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InfoBytes

Additional Note

OTS Differs from Other Federal Banking Agencies on CRE Guidance.  In the December 8th issue of InfoBytes, it was reported that the FDIC, Federal Reserve, and OCC had issued joint final guidance on Commercial Real Estate (CRE) risk.  However, it should be noted that the Office of Thrift Supervision (OTS) issued separate final guidance which differed significantly from the others, and removed references to CRE lending ratio thresholds entirely.

The guidance from the three agencies outlines two possible criteria for determining if a bank “may be identified for further supervisory analysis of the level and nature of its CRE concentration risk.”  Those criteria are if (i) the “total reported loans for construction, land development and other land represent 100 percent or more of the institution’s total capital” or (ii) if the total CRE loans, including loans for, inter alia, development and construction, loans secured by multifamily and commercial properties, and certain loans to REITs and developers, “represent 300 percent or more of the institution’s total capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50 percent or more during the prior 36 months.”  These were largely unchanged from the January 10 proposed guidance, save for the addition of the 36 month test to the second criterion.  The agencies go on to note that banks falling below these thresholds may still be scrutinized for CRE risk “if other risk indicators are present.”

Final guidance issued by the OTS, on the other hand, makes no mention of these criteria.  Rather than numerical triggers, the guidance outlines “preliminary” criteria for determining the presence of CRE concentration risk and if an institution should receive “further supervisory analysis” of its risk management practices.  These criteria consider if an institution (i) is approaching its Home Owners Loan Act-imposed CRE investment limit of 400% of total capital, (ii) has experienced “rapid growth in CRE lending,” (iii) has “notable exposure to a specific type of, or high-risk, CRE,” (iv) was “subject to supervisory concern over CRE lending during previous examinations,” and (v) has “experienced significant levels of delinquencies or charge-offs in their CRE portfolios.”  The OTS points out, however, that concentration levels below 400% of capital should not be considered as being within a “safe harbor.”

Due to the interpretive nature of the OTS criteria, it remains to be seen if it will in practice confer additional latitude to Federal Savings Banks in CRE lending, relative to other federally regulated banking institutions.  For the OTS guidance in full, see http://www.ots.treas.gov/docs/7/776055.html.  For text of the joint guidance of the other federal banking agencies, see http://www.fdic.gov/news/news/press/2006/pr06114a.html.

© Buckley Kolar, LLP 2006. INFOBYTES is not intended as legal advice to any person or firm. It is provided as a client service and information contained herein is drawn from various public sources, including other publications.

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