|
[Main Tabs]
[Table of Contents - 2000]
[Index]
[Previous Page]
[Next Page]
[Search]
2000 - FDIC Rules and Regulations
{{12-31-92 p.3173}}
PART 365REAL ESTATE LENDING STANDARDS
Sec. 365.1
Purpose and scope.
365.2
Real estate lending standards.
Appendix A to
Part 365Interagency Guidelines for Real Estate Lending Policies
AUTHORITY: 12 U.S.C. 1828(o).
SOURCE: The provisions of this Part 365 appear at 57 Fed. Reg.
62900, December 31, 1992, effective March 19, 1993, except as otherwise
noted.
§ 365.1 Purpose and scope.
This part, issued pursuant to section 304 of the Federal Deposit
Insurance Corporation Improvement Act of 1991,
12 U.S.C. 1828(o), prescribes
standards for real estate lending to be used by insured state nonmember
banks (including state-licensed insured branches of foreign banks) in
adopting internal real estate lending policies.
[Codified to 12 C.F.R.
§ 365.1]
§ 365.2 Real estate lending standards.
(a) Each insured state nonmember bank shall adopt and maintain
written policies that establish appropriate limits and standards for
extensions of credit that are secured by liens on or interests in real
estate, or that are made for the purpose of financing permanent
improvements to real estate.
(b)(1) Real estate lending policies adopted pursuant to this
section must:
(i) Be consistent with safe and sound banking practices;
(ii) Be appropriate to the size of the institution and the nature
and scope of its operations; and
(iii) Be reviewed and approved by the bank's board of directors
at least annually.
(2) The lending policies must establish:
(i) Loan portfolio diversification standards;
(ii) Prudent underwriting standards, including loan-to-value
limits, that are clear and measurable;
(iii) Loan administration procedures for the bank's real estate
portfolio; and
(iv) Documentation, approval, and reporting requirements to
monitor compliance with the bank's real estate lending policies.
(c) Each insured state nonmember bank must monitor conditions in
the real estate market in its lending area to ensure that its real
estate lending policies continue to be appropriate for current market
conditions.
(d) The real estate lending policies adopted pursuant to this
section should reflect consideration of the Interagency Guidelines for
Real Estate Lending Policies established by the federal bank and thrift
supervisory agencies.
[Codified to 12 C.F.R. § 365.2]
[The page following this is 3179.]
{{12-31-92 p.3179}}
Appendix A to Part 365Interagency 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. 1
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.
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.
{{12-31-92 p.3180}}
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.
{{6-30-06 p.3181}}
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
category |
Loan-to-value limit (percent) |
Raw
land |
65 |
Land development |
75
|
Construction: |
Commercial, multifamily,1 and other
non residential |
80 |
1- to 4-family
residential |
85 |
Improved property |
85
|
Owner-occupied 1- to 4-family and
home equity |
2
|
1Multifamily construction includes condominiums and
cooperatives.
2A 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
{{6-30-06 p.3182}}excess of the
supervisory loan-to-value limits, based on the support provided by
other credit factors. Such loans should be identified in the
institution'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.
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 extension of credit
is not used to acquire, develop, or construct permanent improvements on
real property.
{{2-28-03 p.3183}}
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 provisions 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;
{{2-28-03 p.3184}}
(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).
[Codified to 12 C.F.R. Appendix A to Part 365]
[The page following this is 3193.]
1The 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). Go Back to Text
2For 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 1 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). Go Back to Text
[Main Tabs]
[Table of Contents - 2000]
[Index]
[Previous Page]
[Next Page]
[Search]
|