“I am concerned that if these new rules are adopted, it will become increasingly difficult for cities and towns to revitalize their downtowns because money will dry up.”
BARNEY FRANK
Federal regulators are proposing increased caution in commercial real estate lending, but at least one Bay State congressman fears the effort could stifle funding development projects in local communities.
“I am concerned that if these new rules are adopted, it will become increasingly difficult for cities and towns to revitalize their downtowns because money will dry up,” said U.S. Rep. Barney Frank, a Newton Democrat, in an interview with Banker & Tradesman.
In January, the Federal Reserve Board, Office of Thrift Supervision, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency jointly issued proposed national guidelines that would require banks to adopt tighter loan standards, more closely monitor borrowers or set aside more capital as a hedge against loans potentially going bad.
The number of those loans has grown consistently in recent years, jumping 16 percent in 2005 to $1.3 trillion. Regulators have said that is currently the average concentration of banks between $100 million and $1 billion in assets and nearly twice the level seen in the late 1980s and early 1990s.
Regulators drafted the new rules following reports from bank examiners who saw high concentrations of commercial real estate loans in comparison to capital levels at some banks. Under the terms of those loans, the repayment primarily is dependent on rental income or from the proceeds of the sale of the property. Regulators are hoping to avoid a repeat of the real estate crash of the late 1980s and early 1990s, when foreclosures soared.
Back then, banks with a greater concentration of real estate loans were more likely to fail and history has shown that banks have gotten in trouble before with lopsided lending. Regulators also are mindful of the savings-and-loan crisis, the wave of bank failures in which over 1,000 institutions in what was called the largest and costliest venture in public malfeasance and larceny of all time. The crisis cost taxpayers $125 billion.
Under the proposed new rules, lenders would be subject to scrutiny whenever an institution’s total construction and land development loans equal 100 percent or more of its total capital. A second trigger would be if the total loans secured by multifamily or commercial properties were equal to 300 percent or more of total capital. Banks with high concentrations of those loans would be expected to ramp up risk management and possibly hold more capital in reserves to protect against losses.
‘Prudent’ Lending
Jon K. Skarin, federal regulatory and legislative policy director at the Massachusetts Bankers Association, who opposes the measure, said regulators may be seeking to tighten rules because lenders in some regions of the country are making speculative loans.
“Regulators are really concerned in areas of the country where there’s fast growth in commercial real estate development such as Phoenix, Atlanta and Las Vegas,” Skarin whose organization has 210 commercial, savings, cooperative and savings-and-loan members. “But most of our members are doing prudent commercial real estate lending and to be lumped in the same bucket as guys doing purely speculative development is unfair.”
Skarin said he is convinced that in instances where lenders are overextended on the commercial loans, they should be dealt with on a case-by-case basis. He said regulators already have the ability to tell lenders that their commercial real estate concentrations are too high.
The national guidelines would require banks to take steps to immediately shore up their commercial real estate loan portfolios and increase capital levels in hopes of minimizing vulnerability to an expected real estate market slowdown. The regulators are particularly concerned about loans for multifamily development, raw land and home construction.
A spokeswoman for the Federal Reserve declined to comment and referred a reporter to a speech made Federal Reserve Board Governor Susan Bies where she defended the interagency proposal.
While Bies acknowledged that bankers are concerned that the proposed guidelines on commercial real estate lending are too restrictive, she said they were not intended to cap or restrict lenders’ participation in the commercial real estate sector.
In her speech, Bies said while underwriting standards are generally stronger today than they were in the 1980s, the agencies are proposing the guidelines to reinforce sound portfolio management principles that a bank should have in place when pursuing a commercial real estate lending strategy.
A bank should be monitoring performance both on an individual loan basis and on a collective basis for loans collateralized by similar property types or in the same markets, Bies said. In addition, while lending to different geographic areas can provide diversification, bankers should be mindful of potential problems when they begin to lend outside their market where they normally have better market intelligence, she said.
“One misconception about our draft regulations relates to the proposed explicit thresholds,” Bies said in her prepared speech. “Contrary to what many think, these thresholds are not intended as hard limits. Rather, the thresholds should be viewed as supervisory screens that examiners should use to identify banks with potential commercial real estate concentration risk.”
But not all regulators support the proposal. John M. Reich, director of the Office of Thrift Supervision, which regulates more than 800 federal savings and loans, said at a congressional hearing earlier this year that the rules issued by his agency and three others were “too prescriptive” and might have “unintended consequences.”
Frank said more information is needed to evaluate the proposal’s impact on the availability of credit. “The information in the proposed guidance said only that practices and capital levels of some institutions are not keeping pace with increased commercial real estate lending concentrations, with no indication as to how extensive this problem is,” he said.
The banking industry has almost universally opposed the measure. By the time the comment period ended in April, the agencies received nearly 2,000 comments, among the most for any single issue.
Jonathan L. Kempner, president and chief executive officer of the Washington, D.C.-based Mortgage Bankers Association, has recommended that the proposed rules not view significant bank concentrations in commercial real estate loans, by themselves, as evidence that heightened risk-management procedures or increased capital is required.
While the proposal is a “guideline,” and a regulation, many lenders already have complained that they are being told by examiners to diversify their portfolios and lower concentrations of those loans.
The final guidelines are expected to be released by the end of the year.
