The institution should also establish loan administration procedures
for its real estate portfolio that address:
Documentation, including:
Type and frequency of financial statements, including requirements
for verification of information provided by the borrower;
Type and frequency of collateral evaluations (appraisals and other
estimates of value).
Loan closing and disbursement.
Payment processing.
Escrow administration.
Collateral administration.
Loan payoffs.
Collections and foreclosure, including:
Delinquency follow-up procedures;
Foreclosure timing;
Extensions and other forms of forbearance;
Acceptance of deeds in lieu of foreclosure.
Claims processing (e.g., seeking recovery on a defaulted
loan covered by a government guaranty or insurance program).
Servicing and participation agreements.
Supervisory Loan-to-Value Limits
Institutions should establish their own internal loan-to-value
limits for real estate loans. These internal limits should not exceed
the following supervisory limits:
------------------------------------------------------------------------
Loan-to-
value
Loan category limit
(percent)
------------------------------------------------------------------------
Raw land.................................................... 65
Land development............................................ 75
Construction:
Commercial, multifamily,\1\ and other nonresidential.... 80
1- to 4-family residential.............................. 85
Improved property........................................... 85
Owner-occupied 1- to 4-family and home equity............... (\2\)
------------------------------------------------------------------------
\1\ Multifamily construction includes condominiums and cooperatives.
\2\ A loan-to-value limit has not been established for permanent
mortgage or home equity loans on owner-occupied, 1- to 4-family
residential property. However, for any such loan with a loan-to-value
ratio that equals or exceeds 90 percent at origination, an institution
should require appropriate credit enhancement in the form of either
mortgage insurance or readily marketable collateral.
The supervisory loan-to-value limits should be applied to the
underlying property that collateralizes the loan. For loans that fund
multiple phases of the same real estate project (e.g., a loan for both
land development and construction of an office building), the
appropriate loan-to-value limit is the limit applicable to the final
phase of the project funded by the loan; however, loan disbursements
should not exceed actual development or construction outlays. In
situations where a loan is fully cross-collateralized by two or more
properties or is secured by a collateral pool of two or more properties,
the appropriate maximum loan amount under supervisory loan-to-value
limits is the sum of the value of each property, less senior liens,
multiplied by the appropriate loan-to-value limit for each property. To
ensure that collateral margins remain within the supervisory limits,
lenders should redetermine conformity whenever collateral substitutions
are made to the collateral pool.
In establishing internal loan-to-value limits, each lender is
expected to carefully consider the institution-specific and market
factors listed under ``Loan Portfolio Management Considerations,'' as
well as any other relevant factors, such as the particular subcategory
or type of loan. For any subcategory of loans that exhibits greater
credit risk than the overall category, a lender should consider the
establishment of an internal loan-to-value limit for that subcategory
that is lower than the limit for the overall category.
The loan-to-value ratio is only one of several pertinent credit
factors to be considered when underwriting a real estate loan. Other
credit factors to be taken into account are highlighted in the
``Underwriting Standards'' section above. Because of these other
factors, the establishment of these supervisory limits should not be
interpreted to mean that loans at these levels will automatically be
considered sound.
Loans in Excess of the Supervisory Loan-to-Value Limits
The agencies recognize that appropriate loan-to-value limits vary
not only among categories of real estate loans but also among individual
loans. Therefore, it may be appropriate in individual cases to originate
or purchase loans with loan-to-value ratios in excess of the supervisory
loan-to-value limits, based on the support provided by other credit
factors. Such loans should be identified in the institutions's records,
and their aggregate amount reported at least quarterly to the
institution's board of directors. (See additional reporting requirements
described under ``Exceptions to the General Policy.'')
The aggregate amount of all loans in excess of the supervisory loan-
to-value limits should not exceed 100 percent of total capital.2
Moreover, within the aggregate limit, total loans for all commercial,
agricultural, multifamily or other non-1-to-4 family residential
properties should not exceed 30 percent of total capital. An institution
will come under increased supervisory scrutiny as the total of such
loans approaches these levels.
2 For the state member banks, the term ``total capital'' means
``total risk-based capital'' as defined in appendix A to 12 CFR part
208. For insured state non-member banks, ``total capital'' refers to
that term described in table I of appendix A to 12 CFR part 325. For
national banks, the term ``total capital'' is defined at 12 CFR 3.2(e).
For savings associations, the term ``total capital'' is defined at 12
CFR 567.5(c).
In determining the aggregate amount of such loans, institutions
should: (a) Include all loans secured by the same property if any one of
those loans exceeds the supervisory loan-to-value limits; and (b) include the recourse obligation of any
such loan sold with recourse. Conversely, a loan should no longer be
reported to the directors as part of aggregate totals when reduction in
principal or senior liens, or additional contribution of collateral or
equity (e.g., improvements to the real property securing the loan),
bring the loan-to-value ratio into compliance with supervisory limits.
Excluded Transactions
The agencies also recognize that there are a number of lending
situations in which other factors significantly outweigh the need to
apply the supervisory loan-to-value limits. These include:
Loans guaranteed or insured by the U.S. government or its
agencies, provided that the amount of the guaranty or insurance is at
least equal to the portion of the loan that exceeds the supervisory
loan-to-value limit.
Loans backed by the full faith and credit of a state
government, provided that the amount of the assurance is at least equal
to the portion of the loan that exceeds the supervisory loan-to-value
limit.
Loans guaranteed or insured by a state, municipal or local
government, or an agency thereof, provided that the amount of the
guaranty or insurance is at least equal to the portion of the loan that
exceeds the supervisory loan-to-value limit, and provided that the
lender has determined that the guarantor or insurer has the financial
capacity and willingness to perform under the terms of the guaranty or
insurance agreement.
Loans that are to be sold promptly after origination,
without recourse, to a financially responsible third party.
Loans that are renewed, refinanced, or restructured without
the advancement of new funds or an increase in the line of credit
(except for reasonable closing costs), or loans that are renewed,
refinanced, or restructured in connection with a workout situation,
either with or without the advancement of new funds, where consistent
with safe and sound banking practices and part of a clearly defined and
well-documented program to achieve orderly liquidation of the debt,
reduce risk of loss, or maximize recovery on the loan.
Loans that facilitate the sale of real estate acquired by
the lender in the ordinary course of collecting a debt previously
contracted in good faith.
Loans for which a lien on or interest in real property is
taken as additional collateral through an abundance of caution by the
lender (e.g., the institution takes a blanket lien on all or
substantially all of the assets of the borrower, and the value of the
real property is low relative to the aggregate value of all other
collateral).
Loans, such as working capital loans, where the lender does
not rely principally on real estate as security and the extension of
credit is not used to acquire, develop, or construct permanent
improvements on real property.
Loans for the purpose of financing permanent improvements
to real property, but not secured by the property, if such security
interest is not required by prudent underwriting practice.
Exceptions to the General Lending Policy
Some provision should be made for the consideration of loan requests
from creditworthy borrowers whose credit needs do not fit within the
institution's general lending policy. An institution may provide for
prudently underwritten exceptions to its lending policies, including
loan-to-value limits, on a loan-by-loan basis. However, any exceptions
from the supervisory loan-to-value limits should conform to the
aggregate limits on such loans discussed above.
The board of directors is responsible for establishing standards for
the review and approval of exception loans. Each institution should
establish an appropriate internal process for the review and approval of
loans that do not conform to its own internal policy standards. The
approval of any such loan should be supported by a written justification
that clearly sets forth all of the relevant credit factors that support
the underwriting decision. The justification and approval documents for
such loans should be maintained as a part of the permanent loan file.
Each institution should monitor compliance with its real estate lending
policy and individually report exception loans of a significant size to
its board of directors.
Supervisory Review of Real Estate Lending Policies and Practices
The real estate lending policies of institutions will be evaluated
by examiners during the course of their examinations to determine if the
policies are consistent with safe and sound lending practices, these
guidelines, and the requirements of the regulation. In evaluating the
adequacy of the institution's real estate lending policies and
practices, examiners will take into consideration the following factors:
The nature and scope of the institution's real estate
lending activities.
The size and financial condition of the institution.
The quality of the institution's management and internal
controls.
The expertise and size of the lending and loan
administration staff.
Market conditions.
Lending policy exception reports will also be reviewed by examiners
during the course of their examinations to determine whether the institutions' exceptions are adequately documented and appropriate
in light of all of the relevant credit considerations. An excessive
volume of exceptions to an institution's real estate lending policy may
signal a weakening of its underwriting practices, or may suggest a need
to revise the loan policy.
Definitions
For the purposes of these Guidelines:
Construction loan means an extension of credit for the purpose of
erecting or rehabilitating buildings or other structures, including any
infrastructure necessary for development.
Extension of credit or loan means:
(1) The total amount of any loan, line of credit, or other legally
binding lending commitment with respect to real property; and
(2) The total amount, based on the amount of consideration paid, of
any loan, line of credit, or other legally binding lending commitment
acquired by a lender by purchase, assignment, or otherwise.
Improved property loan means an extension of credit secured by one
of the following types of real property:
(1) Farmland, ranchland or timberland committed to ongoing
management and agricultural production;
(2) 1- to 4-family residential property that is not owner-occupied;
(3) Residential property containing five or more individual dwelling
units;
(4) Completed commercial property; or
(5) Other income-producing property that has been completed and is
available for occupancy and use, except income-producing owner-occupied
1- to 4-family residential property.
Land development loan means an extension of credit for the purpose
of improving unimproved real property prior to the erection of
structures. The improvement of unimproved real property may include the
laying or placement of sewers, water pipes, utility cables, streets, and
other infrastructure necessary for future development.
Loan origination means the time of inception of the obligation to
extend credit (i.e., when the last event or prerequisite, controllable
by the lender, occurs causing the lender to become legally bound to fund
an extension of credit).
Loan-to-value or loan-to-value ratio means the percentage or ratio
that is derived at the time of loan origination by dividing an extension
of credit by the total value of the property(ies) securing or being
improved by the extension of credit plus the amount of any readily
marketable collateral and other acceptable collateral that secures the
extension of credit. The total amount of all senior liens on or
interests in such property(ies) should be included in determining the
loan-to-value ratio. When mortgage insurance or collateral is used in
the calculation of the loan-to-value ratio, and such credit enhancement
is later released or replaced, the loan-to-value ratio should be
recalculated.
Other acceptable collateral means any collateral in which the lender
has a perfected security interest, that has a quantifiable value, and is
accepted by the lender in accordance with safe and sound lending
practices. Other acceptable collateral should be appropriately
discounted by the lender consistent with the lender's usual practices
for making loans secured by such collateral. Other acceptable collateral
includes, among other items, unconditional irrevocable standby letters
of credit for the benefit of the lender.
Owner-occupied, when used in conjunction with the term 1- to 4-
family residential property means that the owner of the underlying real
property occupies at least one unit of the real property as a principal
residence of the owner.
Readily marketable collateral means insured deposits, financial
instruments, and bullion in which the lender has a perfected interest.
Financial instruments and bullion must be salable under ordinary
circumstances with reasonable promptness at a fair market value
determined by quotations based on actual transactions, on an auction or
similarly available daily bid and ask price market. Readily marketable
collateral should be appropriately discounted by the lender consistent
with the lender's usual practices for making loans secured by such
collateral.
Value means an opinion or estimate, set forth in an appraisal or
evaluation, whichever may be appropriate, of the market value of real
property, prepared in accordance with the agency's appraisal regulations
and guidance. For loans to purchase an existing property, the term
``value'' means the lesser of the actual acquisition cost or the
estimate of value.
1- to 4-family residential property means property containing fewer
than five individual dwelling units, including manufactured homes
permanently affixed to the underlying property (when deemed to be real
property under state law).
BankersOnline is a free service made possible by the generous support of our advertisers and sponsors. Advertisers and sponsors are not responsible for site content. Please help us keep BankersOnline FREE to all banking professionals. Support our advertisers and sponsors by clicking through to learn more about their products and services.
Print Friendly!
Email This Article!
Discuss NOW!
Identify the geographic areas in which the institution will
consider lending.
