URGENT ACTION NEEDED:
SEND COMMENT LETTERS TO THE OTS, FDIC, OCC, FEDERAL RESERVE ON PROPOSED GUIDANCE – CONCENTRATIONS IN COMMERCIAL REAL ESTATE LENDING

The federal banking agencies have issued a joint proposed guidance regarding “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices.” We expect the original comment period end date of March 14 to be extended for 30 days at ACB’s request to end on April 13, 2006.

This proposed guidance has generated tremendous concern among community banks involved in commercial real estate lending. The proposed guidance indicates that banks with high concentrations of commercial real estate loans should receive significantly increased regulatory scrutiny on their underwriting standards, risk management practices and capital levels.

While ACB recognizes the critical importance of prudent commercial real estate lending, we have serious concerns about the impact of the proposed guidance on ACB members’ ability to serve their communities’ CRE needs. The guidance seems to impose additional regulation in a mechanical and arbitrary manner.

Under the proposed guidance, financial institutions are deemed to have a concentration in commercial real estate loans if one or both of the following tests are met.

1. “Total reported loans for construction, land development and other land represent one hundred percent (100%) or more of the institution”s total capital, or
2. Total reported loans secured by multi-family and nonfarm nonresidential properties and loans for construction, land development, and other land represent three hundred percent (300%) or more of the institution”s total capital.”

These threshold tests ignore the actual risk factors associated with your particular portfolio. The guidance would also give the banking regulators the ability to require your institution to increase its capital levels simply because you have a concentration of CRE loans.

ACTION NEEDED:
We strongly encourage ACB member banks to send their own comment letters to their banking regulatory agency to let them know how important CRE lending is to community banks and how this proposed guidance could negatively affect your business. The more letters that the regulators receive from community banks, in their own words, the more likely it is that they will make reasonable modifications in the final guidance.

If you would like to read the Federal Register Notice of the proposed guidance, in can be accessed via the internet at
http://a257.g.akamaitech.net/7/257/2422/01jan20061800/edocket.access.gpo.gov/2006/pdf/06-1675.pdf

Attached are the following:

• A summary of the proposed guidance.
• Talking points.

Please use this information as a guide to drafting your own comment letter. After you have submitted your letter, please send us a copy. If you have any questions, please contact Janet Frank at 202-857-3129 or by email at [email protected].

Please be sure to include the appropriate Docket Number (indicated below) on your letter. The addresses, email addresses and fax numbers (if appropriate) of the banking regulatory agencies are:

SUMMARY

Proposed Regulatory Guidance on Commercial Real Estate Loan Concentrations

On January 13th the federal banking agencies published a proposal in the Federal Register that highlights the agencies concern regarding the concentrations in commercial real estate loans that are increasingly showing up on financial institution call reports. The agencies fear that banks with high concentrations in commercial real estate loans will be more likely to experience rapid declines in asset quality and earnings when the economy takes its cyclical downturn.

The proposed guidance suggests that banks with high concentrations in commercial real estate loans should receive increased regulatory scrutiny with regards to their underwriting standards, risk management practices and capital levels. Commercial real estate loans that would be subject to the guidance are those where the “…repayment is primarily dependent on rental income or from the proceeds of the sale, refinancing or permanent financing of the property.” Examples of commercial real estate loans that would come under increased scrutiny include: loans that are secured by raw land, one to four family residential development and construction loans, multi-family property loans and non-farm residential property loans. The regulators are also including loans made by financial institutions to REITS and unsecured loans to developers in their guidance.

Under the proposed guidance, financial institutions are deemed to have a concentration in commercial real estate loans if one or both of the following tests are met:

• “Total reported loans for construction, land development and other land represent one hundred percent (100%) or more of the institution”s total capital, or
• Total reported loans secured by multi-family and nonfarm nonresidential properties and loans for construction, land development, and other land represent three hundred percent (300%) or more of the institution”s total capital.”

ACB has done a preliminary analysis of the members that might be classified as having a significant concentration in commercial real estate loans using the above tests. This analysis is attached as an excel spreadsheet for your review. Our analysis is based on publicly available data and does not include all of the additions and subtractions a regulator would make to determine if your institution would be judged to have a high concentration of commercial loans. We have, for example, not included loans to REITs nor have we added into the equation non-real estate secured construction and development loans. Also, for some unknown reason, SNL data does not include data for some ACB member institutions that we would expect to be classified as having high concentrations of commercial real estate loans. Please use this list as a starting point for your institution”s own analysis of commercial real estate loan concentrations.

The regulatory agencies further indicated that the guidance might also be applied to “…any institution that has had a sharp increase in CRE (commercial real estate) lending over a short period of time or has a significant concentration in CRE loans secured by a particular property type.”

The proposed guidance also has applicability for financial institutions that do not meet the above tests. The guidance specifically mentions that the risk management principles and capital adequacy guidelines outlined in the guidance are “…are broadly prudent for all institutions involved in CRE lending.”

TALKING POINTS

• Commercial real estate is vitally important to the lending programs of many community bankers, to the revitalization of urban communities and to the strength of the American economy.
  
• Any guidance that imposes additional requirements in a mechanical or arbitrary manner could lead to policy shifts in the lending practices of community banks that could discourage CRE lending and encourage more risky types of lending.
  
• The Agencies should avoid imposing rigid, arbitrary threshold tests that ignore the actual risk factors associated with a particular loan or mortgage portfolio.
  
• The threshold tests are inappropriate because different types of commercial real estate have very different risk profiles.
  
• There is a huge difference in risk levels between CRE loans for raw land, land development, contractor spec home construction, and commercial construction – and development from non-speculative CRE loans that either have firm takeouts or established cash flow patterns
  
• If the Agencies deem it necessary to impose threshold tests, they should exclude from the test: multifamily loans, presold residential construction and construction/permanent financing with either firm takeouts or established cash flows that provide sufficient debt service coverage.
  
• The Agencies’ should not have discretion arbitrarily to require an institution to increase its capital levels simply because the institution has a concentration of CRE loans.
  
• Appropriate capital levels should be determined based on a thorough analysis of the individual institution.
  
• Any requirement for an institution to hold extra capital should be imposed by regulation in the “risk based capital” rules currently being considered by the Agencies and not by this proposed Agency guidance