New Commercial Lending Rules Expected
In response to real estate lending concentrations that may make institutions more vulnerable to cyclical commercial markets, federal regulators are preparing new commercial real estate lending guidelines, reports The South Florida Business Journal. The agencies involved say new rules will help identify institutions with commercial loan concentrations that “may be subject to greater supervisory scrutiny.”
The proposed list of guidelines is from the Federal Reserve Board, the U.S. Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corp.
Regulators may be preparing to suggest changes in underwriting at some banks and advise others to reduce their commercial real estate lending overall. Those steps would be taken following examinations, which the government conducts every 12 or 18 months, based on grades banks received on previous exams.
Among lending areas where the agencies’ proposal sets out guidelines and asks for comments:
- Underwriting
- Strategic planning
- Management information systems
- Risk assessment and loan monitoring
- Portfolio stress tests, risk management
- Identifying, managing concentrations of real estate loans
The proposed guidance is expected to be published later this week. Then, bankers and anyone else with opinions about banks’ real estate lending will have 60 days to send comments to any of the four regulators. The comments will then be reviewed and the final guidelines issued. The date for final guidelines is not yet specified, but the new set of rules is expected to reinforce previous regulations and guidelines on commercial real estate lending.
The agencies did not specifically mention South Florida real estate, where fast-paced, high-rise condo construction has led to much concerns. Possible units not being sold or not being rented out by buyers have a lot of analysyts worrying about a market correction and economic damage as a result. The agencies certainly described scenarios that exist in South Florida, however.
The report expressed concern about heavy amounts of commercial real estate loans where repayment is primarily dependent on rental income or from refinancing or permanent financing of the property. It is a pattern that has emerged statewide, particularly during the boom of the past five years. This may expose institutions to unanticipated earnings and capital volatility due to adverse changes in the general Florida commercial real estate market.
