Institutions’ commercial real estate lending is once again under fire from regulators. Last month, I published an EDR Insight brief about the OCC’s twice-yearly report from examiners that highlighted an easing of underwriting standards for the third consecutive year.
On the heels of that survey came a joint statement from the three main bank regulators that is either a high alert, a gentle warning or friendly reminder depending on which news source you read. Given the timing just before Christmas and year-end, the statement may have gone unnoticed, but is worth drawing attention to as the new year gets underway.
In the December 18, 2015 joint release, the Statement on Prudent Risk Management for Commercial Lending, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. vowed to pay “special attention” to lending risks in 2016. Among the points made in the statement are:
- The agencies have “observed substantial growth in many CRE asset and lending markets, increased competitive pressures, and an easing of CRE underwriting standards.”
- Financial institutions are being advised to review their CRE lending policies to ensure that they “maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor, and manage the risks arising from CRE lending.”
- Banks that have seen substantial growth in their commercial real estate lending or whose expansion strategies call for it will get the most scrutiny.
- Those with insufficient safeguards may be told to reduce their risk tolerance or to raise additional capital to mitigate the risk.
“When conducting examinations that include a review of CRE lending activities, the agencies will focus on financial institutions’ implementation of the prudent principles… In particular, the agencies will focus on those financial institutions that have recently experienced… substantial growth in CRE lending activity.”
Statement on Prudent Risk Management for Commercial Lending
During 2016, these three agencies vowed to continue to scrutinize risks associated with CRE lending and conduct examinations that may include a review of CRE lending activities and banks’ implementation of regulations and guidance. The agencies may ask financial institutions found to have inadequate risk management practices and capital strategies to:
- develop a plan to identify, measure, monitor, and manage CRE concentrations,
- reduce risk tolerances in their underwriting standards, or
- raise additional capital to mitigate the risk associated with their CRE strategies or exposures.
FOR MORE INFORMATION
The entire 4-page Interagency Statement on Prudential Risk Management in Commercial Real Estate Lending can be found here.
Any lenders looking for a solid reference guide to current regulations/guidance related to commercial real estate lending will find a valuable table at the end of the statement.
In examinations of CRE lending activities, the agencies announced their intent to focus on an institution’s implementation of the prudent principals in the interagency “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” (Concentration Guidance), 71 Fed. Reg. 74580 issued in December 2006.