On December 18, 2015, the US federal banking agencies (the Federal Reserve Board, the FDIC and the Comptroller of the Currency) issued a statement regarding prudent risk management in commercial real estate (“CRE”) lending and a need for banks to ensure that appropriate risk management standards are in place and observed. The statement was issued as a result of the agencies’ observations and concerns about an easing of CRE loan underwriting standards, and a rise in CRE concentrations at some institutions. In 2016, bank examiners will be paying “special attention” to banks’ CRE lending risks.
The CRE lending covered in the statement refers to loans used to acquire, develop, construct, improve, or refinance real property and where the primary source of repayment is the sale of the real property or the revenues from third-party rent or lease payments. It is not meant to cover ordinary business loans and lines of credit collateralized by real estate.
According to the agencies, prudent CRE lending risk management standards should include the following:
- Adequate and appropriate loan underwriting standards, policies, procedures, and strategies on CRE lending
- Realistic analyses of cash flows associated with the CRE being financed
- Adequate ongoing monitoring policies and procedures of the bank’s CRE loan portfolio and a borrower’s ability to repay a loan
- Keeping the bank’s board and management sufficiently informed so they may appropriately assess the bank’s overall CRE lending strategy and manage any CRE lending concentration risk
The statement includes a list of current regulations and regulatory guidance on CRE lending.