Interagency Guidelines for Real Estate Lending

Pt. 34, Subpt. D, App. A 12 CFR Ch. I (1–1–12 Edition)

(d) The real estate lending policies • Establish prudent underwriting standards adopted pursuant to this section should that are clear and measurable, including reflect consideration of the Inter- loan-to-value limits, that are consistent agency Guidelines for Real Estate with these supervisory guidelines. • Establish review and approval procedures Lending Policies established by the for exception loans, including loans with Federal bank and thrift supervisory loan-to-value percentages in excess of super- agencies. visory limits. • Establish loan administration proce- APPENDIX A TO SUBPART D OF PART 34— dures, including documentation, disburse- INTERAGENCY GUIDELINES FOR REAL ment, collateral inspection, collection, and ESTATE LENDING loan review. • Establish real estate appraisal and eval- The agencies’ regulations require that each uation programs. insured depository institution adopt and • Require that management monitor the maintain a written policy that establishes loan portfolio and provide timely and ade- appropriate limits and standards for all ex- quate reports to the board of directors. tensions of credit that are secured by liens The institution should consider both inter- on or interests in real estate or made for the nal and external factors in the formulation purpose of financing the construction of a of its loan policies and strategic plan. Fac- 1 building or other improvements. These tors that should be considered include: guidelines are intended to assist institutions • The size and financial condition of the in- in the formulation and maintenance of a real stitution. estate lending policy that is appropriate to • The expertise and size of the lending the size of the institution and the nature and staff. scope of its individual operations, as well as • The need to avoid undue concentrations satisfies the requirements of the regulation. of risk. Each institution’s policies must be com- • Compliance with all real estate related prehensive, and consistent with safe and laws and regulations, including the Commu- sound lending practices, and must ensure nity Reinvestment Act, anti-discrimination that the institution operates within limits laws, and for savings associations, the Quali- and according to standards that are reviewed fied Thrift Lender test. and approved at least annually by the board • Market conditions. of directors. Real estate lending is an inte- gral part of many institutions’ business The institution should monitor conditions plans and, when undertaken in a prudent in the real estate markets in its lending area manner, will not be subject to examiner crit- so that it can react quickly to changes in icism. market conditions that are relevant to its lending decisions. Market supply and de- LOAN PORTFOLIO MANAGEMENT mand factors that should be considered in- CONSIDERATIONS clude: • Demographic indicators, including popu- The lending policy should contain a gen- lation and employment trends. eral outline of the scope and distribution of • Zoning requirements. the institution’s credit facilities and the • Current and projected vacancy, construc- manner in which real estate loans are made, tion, and absorption rates. serviced, and collected. In particular, the in- • Current and projected lease terms, rental stitution’s policies on real estate lending rates, and sales prices, including conces- should: sions. • Identify the geographic areas in which • Current and projected operating expenses the institution will consider lending. for different types of projects. • Establish a loan portfolio diversification • Economic indicators, including trends policy and set limits for real estate loans by and diversification of the lending area. type and geographic market (e.g., limits on • Valuation trends, including discount and higher risk loans). direct capitalization rates. • Identify appropriate terms and conditions by type of real estate loan. UNDERWRITING STANDARDS • Establish loan origination and approval Prudently underwritten real estate loans procedures, both generally and by size and should reflect all relevant credit factors, in- type of loan. cluding: • The capacity of the borrower, or income 1 The agencies have adopted a uniform rule from the underlying property, to adequately on real estate lending. See 12 CFR part 365 service the debt. (FDIC); 12 CFR part 208, subpart C (FRB); 12 • The value of the mortgaged property. CFR part 34, subpart D (OCC); and 12 CFR • The overall creditworthiness of the bor- 563.100–101 (OTS). rower.

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• The level of equity invested in the prop- • Payment processing. erty. • Escrow administration. • Any secondary sources of repayment. • Collateral administration. • Any additional collateral or credit en- • Loan payoffs. hancements (such as guarantees, mortgage • Collections and foreclosure, including: insurance or takeout commitments). Delinquency follow-up procedures; The lending policies should reflect the Foreclosure timing; level of risk that is acceptable to the board Extensions and other forms of forbearance; of directors and provide clear and measur- Acceptance of deeds in lieu of foreclosure. • able underwriting standards that enable the Claims processing (e.g., seeking recovery institution’s lending staff to evaluate these on a defaulted loan covered by a government credit factors. The underwriting standards guaranty or insurance program). • Servicing and participation agreements. should address: • The maximum loan amount by type of SUPERVISORY LOAN-TO-VALUE LIMITS property. • Maximum loan maturities by type of Institutions should establish their own in- property. ternal loan-to-value limits for real estate • Amortization schedules. loans. These internal limits should not ex- • Pricing structure for different types of ceed the following supervisory limits: real estate loans. • Loan-to- Loan-to-value limits by type of property. Loan category value limit For development and construction (percent) projects, and completed commercial prop- Raw land ...... 65 erties, the policy should also establish, com- Land development ...... 75 mensurate with the size and type of the Construction: project or property: Commercial, multifamily, 1 and other non- • Requirements for feasibility studies and residential ...... 80 sensitivity and risk analyses (e.g., sensi- 1- to 4-family residential ...... 85 tivity of income projections to changes in Improved property ...... 85 Owner-occupied 1- to 4-family and home equity (2) economic variables such as interest rates, vacancy rates, or operating expenses). 1 Multifamily construction includes condominiums and co- • operatives. Minimum requirements for initial invest- 2 A loan-to-value limit has not been established for perma- ment and maintenance of hard equity by the nent mortgage or home equity loans on owner-occupied, 1- to borrower (e.g., cash or unencumbered invest- 4-family residential property. However, for any such loan with a loan-to-value ratio that equals or exceeds 90 percent at ment in the underlying property). origination, an institution should require appropriate credit en- • Minimum standards for net worth, cash hancement in the form of either mortgage insurance or readily flow, and debt service coverage of the bor- marketable collateral. rower or underlying property. The supervisory loan-to-value limits • Standards for the acceptability of and should be applied to the underlying property limits on non-amortizing loans. that collateralizes the loan. For loans that • Standards for the acceptability of and fund multiple phases of the same real estate limits on the use of interest reserves. project (e.g., a loan for both land develop- • Pre-leasing and pre-sale requirements for ment and construction of an office building), income-producing property. the appropriate loan-to-value limit is the • Pre-sale and minimum unit release re- limit applicable to the final phase of the quirements for non-income-producing prop- project funded by the loan; however, loan erty loans. disbursements should not exceed actual de- • Limits on partial recourse or non- velopment or construction outlays. In situa- recourse loans and requirements for guar- tions where a loan is fully cross- antor support. collateralized by two or more properties or is • Requirements for takeout commitments. secured by a collateral pool of two or more • Minimum covenants for loan agreements. properties, the appropriate maximum loan amount under supervisory loan-to-value lim- LOAN ADMINISTRATION its is the sum of the value of each property, The institution should also establish loan less senior liens, multiplied by the appro- administration procedures for its real estate priate loan-to-value limit for each property. portfolio that address: To ensure that collateral margins remain • Documentation, including: within the supervisory limits, lenders should Type and frequency of financial state- redetermine conformity whenever collateral ments, including requirements for substitutions are made to the collateral verification of information provided by pool. the borrower; In establishing internal loan-to-value lim- Type and frequency of collateral evalua- its, each lender is expected to carefully con- tions (appraisals and other estimates of sider the institution-specific and market fac- value). tors listed under ‘‘Loan Portfolio Manage- • Loan closing and disbursement. ment Considerations,’’ as well as any other

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relevant factors, such as the particular sub- gate totals when reduction in principal or category or type of loan. For any sub- senior liens, or additional contribution of category of loans that exhibits greater credit collateral or equity (e.g., improvements to risk than the overall category, a lender the real property securing the loan), bring should consider the establishment of an in- the loan-to-value ratio into compliance with ternal loan-to-value limit for that sub- supervisory limits. category that is lower than the limit for the overall category. EXCLUDED TRANSACTIONS The loan-to-value ratio is only one of sev- eral pertinent credit factors to be considered The agencies also recognize that there are when underwriting a real estate loan. Other a number of lending situations in which credit factors to be taken into account are other factors significantly outweigh the need highlighted in the ‘‘Underwriting Standards’’ to apply the supervisory loan-to-value lim- section above. Because of these other fac- its. These include: tors, the establishment of these supervisory • Loans guaranteed or insured by the U.S. limits should not be interpreted to mean government or its agencies, provided that that loans at these levels will automatically the amount of the guaranty or insurance is be considered sound. at least equal to the portion of the loan that exceeds the supervisory loan-to-value limit. LOANS IN EXCESS OF THE SUPERVISORY LOAN- • Loans backed by the full faith and credit TO-VALUE LIMITS of a State government, provided that the The agencies recognize that appropriate amount of the assurance is at least equal to loan-to-value limits vary not only among the portion of the loan that exceeds the su- categories of real estate loans but also pervisory loan-to-value limit. among individual loans. Therefore, it may be • Loans guaranteed or insured by a State, appropriate in individual cases to originate municipal or local government, or an agency or purchase loans with loan-to-value ratios thereof, provided that the amount of the in excess of the supervisory loan-to-value guaranty or insurance is at least equal to limits, based on the support provided by the portion of the loan that exceeds the su- other credit factors. Such loans should be pervisory loan-to-value limit, and provided identified in the institutions’s records, and that the lender has determined that the their aggregate amount reported at least guarantor or insurer has the financial capac- quarterly to the institution’s board of direc- ity and willingness to perform under the tors. (See additional reporting requirements terms of the guaranty or insurance agree- described under ‘‘Exceptions to the General ment. Policy.’’) • Loans that are to be sold promptly after The aggregate amount of all loans in ex- origination, without recourse, to a finan- cess of the supervisory loan-to-value limits cially responsible third party. should not exceed 100 percent of total cap- • Loans that are renewed, refinanced, or ital. 2 Moreover, within the aggregate limit, restructured without the advancement of total loans for all commercial, agricultural, new funds or an increase in the line of credit multifamily or other non-1-to-4 family resi- (except for reasonable closing costs), or dential properties should not exceed 30 per- loans that are renewed, refinanced, or re- cent of total capital. An institution will structured in connection with a workout sit- come under increased supervisory scrutiny uation, either with or without the advance- as the total of such loans approaches these ment of new funds, where consistent with levels. safe and sound banking practices and part of In determining the aggregate amount of a clearly defined and well-documented pro- such loans, institutions should: (a) Include gram to achieve orderly liquidation of the all loans secured by the same property if any debt, reduce risk of loss, or maximize recov- one of those loans exceeds the supervisory ery on the loan. loan-to-value limits; and (b) include the re- • Loans that facilitate the sale of real es- course obligation of any such loan sold with tate acquired by the lender in the ordinary recourse. Conversely, a loan should no longer course of collecting a debt previously con- be reported to the directors as part of aggre- tracted in good faith. • Loans for which a lien on or interest in 2 For the state member banks, the term real property is taken as additional collat- ‘‘total capital’’ means ‘‘total risk-based cap- eral through an abundance of caution by the ital’’ as defined in appendix A to 12 CFR part lender (e.g., the institution takes a blanket 208. For insured state non-member banks, lien on all or substantially all of the assets ‘‘total capital’’ refers to that term described of the borrower, and the value of the real in table I of appendix A to 12 CFR part 325. property is low relative to the aggregate For national banks, the term ‘‘total capital’’ value of all other collateral). is defined at 12 CFR 3.2(e). For savings asso- • Loans, such as working capital loans, ciations, the term ‘‘total capital’’ is defined where the lender does not rely principally on at 12 CFR 567.5(c). real estate as security and the extension of

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credit is not used to acquire, develop, or con- sive volume of exceptions to an institution’s struct permanent improvements on real real estate lending policy may signal a property. weakening of its underwriting practices, or • Loans for the purpose of financing per- may suggest a need to revise the loan policy. manent improvements to real property, but not secured by the property, if such security DEFINITIONS interest is not required by prudent under- For the purposes of these Guidelines: writing practice. Construction loan means an extension of credit for the purpose of erecting or rehabili- EXCEPTIONS TO THE GENERAL LENDING POLICY tating buildings or other structures, includ- Some provision should be made for the ing any infrastructure necessary for develop- consideration of loan requests from credit- ment. worthy borrowers whose credit needs do not Extension of credit or loan means: fit within the institution’s general lending (1) The total amount of any loan, line of policy. An institution may provide for pru- credit, or other legally binding lending com- dently underwritten exceptions to its lend- mitment with respect to real property; and ing policies, including loan-to-value limits, (2) The total amount, based on the amount on a loan-by-loan basis. However, any excep- of consideration paid, of any loan, line of tions from the supervisory loan-to-value lim- credit, or other legally binding lending com- its should conform to the aggregate limits mitment acquired by a lender by purchase, on such loans discussed above. assignment, or otherwise. The board of directors is responsible for es- Improved property loan means an extension tablishing standards for the review and ap- of credit secured by one of the following proval of exception loans. Each institution types of real property: should establish an appropriate internal (1) Farmland, ranchland or timberland process for the review and approval of loans committed to ongoing management and agri- that do not conform to its own internal pol- cultural production; icy standards. The approval of any such loan (2) 1- to 4-family residential property that should be supported by a written justifica- is not owner-occupied; tion that clearly sets forth all of the rel- (3) Residential property containing five or more individual dwelling units; evant credit factors that support the under- (4) Completed commercial property; or writing decision. The justification and ap- (5) Other income-producing property that proval documents for such loans should be has been completed and is available for occu- maintained as a part of the permanent loan pancy and use, except income-producing file. Each institution should monitor compli- owner-occupied 1- to 4-family residential ance with its real estate lending policy and property. individually report exception loans of a sig- Land development loan means an extension nificant size to its board of directors. of credit for the purpose of improving unim- SUPERVISORY REVIEW OF REAL ESTATE proved real property prior to the erection of LENDING POLICIES AND PRACTICES structures. The improvement of unimproved real property may include the laying or The real estate lending policies of institu- placement of sewers, water pipes, utility ca- tions will be evaluated by examiners during bles, streets, and other infrastructure nec- the course of their examinations to deter- essary for future development. mine if the policies are consistent with safe Loan origination means the time of incep- and sound lending practices, these guide- tion of the obligation to extend credit (i.e., lines, and the requirements of the regula- when the last event or prerequisite, control- tion. In evaluating the adequacy of the insti- lable by the lender, occurs causing the lender tution’s real estate lending policies and to become legally bound to fund an extension practices, examiners will take into consider- of credit). ation the following factors: Loan-to-value or loan-to-value ratio means • The nature and scope of the institution’s the percentage or ratio that is derived at the real estate lending activities. time of loan origination by dividing an ex- • The size and financial condition of the tension of credit by the total value of the institution. property(ies) securing or being improved by • The quality of the institution’s manage- the extension of credit plus the amount of ment and internal controls. any readily marketable collateral and other • The expertise and size of the lending and acceptable collateral that secures the exten- loan administration staff. sion of credit. The total amount of all senior • Market conditions. liens on or interests in such property(ies) Lending policy exception reports will also should be included in determining the loan- be reviewed by examiners during the course to-value ratio. When mortgage insurance or of their examinations to determine whether collateral is used in the calculation of the the institutions’ exceptions are adequately loan-to-value ratio, and such credit enhance- documented and appropriate in light of all of ment is later released or replaced, the loan- the relevant credit considerations. An exces- to-value ratio should be recalculated.

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Other acceptable collateral means any col- Condition and Income filed under 12 lateral in which the lender has a perfected U.S.C. 161; plus security interest, that has a quantifiable (2) The balance of a bank’s allowance value, and is accepted by the lender in accordance with safe and sound lending prac- for loan and lease losses not included tices. Other acceptable collateral should be in the bank’s Tier 2 capital, for pur- appropriately discounted by the lender con- poses of the calculation of risk-based sistent with the lender’s usual practices for capital under Appendix A to 12 CFR making loans secured by such collateral. part 3, based upon the bank’s Consoli- Other acceptable collateral includes, among dated Report of Condition and Income other items, unconditional irrevocable filed under 12 U.S.C. 161. standby letters of credit for the benefit of (b) Debts previously contracted (DPC) the lender. Owner-occupied, when used in conjunction real estate means real estate (including with the term 1- to 4-family residential prop- capitalized and operating leases) ac- erty means that the owner of the underlying quired by a national bank through any real property occupies at least one unit of means in full or partial satisfaction of the real property as a principal residence of a debt previously contracted. the owner. (c) Former banking premises means Readily marketable collateral means insured real estate (including capitalized and deposits, financial instruments, and bullion operating leases) for which banking use in which the lender has a perfected interest. Financial instruments and bullion must be no longer is contemplated. This in- salable under ordinary circumstances with cludes real estate originally acquired reasonable promptness at a fair market for future expansion that no longer will value determined by quotations based on ac- be used for expansion or other banking tual transactions, on an auction or similarly purposes. available daily bid and ask price market. (d) Market value means the value de- Readily marketable collateral should be ap- termined in accordance with subpart C propriately discounted by the lender con- of this part. sistent with the lender’s usual practices for making loans secured by such collateral. (e) Other real estate owned (OREO) Value means an opinion or estimate, set means: forth in an appraisal or evaluation, which- (1) DPC real estate; and ever may be appropriate, of the market value (2) Former banking premises. of real property, prepared in accordance with (f) Recorded investment amount means: the agency’s appraisal regulations and guid- (1) For loans, the recorded loan balance. For loans to purchase an existing property, the term ‘‘value’’ means the lesser of ance, as determined by generally ac- the actual acquisition cost or the estimate of cepted accounting principles; and value. (2) For former banking premises, the 1- to 4-family residential property means net book value. property containing fewer than five individual dwelling units, including manufac- § 34.82 Holding period. tured homes permanently affixed to the underlying property (when deemed to be real (a) Holding period for OREO. A na- property under State law). tional bank shall dispose of OREO at the earliest time that prudent judg- [57 FR 62896, Dec. 31, 1992; 58 FR 4460, Jan. 14, ment dictates, but not later than the 1993] end of the holding period (or an extension thereof) permitted by 12 U.S.C. 29. Subpart E—Other Real Estate (b) Commencement of holding period. Owned The holding period begins on the date that: SOURCE: 61 FR 11301, Mar. 20, 1996, unless (1) Ownership of the property is origi- otherwise noted. nally transferred to a national bank; (2) A bank completes relocation from § 34.81 Definitions. former banking premises to new bank- (a) Capital and surplus means: ing premises or ceases to use the (1) A bank’s Tier 1 and Tier 2 capital former banking premises without relo- as calculated under the OCC’s risk- cating; or based capital standards set out in ap- (3) A bank decides not to use real es- pendix A to part 3 of this chapter based tate acquired for future bank expan- upon the bank’s Consolidated Report of sion.

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