Download Policies and Procedures

Commercial Real Estate Lending Policy and
Procedures (Banks)
POLICY STATEMENT
It is the policy of [insert the name of your bank] to comply with the interagency guidance on
Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices, issued in
December 2006 (see 71 FR 238, p. 74580), with our general loan policy relating to the origination
of commercial real estate loans, with the Interagency Guidelines for Real Estate Lending Policies
(12 CFR 208, Appendix C to Part 208), and with the 2006 Interagency Policy Statement on the
Allowance for Loan and Lease Losses 12/06.
The interagency guidance on Concentrations in Commercial Real Estate Lending reminds
institutions that strong risk management practices and appropriate levels of capital are important
elements of a sound lending program, particularly when an institution has a concentration in
commercial real estate loans. The final guidance reinforces and enhances existing regulations and
guidelines for safe and sound real estate lending.
SCOPE OF POLICY
This policy covers commercial real estate (CRE) loans for which the cash flow from the real
estate is the primary source of repayment rather than loans to a borrower for which real estate
collateral is taken as a secondary source of repayment or through an abundance of caution.
CRE loans include those loans with risk profiles sensitive to the condition of the general CRE
market (e.g., market demand, changes in capitalization rates, vacancy rates, or rents). CRE loans
are land development and construction loans (including 1- to 4-family residential and commercial
construction loans) and other land loans. CRE loans also include loans secured by multifamily
property, and nonfarm nonresidential property where the primary source of repayment is derived
from rental income associated with the property (i.e., loans for which 50 percent or more of the
source of repayment comes from third party, nonaffiliated, rental income) or the proceeds of the
sale, refinancing, or permanent financing of the property.
Loans to real estate investment trusts and unsecured loans to developers should also be
considered CRE loans for purposes of this policy if their performance is closely linked to
performance of the CRE markets. Excluded from the scope of this policy are loans secured by
nonfarm nonresidential properties where the primary source of repayment is the cash flow from
the ongoing operations and activities conducted by the party, or affiliate of the party, who owns
the property.
CRE CONCENTRATION ASSESSMENTS
The board directs management to perform an initial and then ongoing risk assessments to identify
CRE concentrations. The risk assessment should identify potential concentrations by stratifying
the CRE portfolio into segments that have common risk characteristics or sensitivities to
economic, financial, or business developments. The CRE portfolio should not be divided into
multiple segments simply to avoid the appearance of concentration risk.
The board further directs management to identify and monitor credit concentrations by
establishing internal controls that are commensurate with the bank’s portfolio risk characteristics
and capital levels. Senior loan management will report all concentrations to the board of directors
on a periodic basis. We will adjust and, if necessary, enhance our risk management systems based
on our ongoing risk assessments.
RISK MANAGEMENT
The board directs management to ensure that our risk management processes are appropriate to
the size of our portfolio and the level and nature of concentrations and the associated risk to our
bank. As directed by the interagency guidance, management should address the following key
elements in establishing a risk management framework that effectively identifies, monitors, and
controls CRE concentration risk:
•
Portfolio management
•
Management information systems
•
Market analysis
•
Credit underwriting standards
•
Portfolio stress testing and sensitivity analysis
•
Credit risk review function
CRE CONCENTRATION
The board directs management to ensure that, in general, the bank's commercial lending portfolio
will stay within the bounds of the levels noted in the interagency guidance on Concentrations in
Commercial Real Estate Lending. While the board realizes that the levels are guidelines for
examiners and will not necessarily be considered an unsound concentration, further supervisory
analysis may be conducted if our lending portfolio is above the levels, particularly if it grows by
50 percent within three years. The levels are as follows:
•
Total reported loans for construction, land development, and other land represent 100
percent or more of the bank’s total capital
•
Total commercial real estate loans as defined in this policy represent 300 percent or more
of the institution’s total capital, and the outstanding balance of the bank’s commercial
real estate loan portfolio has increased by 50 percent or more during the prior 36 months
The board further directs senior loan management to:
•
Establish policy guidelines and approve an overall CRE lending strategy regarding the
level and nature of CRE exposures acceptable to the institution, including any specific
commitments to particular borrowers or property types, such as multifamily housing
•
Ensure that lending departments implement procedures and controls to effectively adhere
to and monitor compliance with the institution’s lending policies and strategies
•
Submit reports to the board that identify and quantify the nature and level of risk
presented by CRE concentrations, including reports that describe changes in CRE market
conditions in which we lend
•
Submit reports to the board (or a suitable committee) for review and approval of CRE
risk exposure limits and appropriate sub-limits (e.g., by nature of concentration) to
conform to any changes in our strategies and to respond to changes in market conditions
CRE PORTFOLIO MANAGEMENT
Senior loan management should manage the risk of the entire portfolio, not just the risk of
individual loans. Management should regularly evaluate the degree of correlation between related
real estate sectors and establish internal lending guidelines and concentration limits that control
the bank’s overall risk exposure.
Management should develop appropriate strategies for managing CRE concentration levels,
including a contingency plan to reduce or mitigate concentrations in the event of adverse CRE
market conditions. Loan participations, whole loan sales, and securitizations are a few examples
of strategies for actively managing concentration levels without curtailing new originations.
If the contingency plan includes selling or securitizing CRE loans, management should assess
periodically the marketability of the portfolio. This should include an evaluation of the bank’s
ability to access the secondary market and a comparison of its underwriting standards with those
that exist in the secondary market.
If our loan portfolio consists of a significant number of construction and development (C&D)
loans and CRE loans, we will:
•
Take steps to increase capital levels to support our CRE concentrations. Capital
protection for C&D and CRE concentrations will be a strategic priority when we
contemplate declaring cash dividends for our stockholders.
•
Determine our allowance for loan and lease losses (ALLL) in accordance with generally
accepted accounting principles, our written policies and procedures, management's best
judgment, and supervisory guidance. We will analyze the collectibility of CRE and all
other exposures at least quarterly and will maintain an ALLL at a level that is appropriate
to cover estimated credit losses on individually evaluated loans that are determined to be
impaired as well as estimated credit losses in the remainder of the loan portfolio.
MANAGEMENT INFORMATION SYSTEMS
Our bank should also be able to identify and aggregate exposures to a borrower, including our
credit exposure relating to derivatives. Reports should be timely and in a format that clearly
indicates changes in the portfolio's risk profile, including risk-rating migrations. Management
information systems must provide the board and management with effective data resources on
concentration levels and market conditions.
We will also have a process through which management reviews and evaluates concentration and
risk management reports, as well as special ad hoc analysis in response to potential market events
that could affect the CRE loan portfolio. Management must have internal controls and procedures
that will effectively manage interest reserve and loan extension accommodations, reflecting the
borrower's condition accurately in loan ratings and documented reviews.
Finally, the board directs management to present a market analysis periodically that assesses
whether the bank's CRE lending strategy and policies continue to be appropriate in light of
changes in CRE market conditions. The market analysis should include various property types
and geographic markets represented in the bank's CRE portfolio.
CREDIT UNDERWRITING STANDARDS AND PORTFOLIO LEVEL STRESS TESTS
We will underwrite our commercial real estate loans in a way that is consistent with the
Interagency Guidelines for Real Estate Lending Policies (12 CFR 208, Appendix C to Part 208)
and our loan policy. Additionally, management should perform portfolio-level stress tests to
quantify the impact of changing economic conditions on asset quality, earnings, and capital.
Workouts of commercial real estate loans will be conducted in accordance with our Problem
Asset Policy and with consideration of the interagency Policy Statement on Prudent Commercial
Real Estate Loan Workouts, issued on October 30, 2009.
MAINTAIN UPDATED FINANCIAL AND ANALYTICAL INFORMATION
We will maintain recent borrower financial statements, including property cash flow statements,
rent rolls, guarantor personal statements, tax return data, global builder and other income property
performance information. Global financial analysis of obligors should be emphasized, as well as
the concentration of individual builders or developers in a loan portfolio. As real estate market
conditions change, management should consider the continued relevance of appraisals performed
during high growth periods, and update appraisal reports as necessary.
The board of directors approved and adopted this policy on ____________________.