Commercial Real Estate Lending Joint Guidance

74580

Federal Register / Vol. 71, No. 238 / Tuesday, December 12, 2006 / Notices

1 CRE concentration levels for loans secured by

real estate for (a) construction, land development,

and other land loans; (b) multifamily residential

properties; and (c) nonfarm nonresidential

properties.

2 The Agencies did receive a number of comment

letters requesting a 30-day extension of the

comment period, which the Agencies granted. See

71 FR 13215 (March 14, 2006).

DATES: Written comments should be

received on or before January 11, 2007

to be assured of consideration.

Alcohol and Tobacco Tax and Trade

Bureau (TTB)

OMB Number: 1513–0107.

Type of Review: Revision.

Title: Monthly Report—Tobacco

Products Importer.

Form: TTB 5220.6.

Description: Reports of the

importation and disposition of tobacco

products are necessary to determine

whether those issued the permits

required by 26 U.S.C. 5713 should be

allowed to continue their operations or

renew their permits. This report is used

to accomplish this goal, which protects

the revenue.

Respondents: Business and other for

profits.

Estimated Total Burden Hours: 7,258

hours.

Clearance Officer: Frank Foote, (202)

927–9347, Alcohol and Tobacco Tax

and Trade Bureau, Room 200 East, 1310

G. Street, NW., Washington, DC 20005.

OMB Reviewer: Alexander T. Hunt,

(202) 395–7316, Office of Management

and Budget, Room 10235, New

Executive Office Building, Washington,

DC 20503.

Michael A. Robinson,

Treasury PRA Clearance Officer.

[FR Doc. E6–21112 Filed 12–11–06; 8:45 am]

BILLING CODE 4810–31–P

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

[Docket No. 06–14]

FEDERAL RESERVE SYSTEM

[Docket No. OP–1248]

FEDERAL DEPOSIT INSURANCE

CORPORATION

Concentrations in Commercial Real

Estate Lending, Sound Risk

Management Practices

AGENCIES: Office of the Comptroller of

the Currency, Treasury (OCC); Board of

Governors of the Federal Reserve

System (Board); and Federal Deposit

Insurance Corporation (FDIC)

Comptroller of the

Currency

[Docket No. 06–14]

FEDERAL RESERVE SYSTEM

[Docket No. OP–1248]

FEDERAL DEPOSIT INSURANCE

CORPORATION

Concentrations in Commercial Real

Estate Lending, Sound Risk

Management Practices

AGENCIES: Office of the Comptroller of

the Currency, Treasury (OCC); Board of

Governors of the Federal Reserve

System (Board); and Federal Deposit

Insurance Corporation (FDIC).

ACTION: Final guidance.

SUMMARY: The OCC, Board, and FDIC

(the Agencies) are issuing final joint

Guidance on Concentrations in

Commercial Real Estate Lending, Sound

Risk Management Practices (Guidance).

This Guidance has been developed to

reinforce sound risk management

practices for institutions with high and

increasing concentrations of commercial

real estate loans on their balance sheets.

This Guidance applies to national banks

and state chartered banks (institutions).

Further, the Board believes that the

Guidance is broadly applicable to bank

holding companies.

DATES: Effective Date: The final

Guidance is effective December 12,

2006.

FOR FURTHER INFORMATION CONTACT:

OCC: Dena G. Patel, Credit Risk

Specialist, (202) 874–5170; or Vance

Price, National Bank Examiner, (202)

874–5170.

Board: Denise Dittrich, Supervisory

Financial Analyst, (202) 452–2783;

Virginia Gibbs, Senior Supervisory

Financial Analyst, (202) 452–2521; or

Sabeth I. Siddique, Assistant Director,

(202) 452–3861, Division of Banking

Supervision and Regulation; or Mark

Van Der Weide, Senior Counsel, Legal

Division, (202) 452–2263. For users of

Telecommunications Device for the Deaf

(‘‘TDD’’) only, contact (202) 263–4869.

FDIC: Patricia A. Colohan, Senior

Examination Specialist, (202) 898–7283;

or Serena L. Owens, Chief, Planning and

Program Development, (202) 898–8996,

Division of Supervision and Consumer

Protection; or Benjamin W. McDonough,

Attorney, Legal Division, (202) 898–

7411.

SUPPLEMENTARY INFORMATION:

I

or users of

Telecommunications Device for the Deaf

(‘‘TDD’’) only, contact (202) 263–4869.

FDIC: Patricia A. Colohan, Senior

Examination Specialist, (202) 898–7283;

or Serena L. Owens, Chief, Planning and

Program Development, (202) 898–8996,

Division of Supervision and Consumer

Protection; or Benjamin W. McDonough,

Attorney, Legal Division, (202) 898–

7411.

SUPPLEMENTARY INFORMATION:

I. Background

The Agencies have observed that

commercial real estate (CRE)

concentrations have been rising over the

past several years and have reached

levels that could create safety and

soundness concerns in the event of a

significant economic downturn. To

some extent, the level of CRE lending

reflects changes in the demand for

credit within certain geographic areas

and the movement by many financial

institutions to specialize in a lending

sector that is perceived to offer

enhanced earnings. In particular, small

to mid-size institutions have shown the

most significant increase in CRE

concentrations over the last decade. CRE

concentration levels 1 at commercial and

savings banks with assets between $100

million and $1 billion have doubled

from approximately 156 percent of total

risk-based capital in 1993 to 318 percent

in third quarter 2006. This same trend

has been observed at commercial and

savings banks with assets of $1 billion

to $10 billion with concentration levels

rising from approximately 127 percent

in 1993 to approximately 300 percent in

third quarter 2006.

While current CRE market

fundamentals remain generally strong,

and supply and demand are generally in

balance, past history has demonstrated

that commercial real estate markets can

experience fairly rapid changes. For

institutions with significant

concentrations, the ability to withstand

difficult market conditions will depend

heavily on the adequacy of their risk

management practices and capital

levels

market

fundamentals remain generally strong,

and supply and demand are generally in

balance, past history has demonstrated

that commercial real estate markets can

experience fairly rapid changes. For

institutions with significant

concentrations, the ability to withstand

difficult market conditions will depend

heavily on the adequacy of their risk

management practices and capital

levels. In recent examinations, the

Agencies’ examiners have observed that

some institutions have relaxed their

underwriting standards as a result of

strong competition for business.

Further, examiners also have identified

a number of institutions with high CRE

concentrations that lack appropriate

policies and procedures to manage the

associated risk arising from a CRE

concentration. For these reasons, the

Agencies are concerned with

institutions’ CRE concentrations and the

risks arising from such concentrations.

To address these concerns, the

Agencies published for comment

proposed Interagency Guidance on

Concentrations in Commercial Real

Estate Lending, Sound Risk

Management Practices, 71 FR 2302

(January 13,2006). The proposal set

forth thresholds to identify institutions

with CRE loan concentrations that

would be subject to greater supervisory

scrutiny. As provided in the proposal,

an institution exceeding these

thresholds would be deemed to have a

CRE concentration and expected to have

appropriate risk management practices

as described in the proposed guidance.

After reviewing the public comment

letters 2 on the proposal, the Agencies

are now issuing final Guidance to

remind institutions that there are

substantial risks posed by CRE

concentrations and that these risks

should be recognized and appropriately

addressed. The final Guidance describes

sound risk management practices that

are important for an institution that has

strategically decided to concentrate in

CRE lending. These risk management

practices build upon existing real estate

lending regulations and guidelines

hat there are

substantial risks posed by CRE

concentrations and that these risks

should be recognized and appropriately

addressed. The final Guidance describes

sound risk management practices that

are important for an institution that has

strategically decided to concentrate in

CRE lending. These risk management

practices build upon existing real estate

lending regulations and guidelines. The

Agencies also have clarified that they

are not establishing a limit on the

amount of commercial real estate

lending that an institution may conduct.

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Federal Register / Vol. 71, No. 238 / Tuesday, December 12, 2006 / Notices

In addition, the final Guidance includes

supervisory criteria to help the

Agencies’ supervisory staff identify

institutions that may have significant

CRE concentration risk.

II. Proposed Guidance

The proposed guidance described the

Agencies’ expectations for heightened

risk management practices for an

institution with a concentration in CRE

loans. Further, the proposal set forth

two thresholds to identify institutions

with CRE loan concentrations that

would be subject to greater supervisory

scrutiny. The proposal provided that

such institutions should have in place

the heightened risk management

practices and capital levels set forth in

the proposal.

The first proposed threshold stated

that if loans for construction, land

development, and other land were 100

percent or more of total capital, the

institution would be considered to have

a CRE concentration and should have

heightened risk management practices

at

such institutions should have in place

the heightened risk management

practices and capital levels set forth in

the proposal.

The first proposed threshold stated

that if loans for construction, land

development, and other land were 100

percent or more of total capital, the

institution would be considered to have

a CRE concentration and should have

heightened risk management practices.

Secondly, if loans for construction, land

development, and other land and loans

secured by multifamily and nonfarm

nonresidential property (excluding

loans secured by owner-occupied

properties) were 300 percent or more of

total capital, the institution would also

be considered to have a CRE

concentration and should employ

heightened risk management practices.

The proposal described the key risk

management elements for an

institution’s CRE lending activity with

an emphasis on those components of the

risk management process that are

particularly applicable to an institution

with a CRE concentration, including:

board and management oversight,

strategic planning, underwriting, risk

assessment and monitoring of CRE

loans, portfolio risk management,

management information systems,

market analysis, and stress testing. The

proposal also reminded institutions

with CRE concentrations that they

should hold capital exceeding

regulatory minimums and

commensurate with the level of risk in

their CRE lending portfolios.

III. Overview of Public Comments

Collectively, the Agencies received

over 4,400 comment letters on the

proposed guidance. The OCC received

approximately 1,700 comment letters,

the Board had approximately 1,700

letters, and the FDIC had approximately

1,000 letters. The majority of comment

letters were from regulated financial

institutions and their trade groups

eir CRE lending portfolios.

III. Overview of Public Comments

Collectively, the Agencies received

over 4,400 comment letters on the

proposed guidance. The OCC received

approximately 1,700 comment letters,

the Board had approximately 1,700

letters, and the FDIC had approximately

1,000 letters. The majority of comment

letters were from regulated financial

institutions and their trade groups.

Among the trade or other groups

submitting comments were seven

nationwide banking trade associations,

26 state banking trade associations, the

Conference of State Bank Supervisors,

three state financial institution

regulatory agencies, the Appraisal

Institute, the National Association of

Home Builders, National Association of

REITs, and Real Estate Roundtable.

Additionally, during the comment

period, the Agencies met with several

industry groups.

The vast majority of commenters

expressed strong opposition to the

proposed guidance and believe that the

Agencies should address the issue of

CRE concentration risk on a case-by-

case basis as part of the examination

process. Many commenters contended

that existing regulations and guidance

are sufficient to address the Agencies’

concerns regarding CRE concentration

risk and the adequacy of an institution’s

risk management practices and capital.

Several commenters asserted that

today’s lending environment is

significantly different than that of the

late 1980s and early 1990s when

regulated financial institutions suffered

losses from their real estate lending

activities due to weak underwriting

standards and risk management

practices. These commenters contended

that regulated financial institutions

learned their lessons from past

economic cycles and that underwriting

practices are now stronger

ignificantly different than that of the

late 1980s and early 1990s when

regulated financial institutions suffered

losses from their real estate lending

activities due to weak underwriting

standards and risk management

practices. These commenters contended

that regulated financial institutions

learned their lessons from past

economic cycles and that underwriting

practices are now stronger.

Many community-based institutions,

particularly Florida-based and

Massachusetts-based institutions,

opposed the proposed guidance and

contended that the proposal would

discourage community-based

institutions from CRE lending and

serving the needs of their communities.

If community-based institutions were

forced to reduce their CRE lending

activity, these commenters asserted that

there was the potential for a downturn

in the economy, creating systemic

problems beyond the risks in CRE loans.

While smaller institutions

acknowledged that many community

banks do concentrate in commercial real

estate loans, they contended that there

are few other lending opportunities in

which community-based institutions

can successfully compete against larger

financial institutions. Community-based

institutions commented that secured

real estate lending has been their ‘‘bread

and butter’’ business and, if required to

reduce their commercial real estate

lending activity, they would have to

look to other types of lending, which

have been historically more risky.

Moreover, these commenters noted that

community-based institutions are

actively involved in their local

communities and markets, which

affords them a significant advantage

when competing for CRE loan business.

Community-based institutions also

noted that their lending opportunities

have dwindled as a result of

competition from other types of

financial institutions, such as finance

companies, Farm Credit banks, and

credit unions.

IV

-based institutions are

actively involved in their local

communities and markets, which

affords them a significant advantage

when competing for CRE loan business.

Community-based institutions also

noted that their lending opportunities

have dwindled as a result of

competition from other types of

financial institutions, such as finance

companies, Farm Credit banks, and

credit unions.

IV. Overview of Final Guidance

After carefully reviewing the

comments on the proposed guidance,

the Agencies have made significant

changes to the proposal to clarify the

purpose and scope of the Guidance. The

Agencies continue to believe that it is

important for institutions with CRE

credit concentrations to assess the risk

posed by the concentration and to

maintain sound risk management

practices and an adequate level of

capital to address the risk. Therefore,

while the final Guidance continues to

emphasize these principles, the

Agencies have revised the proposal to

clarify that financial institutions play a

vital role in providing credit for

commercial real estate activity and to

make clear that the Guidance does not

establish a limit on an institution’s CRE

lending activity.

A discussion of the changes in the

final Guidance from the proposal, major

comments on the proposal, and the

Agencies’ responses follows.

A. Purpose

The final Guidance reminds

institutions that sound risk management

practices and appropriate capital levels

are important when an institution has a

CRE concentration. Like the proposal,

the final Guidance reinforces and builds

upon the Agencies’ existing regulations

and guidelines for real estate lending

and loan portfolio management.

Commenters expressed concern that

the proposal placed additional burden

on institutions that already have sound

practices in place to manage their CRE

lending activity

portant when an institution has a

CRE concentration. Like the proposal,

the final Guidance reinforces and builds

upon the Agencies’ existing regulations

and guidelines for real estate lending

and loan portfolio management.

Commenters expressed concern that

the proposal placed additional burden

on institutions that already have sound

practices in place to manage their CRE

lending activity. Further, commenters

contended that the Agencies have

sufficient existing authority to address

their concerns with an institution’s CRE

lending activity and that the Agencies’

examination process affords the

Agencies with ample opportunity to

address weaknesses in an institution’s

lending practices.

The Agencies are issuing the final

Guidance to remind institutions of the

substantial potential risks posed by

credit concentrations, especially in

sectors such as CRE, which history has

shown to have cycles that can, at much

lower concentration levels, inflict large

losses upon institutions. While most

institutions are practicing sound credit

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Federal Register / Vol. 71, No. 238 / Tuesday, December 12, 2006 / Notices

3 Another commenter, representing REITs, sought

clarification as to whether the proposed guidance

would apply to both secured and unsecured loans

to REITs. This commenter asserted that unsecured

loans to REITs should not be considered a CRE loan

for purposes of the proposed guidance as the

commenter believes that the risk of an unsecured

loan to a REIT is mitigated by well-diversified cash

flow comprising the sources of repayment. The final

Guidance, like the proposal, applies to both secured

and unsecured loans to REITs where repayment

capacity is sensitive to conditions of the general

CRE market

ould not be considered a CRE loan

for purposes of the proposed guidance as the

commenter believes that the risk of an unsecured

loan to a REIT is mitigated by well-diversified cash

flow comprising the sources of repayment. The final

Guidance, like the proposal, applies to both secured

and unsecured loans to REITs where repayment

capacity is sensitive to conditions of the general

CRE market. The Agencies note that the structure

of such loans would be considered a mitigating

factor when an institution analyzes the risk posed

by such a concentration.

risk management on a transaction basis,

the Agencies believe this Guidance is

necessary to emphasize the importance

of portfolio risk management practices

to address CRE concentration risk.

B. Scope

The final Guidance, like the proposal,

focuses on CRE loans that have risk

profiles sensitive to the condition of the

general CRE market. This includes loans

for land development and construction

(including 1- to 4-family residential and

commercial properties), other land

loans, and loans secured by multifamily

and nonfarm nonresidential properties

(where the primary source of repayment

is cash flows from the real estate

collateral). Loans to REITs and

unsecured loans to developers also are

considered CRE loans for purposes of

this Guidance if their performance is

closely linked to the performance of the

general CRE market.

Commenters noted that the

identification of CRE loans in the

current Consolidated Reports of

Condition and Income (Call Report) did

not correspond to the proposed

guidance’s CRE definition and did not

constitute an accurate measurement of

the volume of an institution’s CRE loans

that would be vulnerable to cyclical

CRE markets. Commenters did

acknowledge that the revisions to the

Call Reports, effective in 2007, would

address this inconsistency

e

current Consolidated Reports of

Condition and Income (Call Report) did

not correspond to the proposed

guidance’s CRE definition and did not

constitute an accurate measurement of

the volume of an institution’s CRE loans

that would be vulnerable to cyclical

CRE markets. Commenters did

acknowledge that the revisions to the

Call Reports, effective in 2007, would

address this inconsistency.

In response to these comments, the

Agencies have clarified that the focus of

the Guidance is on those CRE loans

where the cash flow from the real estate

collateral is the primary source of

repayment rather than on loans to a

borrower where real estate is a

secondary source of repayment or is

taken as collateral through an

abundance of caution. This is consistent

with the 2007 revisions to the Call

Report.

Many commenters found the

proposal’s definition of CRE loans

overly broad and failed to recognize

unique risks posed by loans with

different risk characteristics. Further,

commenters asked for clarification as to

the types of properties included in the

scope of the Guidance, such as loans

secured by motels, hotels, mini-storage

warehouse facilities, and apartment

complexes where the primary source of

repayment is rental or lease income. A

number of commenters contended that

loans on certain types of CRE properties

should not be considered CRE loans,

including: Presold 1- to 4-family

residential construction loans,

multifamily loans, and loans to REITs.

Commenters recommended that the

proposal should not cover residential

construction loans where a house has

been sold to a qualified borrower prior

to the start of the construction. These

commenters argued that presold 1- to 4-

family residential construction loans

carry far less risk than speculative home

construction loans because the future

homeowners are known and

contractually obligated to purchase the

home, and have passed a credit review

prior to the commencement of

construction

se has

been sold to a qualified borrower prior

to the start of the construction. These

commenters argued that presold 1- to 4-

family residential construction loans

carry far less risk than speculative home

construction loans because the future

homeowners are known and

contractually obligated to purchase the

home, and have passed a credit review

prior to the commencement of

construction. Commenters noted that

their rationale for excluding presold 1-

to 4-family residential construction is

consistent with the proposal’s exclusion

of CRE loans on owner-occupied

properties.

Further, commenters recommended

that multifamily construction loans with

firm takeouts or loans on completed

multifamily properties with established

rent rolls be excluded from the scope of

the guidance. Commenters contended

that multifamily residential loans have

much less risk than CRE loans that have

no firm takeout or established cash flow

history.3 One commenter noted that

over the last 20 years, institutions have

incurred minimal losses on multifamily

loans and attributed this performance to

strong underwriting and stability in

rental properties.

The Agencies note that because the

Guidance does not impose lending

limits, its scope is purposely broad so

that it includes those CRE loans,

including multifamily loans, with risk

profiles sensitive to the condition of the

general CRE markets, such as market

demand, changes in capitalization rates,

vacancy rates, and rents. However, the

Agencies believe that institutions are in

the best position to segment their CRE

portfolios and group credit exposures by

common risk characteristics or

sensitivities to economic, financial, or

business developments. As explained in

the final Guidance, institutions should

be able to identify potential

concentrations in their CRE portfolios

by common risk characteristics, which

will differ by property type

hat institutions are in

the best position to segment their CRE

portfolios and group credit exposures by

common risk characteristics or

sensitivities to economic, financial, or

business developments. As explained in

the final Guidance, institutions should

be able to identify potential

concentrations in their CRE portfolios

by common risk characteristics, which

will differ by property type. The final

Guidance notes that factors, such as

portfolio diversification, geographic

dispersion, levels of underwriting

standards, level of presold buildings,

and portfolio liquidity, would be

considered in evaluating whether an

institution has mitigated the risk posed

by a concentration. Further, the

Agencies acknowledge in the final

guidance that consideration should be

given to the lower risk profiles and

historically superior performance of

certain types of CRE such as well-

structured multifamily housing loans,

when compared to others, such as

speculative office construction.

C. CRE Concentration Assessment

The final Guidance contains a new

section referred to as ‘‘CRE

Concentration Assessment’’ that

provides that institutions should

perform their own assessment of

concentration risk in their CRE loan

portfolios. While the final Guidance

does not establish a CRE concentration

limit, the Agencies have retained high-

level indicators to assist examiners in

identifying institutions potentially

exposed to CRE concentration risk.

These are described in section IV.E of

this preamble.

Many commenters noted that the

proposal did not recognize the different

segments in an institution’s CRE

portfolio and treated all CRE loans as

having equal risk

h a CRE concentration

limit, the Agencies have retained high-

level indicators to assist examiners in

identifying institutions potentially

exposed to CRE concentration risk.

These are described in section IV.E of

this preamble.

Many commenters noted that the

proposal did not recognize the different

segments in an institution’s CRE

portfolio and treated all CRE loans as

having equal risk. A commenter noted

that a concentration test cannot reflect

the distinct risk profile within an

institution’s loan portfolio and that the

risk profile is a function of many factors,

including the institution’s risk

tolerance, portfolio diversification, the

prevalence of guarantees and secondary

collateral, and the condition of the

regional economy.

In response to such comments, the

Agencies have added a section on CRE

Concentration Assessments to the final

Guidance. The Agencies recognize that

risk characteristics vary by different

property types of CRE loans and that

institutions are in the best position to

identify potential concentrations by

stratifying their CRE portfolios into

segments with common risk

characteristics. The Agencies believe an

institution’s board of directors and

management should identify and

monitor credit concentrations and

establish internal concentration limits.

The final Guidance clarifies that an

institution actively involved in CRE

lending should be able to identify

concentrations in its CRE portfolio and

to monitor concentration risk on an

ongoing basis.

Commenters raised concern that the

proposed thresholds would be

perceived by examiners as de facto

limits on an institution’s CRE lending

activity. The Agencies believe that the

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ortfolio and

to monitor concentration risk on an

ongoing basis.

Commenters raised concern that the

proposed thresholds would be

perceived by examiners as de facto

limits on an institution’s CRE lending

activity. The Agencies believe that the

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final Guidance addresses the concerns

of commenters by placing the emphasis

on the institution’s own assessment of

its CRE concentration risk rather than

on the proposed concentration

thresholds. In the final Guidance, the

Agencies have responded to these

concerns by specifically stating that the

Guidance does not establish any specific

limits on institutions’ CRE lending

activity. Moreover, in implementing the

Guidance, the Agencies will take the

necessary steps to communicate the

purpose of the Guidance to their

supervisory staffs to prevent any

unintended consequences.

The final Guidance does incorporate

the proposed concentration thresholds

as part of the Agencies’ supervisory

oversight criteria for examiners to use as

a starting point for identifying

institutions that are potentially exposed

to significant CRE concentration risk.

The Agencies believe that these

numerical supervisory screens will

serve to promote consistent application

of this Guidance across the Agencies as

well as within an agency. The

supervisory oversight and evaluation of

an institution’s CRE concentration risk

are discussed in more detail in section

IV.E. of the preamble.

D. Risk Management

The final Guidance, like the proposal,

builds upon the Agencies’ existing

regulations and guidance for real estate

lending and loan portfolio management,

emphasizing those risk management

practices that will enable an institution

to pursue CRE lending in a safe and

sound manner

ion’s CRE concentration risk

are discussed in more detail in section

IV.E. of the preamble.

D. Risk Management

The final Guidance, like the proposal,

builds upon the Agencies’ existing

regulations and guidance for real estate

lending and loan portfolio management,

emphasizing those risk management

practices that will enable an institution

to pursue CRE lending in a safe and

sound manner.

Many commenters acknowledged that

the risk management principles

described in the proposal should be

viewed as prudent industry standards

for an institution engaged in CRE

lending. However, some commenters

alleged that the proposed guidance

would create additional regulatory

burden at a time when institutions are

already faced with other compliance

responsibilities. Further, commenters

noted that the Agencies needed to

consider an institution’s size and

complexity in assessing the adequacy of

risk management practices. This

particular concern was raised with

regard to the expectations for

management information systems and

portfolio stress testing that commenters

found to be burdensome for smaller

institutions.

In response to these comments, the

Agencies have revised the final

Guidance’s risk management section to

make the discussion more principle-

based and to focus on those aspects of

existing regulations and guidelines that

deserve greater attention when an

institution has a CRE concentration or is

pursuing a CRE lending strategy leading

to a concentration. As a result, the risk

management section in the final

Guidance sets forth the key elements of

an institution’s risk management

framework for managing concentration

risk. Further, the final Guidance

recognizes the sophistication of an

institution’s risk management processes

will depend upon the size of the CRE

portfolio and the level and nature of its

CRE concentration risk

concentration. As a result, the risk

management section in the final

Guidance sets forth the key elements of

an institution’s risk management

framework for managing concentration

risk. Further, the final Guidance

recognizes the sophistication of an

institution’s risk management processes

will depend upon the size of the CRE

portfolio and the level and nature of its

CRE concentration risk.

The final Guidance describes the key

elements that an institution should

address in board and management

oversight, portfolio management,

management information systems,

market analysis, credit underwriting

standards, portfolio stress testing and

sensitivity analysis, and credit risk

review function. In general, an

institution with a CRE concentration

should manage not only the risk of the

individual loans but also the portfolio

risk. Recognizing that an institution’s

board of directors has ultimate

responsibility for the level of risk

assumed by the institution, the Agencies

believe that appropriate board oversight

should address the rationale for an

institution’s CRE lending levels in

relation to its growth objectives,

financial targets, and capital plan.

The Agencies believe that the final

Guidance’s discussion of management

information systems (MIS), market

analysis, and portfolio stress testing

addresses the concerns of smaller

institutions regarding regulatory burden.

The Agencies recognize that the level of

sophistication of an institution’s MIS,

market analysis and stress testing will

depend upon the size and complexity of

the institution. Therefore, the focus of

the final Guidance is on the ability of

the institution to provide its

management and board of directors with

the necessary information to assess its

CRE lending strategy and policies in

light of changes in CRE market

conditions

sophistication of an institution’s MIS,

market analysis and stress testing will

depend upon the size and complexity of

the institution. Therefore, the focus of

the final Guidance is on the ability of

the institution to provide its

management and board of directors with

the necessary information to assess its

CRE lending strategy and policies in

light of changes in CRE market

conditions. Regardless of its size, an

institution should be able to identify

and monitor CRE concentrations and the

potential effect that changes in market

conditions may have on the institution.

Some commenters requested

clarification on the Agencies’

expectations for stress testing. These

commenters expressed concern that, as

a result of the proposal, management’s

time would be diverted to creating

reports and statistics with not much

value. These commenters represented

that an institution’s focus should be on

a loan review program, portfolio

monitoring procedures, and loan loss

reserves.

The Agencies agree with these

comments and have revised the

discussion on market analysis and stress

testing. The final Guidance

acknowledges that an institution’s

market analysis will vary by its market

share and exposure levels as well as the

availability of market data. Further, the

final Guidance notes that portfolio stress

testing does not require the use of

sophisticated portfolio models.

Depending on the institution, stress

testing may be as simple as analyzing

the potential effect of stressed loss rates

on the institution’s CRE portfolio,

capital, and earnings. The important

objective is that an institution should

have the information necessary to assess

the potential effect of market changes on

its CRE portfolio and lending strategy.

Commenters questioned the proposed

guidance’s suggestion that institutions

should compare their underwriting

standards to those of the secondary

commercial mortgage market

n’s CRE portfolio,

capital, and earnings. The important

objective is that an institution should

have the information necessary to assess

the potential effect of market changes on

its CRE portfolio and lending strategy.

Commenters questioned the proposed

guidance’s suggestion that institutions

should compare their underwriting

standards to those of the secondary

commercial mortgage market.

Commenters noted that there is not a

ready secondary market for CRE loans

made by smaller institutions as the

loans are smaller in dollar size and have

characteristics that make them

unsuitable for securitization.

The Agencies recognize that smaller

institutions do not have ready access to

the secondary market and had not

intended that the proposal be viewed in

this way. Therefore, in the final

Guidance, the Agencies have clarified

the situations when an institution

should conduct secondary market

comparisons. If an institution’s portfolio

management strategy includes selling or

securitizing CRE loans as a contingency

plan for managing concentration levels,

an institution should evaluate its ability

to do so and compare its underwriting

standards to those of the secondary

market.

E. Supervisory Oversight

In the final Guidance, the Agencies

have retained the concept of

concentration thresholds as a

supervisory tool for examiners to screen

institutions for potential CRE

concentration risk. The intent of these

indicators is to encourage a dialogue

between the Agency supervisory staff

and an institution’s management about

the level and nature of CRE

concentration risk. While the final

Guidance is effective immediately upon

publication in the Federal Register, the

Agencies will provide institutions with

CRE concentrations a reasonable

timeframe over which to demonstrate

that their risk management practices are

appropriate for the level and nature of

the concentration risk

an institution’s management about

the level and nature of CRE

concentration risk. While the final

Guidance is effective immediately upon

publication in the Federal Register, the

Agencies will provide institutions with

CRE concentrations a reasonable

timeframe over which to demonstrate

that their risk management practices are

appropriate for the level and nature of

the concentration risk.

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4 For commercial banks, this total is reported in

the Call Report FFIEC 031 and 041 schedule RC–

C item 1a.

5 For purposes of this Guidance, the term ‘‘total

capital’’ means the total risk-based capital as

reported for commercial banks in the Call Report

FFIEC 031 and 041 schedule RC–R—Regulatory

Capital, line 21.

6 For commercial banks, this total is reported in

the Call Report FFIEC 031 and 041 schedule RC–

C items 1a, 1d, 1e, and Memorandum Item #3.

Commenters encouraged the Agencies

to evaluate institutions’ CRE

concentrations on a bank-by-bank basis

and not to take a ‘‘one-size-fits-all’’

approach to evaluating concentrations.

Commenters asserted that an assessment

of concentration risk based on the

Agencies’ proposed thresholds did not

consider the differing risk

characteristics of the subcategories of

CRE loans. Further, commenters noted

that the proposed thresholds did not

consider whether or not an institution

had an established history of managing

a high CRE concentration.

In the final Guidance, the Agencies

addressed the commenters’ concerns by

stating that numeric indicators do not

constitute limits; rather they will be

used as a supervisory monitoring tool.

These indicators will assist examiners

in identifying institutions with CRE

concentrations

not

consider whether or not an institution

had an established history of managing

a high CRE concentration.

In the final Guidance, the Agencies

addressed the commenters’ concerns by

stating that numeric indicators do not

constitute limits; rather they will be

used as a supervisory monitoring tool.

These indicators will assist examiners

in identifying institutions with CRE

concentrations. These indicators will

function similarly to other analytical

screens that the Agencies use to

evaluate an institution. By including

these indicators in the final Guidance,

institutions will have an understanding

of the Agencies’ supervisory monitoring

criteria. The Agencies also have tried to

strike a balanced tone in the final

Guidance to promote an appropriate and

consistent application of these

indicators by their supervisory staffs.

As explained in the final Guidance,

an institution that has experienced

rapid growth in CRE lending, has

notable exposure to a specific type of

CRE, or is approaching or exceeds the

following supervisory criteria may be

identified for further supervisory

analysis of the level and nature of its

CRE concentration risk. The supervisory

criteria are:

(1) Total reported loans for

construction, land development, and

other land 4 represent 100 percent or

more of the institution’s total capital; 5

or

(2) Total commercial real estate loans

as defined in the Guidance 6 represent

300 percent or more of the institution’s

total capital and the outstanding balance

of the institution’s CRE loan portfolio

has increased 50 percent or more during

the prior 36 months.

While the criteria will serve as a

screen for identifying institutions with

potential CRE concentration risk, the

final Guidance notes that institutions

should not view the criteria as a ‘‘safe

harbor’’ if other risk indicators are

present, regardless of the measurements

under criteria (1) and (2)

stitution’s CRE loan portfolio

has increased 50 percent or more during

the prior 36 months.

While the criteria will serve as a

screen for identifying institutions with

potential CRE concentration risk, the

final Guidance notes that institutions

should not view the criteria as a ‘‘safe

harbor’’ if other risk indicators are

present, regardless of the measurements

under criteria (1) and (2). Further, the

final Guidance notes that institutions

experiencing recent, significant growth

in CRE lending will receive closer

supervisory review than other

institutions that have demonstrated a

successful track record of managing the

risks in CRE concentrations.

In response to comments that the

proposal concentration thresholds did

not consider an institution’s track

record for managing CRE

concentrations, the Agencies have

included an additional condition to the

300 percent screen. The Agencies also

will consider whether the institution’s

CRE portfolio increased by 50 percent or

more during the prior 36 months. This

additional screen acknowledges that the

Agencies will be focusing on those

institutions that have recently

experienced a significant growth in their

CRE portfolio and may not have been

subject to prior supervisory review.

While most commenters opposed the

adoption of any concentration

thresholds, several commenters did

comment on the appropriateness of the

proposed CRE concentration thresholds.

These commenters asserted that the

proposed 300 percent threshold was too

low and suggested that a benchmark

from 400 to 600 percent of capital

would be more appropriate.

As previously discussed, the Agencies

have retained the 300 percent screen

with an additional screen (that is, an

institution’s CRE portfolio increased by

50 percent or more during the prior 36

months)

tion thresholds.

These commenters asserted that the

proposed 300 percent threshold was too

low and suggested that a benchmark

from 400 to 600 percent of capital

would be more appropriate.

As previously discussed, the Agencies

have retained the 300 percent screen

with an additional screen (that is, an

institution’s CRE portfolio increased by

50 percent or more during the prior 36

months). In developing the supervisory

criteria, the Agencies relied on

historical trends in concentration levels

over real estate cycles, the relationship

of CRE concentration levels to bank

failures, and supervisory experience.

Further, the final Guidance clarifies that

the Agencies’ supervisory staffs will

consider other factors, and not just these

indicators, in evaluating the risk posed

by an institution’s CRE concentration.

F. Assessment of Capital Adequacy

In the final Guidance, the section on

the ‘‘Assessment of Capital Adequacy’’

was significantly revised to address the

commenters’ concerns that the proposal

was too restrictive and did not take into

account the institution’s lending and

risk management practices. The

proposal stated that institutions should

hold capital commensurate with the

level and nature of their CRE

concentration risks and that an

institution with high or inordinate

levels of risk would be expected to

operate well above minimum regulatory

capital requirements. In the final

Guidance, the discussion on the

adequacy of an institution’s capital has

been incorporated into the Supervisory

Oversight section to clarify that the

assessment of an institution’s capital

will be performed in connection with

the supervisory assessment of an

institution’s risk management.

Commenters asserted that many

institutions already hold capital at

levels above minimum standards and

should not be required to raise

additional capital simply because their

CRE concentrations exceeded a

threshold

ersight section to clarify that the

assessment of an institution’s capital

will be performed in connection with

the supervisory assessment of an

institution’s risk management.

Commenters asserted that many

institutions already hold capital at

levels above minimum standards and

should not be required to raise

additional capital simply because their

CRE concentrations exceeded a

threshold. There also was concern that

the proposal would give examiners the

ability to arbitrarily assess additional

capital requirements solely due to a

high concentration.

The Agencies agree with commenters

that the majority of institutions with

CRE concentrations presently have

capital exceeding regulatory minimums

and would generally not be expected to

increase their capital levels. However,

since an institution’s capital serves as a

buffer against unexpected losses from its

CRE concentration, an institution with a

CRE concentration and inadequate

capital should develop a plan for

reducing its concentration or

maintaining capital appropriate for the

level and nature of the concentration

risk. To the extent an institution with a

CRE concentration has effective risk

management practices or is addressing

the need for such practices, the

Agencies’ concerns regarding capital

adequacy are reduced. However, an

institution with a CRE concentration

and with no prospects of enhancing its

risk management practices should

address the need for additional capital.

Therefore, the final Guidance reminds

institutions that they should hold

capital commensurate with the level

and nature of the risks to which they are

exposed.

Commenters noted that the allowance

for loan and lease losses (ALLL) is

another means of protection for an

institution and, therefore, should be

considered in determining whether

capital is adequate for the level and

nature of concentration risk. The

Agencies agree with this comment and

have addressed ALLL within the context

of the capital adequacy section.

V

to which they are

exposed.

Commenters noted that the allowance

for loan and lease losses (ALLL) is

another means of protection for an

institution and, therefore, should be

considered in determining whether

capital is adequate for the level and

nature of concentration risk. The

Agencies agree with this comment and

have addressed ALLL within the context

of the capital adequacy section.

V. Text of the Final Joint Guidance

The text of the final joint Guidance on

Concentrations in Commercial Real

Estate Lending, Sound Risk

Management Practices follows:

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1 Refer to the Agencies’ regualtions on real estate

lending standards and the Interagency Guidelines

for Real Estate Lending Policies: 12 CFR part 34,

subpart D and appendix A (OCC); 12 CFR part 208,

subpart E and appendix C (FRB); and 12 CFR part

365 and appendix A (FDIC). Refer to the

Interagency Guidelines Establishing Standards for

Safety and Soundness: 12 CFR part 30, appendix A

(OCC); 12 CFR part 208, Appendix D–1 (FRB); and

12 CFR part 364, appendix A (FDIC).

Concentrations in Commercial Real

Estate Lending, Sound Risk

Management Practices

Purpose

The Office of the Comptroller of the

Currency, the Board of Governors of the

Federal Reserve System, and the Federal

Deposit Insurance Corporation

(collectively, the Agencies), are jointly

issuing this Guidance to address

institutions’ increased concentrations of

commercial real estate (CRE) loans.

Concentrations of credit exposures add

a dimension of risk that compounds the

risk inherent in individual loans.

The Guidance reminds institutions

that strong risk management practices

and appropriate levels of capital are

important elements of a sound CRE

lending program, particularly when an

institution has a concentration in CRE

loans

entrations of

commercial real estate (CRE) loans.

Concentrations of credit exposures add

a dimension of risk that compounds the

risk inherent in individual loans.

The Guidance reminds institutions

that strong risk management practices

and appropriate levels of capital are

important elements of a sound CRE

lending program, particularly when an

institution has a concentration in CRE

loans. The Guidance reinforces and

enhances the Agencies’ existing

regulations and guidelines for real estate

lending 1 and loan portfolio

management in light of material changes

in institutions’ lending activities. The

Guidance does not establish specific

CRE lending limits; rather, it promotes

sound risk management practices and

appropriate levels of capital that will

enable institutions to continue to pursue

CRE lending in a safe and sound

manner.

Background

The Agencies recognize that regulated

financial institutions play a vital role in

providing credit for business and real

estate development. However,

concentrations in CRE lending coupled

with weak loan underwriting and

depressed CRE markets have

contributed to significant credit losses

in the past. While underwriting

standards are generally stronger than

during previous CRE cycles, the

Agencies have observed an increasing

trend in the number of institutions with

concentrations in CRE loans. These

concentrations may make such

institutions more vulnerable to cyclical

CRE markets. Moreover, the Agencies

have observed that some institutions’

risk management practices are not

evolving with their increasing CRE

concentrations. Therefore, institutions

with concentrations in CRE loans are

reminded that their risk management

practices and capital levels should be

commensurate with the level and nature

of their CRE concentration risk

e vulnerable to cyclical

CRE markets. Moreover, the Agencies

have observed that some institutions’

risk management practices are not

evolving with their increasing CRE

concentrations. Therefore, institutions

with concentrations in CRE loans are

reminded that their risk management

practices and capital levels should be

commensurate with the level and nature

of their CRE concentration risk.

Scope

In developing this guidance, the

Agencies recognized that different types

of CRE lending present different levels

of risk, and that consideration should be

given to the lower risk profiles and

historically superior performance of

certain types of CRE, such as well-

structured multifamily housing finance,

when compared to others, such as

speculative office space construction.

As discussed under ‘‘CRE Concentration

Assessments,’’ institutions are

encouraged to segment their CRE

portfolios to acknowledge these

distinctions for risk management

purposes.

This Guidance focuses on those 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. Thus, for the purposes of this

Guidance, CRE loans include those

loans with risk profiles sensitive to the

condition of the general CRE market (for

example, 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

caution. Thus, for the purposes of this

Guidance, CRE loans include those

loans with risk profiles sensitive to the

condition of the general CRE market (for

example, 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 (that is, 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

(REITs) and unsecured loans to

developers also should be considered

CRE loans for purposes of this Guidance

if their performance is closely linked to

performance of the CRE markets.

Excluded from the scope of this

Guidance 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.

Although the Guidance does not

define a CRE concentration, the

‘‘Supervisory Oversight’’ section

describes the criteria that the Agencies

will use as high-level indicators to

identify institutions potentially exposed

to CRE concentration risk.

CRE Concentration Assessments

Institutions actively involved in CRE

lending should perform 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. An institution’s CRE

portfolio stratification should be

reasonable and supportable

nvolved in CRE

lending should perform 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. An institution’s CRE

portfolio stratification should be

reasonable and supportable. The CRE

portfolio should not be divided into

multiple segments simply to avoid the

appearance of concentration risk.

The Agencies recognize that risk

characteristics vary among CRE loans

secured by different property types. A

manageable level of CRE concentration

risk will vary by institution depending

on the portfolio risk characteristics, the

quality of risk management processes,

and capital levels. Therefore, the

Guidance does not establish a CRE

concentration limit that applies to all

institutions. Rather, the Guidance

encourages institutions to identify and

monitor credit concentrations, establish

internal concentration limits, and report

all concentrations to management and

the board of directors on a periodic

basis. Depending on the results of the

risk assessment, the institution may

need to enhance its risk management

systems.

Risk Management

The sophistication of an institution’s

CRE risk management processes should

be appropriate to the size of the

portfolio, as well as the level and nature

of concentrations and the associated risk

to the institution. Institutions should

address the following key elements in

establishing a risk management

framework that effectively identifies,

monitors, and controls CRE

concentration risk:

• Board and management oversight.

• Portfolio management.

• Management information systems.

• Market analysis.

• Credit underwriting standards.

• Portfolio stress testing and

sensitivity analysis.

• Credit risk review function.

Board and Management Oversight

elements in

establishing a risk management

framework that effectively identifies,

monitors, and controls CRE

concentration risk:

• Board and management oversight.

• Portfolio management.

• Management information systems.

• Market analysis.

• Credit underwriting standards.

• Portfolio stress testing and

sensitivity analysis.

• Credit risk review function.

Board and Management Oversight. An

institution’s board of directors has

ultimate responsibility for the level of

risk assumed by the institution. If the

institution has significant CRE

concentration risk, its strategic plan

should address the rationale for its CRE

levels in relation to its overall growth

objectives, financial targets, and capital

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2 Refer to the Agencies’ appraisal regualtins: 12

CFR part 34, subpart C (OCC); 12 CFR part 208

subpart E and 12 CFR part 225, subpart G (FRB);

and 12 CFR part 323 (FDIC).

plan. In addition, the Agencies’ real

estate lending regulations require that

each institution adopt and maintain a

written policy that establishes

appropriate limits and standards for all

extensions of credit that are secured by

liens on or interests in real estate,

including CRE loans. Therefore, the

board of directors or a designated

committee thereof should:

• 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 management

implements procedures and controls to

effectively adhere to and monitor

compliance with the institution’s

lending policies and strategies

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 management

implements procedures and controls to

effectively adhere to and monitor

compliance with the institution’s

lending policies and strategies.

• Review information that identifies

and quantifies the nature and level of

risk presented by CRE concentrations,

including reports that describe changes

in CRE market conditions in which the

institution lends.

• Periodically review and approve

CRE risk exposure limits and

appropriate sublimits (for example, by

nature of concentration) to conform to

any changes in the institution’s

strategies and to respond to changes in

market conditions.

Portfolio Management. Institutions

with CRE concentrations should manage

not only the risk of individual loans but

also portfolio risk. Even when

individual CRE loans are prudently

underwritten, concentrations of loans

that are similarly affected by cyclical

changes in the CRE market can expose

an institution to an unacceptable level

of risk if not properly managed.

Management regularly should evaluate

the degree of correlation between

related real estate sectors and establish

internal lending guidelines and

concentration limits that control the

institution’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

ce 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 institution’s ability to

access the secondary market and a

comparison of its underwriting

standards with those that exist in the

secondary market.

Management Information Systems. A

strong management information system

(MIS) is key to effective portfolio

management. The sophistication of MIS

will necessarily vary with the size and

complexity of the CRE portfolio and

level and nature of concentration risk.

MIS should provide management with

sufficient information to identify,

measure, monitor, and manage CRE

concentration risk. This includes

meaningful information on CRE

portfolio characteristics that is relevant

to the institution’s lending strategy,

underwriting standards, and risk

tolerances. An institution should assess

periodically the adequacy of MIS in

light of growth in CRE loans and

changes in the CRE portfolio’s size, risk

profile, and complexity.

Institutions are encouraged to stratify

the CRE portfolio by property type,

geographic market, tenant

concentrations, tenant industries,

developer concentrations, and risk

rating. Other useful stratifications may

include loan structure (for example,

fixed rate or adjustable), loan purpose

(for example, construction, short-term,

or permanent), loan-to-value limits, debt

service coverage, policy exceptions on

newly underwritten credit facilities, and

affiliated loans (for example, loans to

tenants). An institution should also be

able to identify and aggregate exposures

to a borrower, including its credit

exposure relating to derivatives

ixed rate or adjustable), loan purpose

(for example, construction, short-term,

or permanent), loan-to-value limits, debt

service coverage, policy exceptions on

newly underwritten credit facilities, and

affiliated loans (for example, loans to

tenants). An institution should also be

able to identify and aggregate exposures

to a borrower, including its credit

exposure relating to derivatives.

Management reporting should be

timely and in a format that clearly

indicates changes in the portfolio’s risk

profile, including risk-rating migrations.

In addition, management reporting

should include a well-defined process

through which management reviews

and evaluates concentration and risk

management reports, as well as special

ad hoc analyses in response to potential

market events that could affect the CRE

loan portfolio.

Market Analysis. Market analysis

should provide the institution’s

management and board of directors with

information to assess whether its CRE

lending strategy and policies continue

to be appropriate in light of changes in

CRE market conditions. An institution

should perform periodic market

analyses for the various property types

and geographic markets represented in

its portfolio.

Market analysis is particularly

important as an institution considers

decisions about entering new markets,

pursuing new lending activities, or

expanding in existing markets. Market

information also may be useful for

developing sensitivity analysis or stress

tests to assess portfolio risk.

Sources of market information may

include published research data, real

estate appraisers and agents,

information maintained by the property

taxing authority, local contractors,

builders, investors, and community

development groups. The sophistication

of an institution’s analysis will vary by

its market share and exposure, as well

as the availability of market data

assess portfolio risk.

Sources of market information may

include published research data, real

estate appraisers and agents,

information maintained by the property

taxing authority, local contractors,

builders, investors, and community

development groups. The sophistication

of an institution’s analysis will vary by

its market share and exposure, as well

as the availability of market data. While

an institution operating in

nonmetropolitan markets may have

access to fewer sources of detailed

market data than an institution

operating in large, metropolitan

markets, an institution should be able to

demonstrate that it has an

understanding of the economic and

business factors influencing its lending

markets.

Credit Underwriting Standards. An

institution’s lending policies should

reflect the level of risk that is acceptable

to its board of directors and should

provide clear and measurable

underwriting standards that enable the

institution’s lending staff to evaluate all

relevant credit factors. When an

institution has a CRE concentration, the

establishment of sound lending policies

becomes even more critical. In

establishing its policies, an institution

should consider both internal and

external factors, such as its market

position, historical experience, present

and prospective trade area, probable

future loan and funding trends, staff

capabilities, and technology resources.

Consistent with the Agencies’ real estate

lending guidelines, CRE lending

policies should address the following

underwriting standards:

• Maximum loan amount by type of

property.

• Loan terms.

• Pricing structures.

• Collateral valuation.2

• Loan-to-Value (LTV) limits by

property type.

• Requirements for feasibility studies

and sensitivity analysis or stress testing.

• Minimum requirements for initial

investment and maintenance of hard

equity by the borrower.

• Minimum standards for borrower

net worth, property cash flow, and debt

service coverage for the property

oan terms.

• Pricing structures.

• Collateral valuation.2

• Loan-to-Value (LTV) limits by

property type.

• Requirements for feasibility studies

and sensitivity analysis or stress testing.

• Minimum requirements for initial

investment and maintenance of hard

equity by the borrower.

• Minimum standards for borrower

net worth, property cash flow, and debt

service coverage for the property.

An institution’s lending policies

should permit exceptions to

underwriting standards only on a

limited basis. When an institution does

permit an exception, it should

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Federal Register / Vol. 71, No. 238 / Tuesday, December 12, 2006 / Notices

3 The Interagency Guidelines for Real Estate

Lending state that loans exceeding the supervisory

LTV guidelines should be recorded in the

institution’s records and reported to the board at

least quarterly.

4 For commercial banks as reported in the Call

Report FFIEC 031 and 041, schdule RC–C, item la.

5 For purposes of this Guidance, the term ‘‘total

capital’’ means the total risk-based capital as

reported fro commercial banks in the Call Report

FFIEC 031 and 041 schedule RC–R—Regulatory

Capital, line 21.

6 For commercial banks as reported in the Call

Report FFIEC 031 and 041 schedule RC–C, items 1a,

1d, 1e, and Memorandum Item #3.

document how the transaction does not

conform to the institution’s policy or

underwriting standards, obtain

appropriate management approvals, and

provide reports to the board of directors

or designated committee detailing the

number, nature, justifications, and

trends for exceptions. Exceptions to

both the institution’s internal lending

standards and the Agencies’ supervisory

LTV limits 3 should be monitored and

reported on a regular basis

institution’s policy or

underwriting standards, obtain

appropriate management approvals, and

provide reports to the board of directors

or designated committee detailing the

number, nature, justifications, and

trends for exceptions. Exceptions to

both the institution’s internal lending

standards and the Agencies’ supervisory

LTV limits 3 should be monitored and

reported on a regular basis. Further,

institutions should analyze trends in

exceptions to ensure that risk remains

within the institution’s established risk

tolerance limits.

Credit analysis should reflect both the

borrower’s overall creditworthiness and

project-specific considerations as

appropriate. In addition, for

development and construction loans,

the institution should have policies and

procedures governing loan

disbursements to ensure that the

institution’s minimum borrower equity

requirements are maintained throughout

the development and construction

periods. Prudent controls should

include an inspection process,

documentation on construction

progress, tracking pre-sold units, pre-

leasing activity, and exception

monitoring and reporting.

Portfolio Stress Testing and

Sensitivity Analysis. An institution with

CRE concentrations should perform

portfolio-level stress tests or sensitivity

analysis to quantify the impact of

changing economic conditions on asset

quality, earnings, and capital. Further,

an institution should consider the

sensitivity of portfolio segments with

common risk characteristics to potential

market conditions. The sophistication of

stress testing practices and sensitivity

analysis should be consistent with the

size, complexity, and risk characteristics

of its CRE loan portfolio. For example,

well-margined and seasoned performing

loans on multifamily housing normally

would require significantly less robust

stress testing than most acquisition,

development, and construction loans

rket conditions. The sophistication of

stress testing practices and sensitivity

analysis should be consistent with the

size, complexity, and risk characteristics

of its CRE loan portfolio. For example,

well-margined and seasoned performing

loans on multifamily housing normally

would require significantly less robust

stress testing than most acquisition,

development, and construction loans.

Portfolio stress testing and sensitivity

analysis may not necessarily require the

use of a sophisticated portfolio model.

Depending on the risk characteristics of

the CRE portfolio, stress testing may be

as simple as analyzing the potential

effect of stressed loss rates on the CRE

portfolio, capital, and earnings. The

analysis should focus on the more

vulnerable segments of an institution’s

CRE portfolio, taking into consideration

the prevailing market environment and

the institution’s business strategy.

Credit Risk Review Function. A strong

credit risk review function is critical for

an institution’s self-assessment of

emerging risks. An effective, accurate,

and timely risk-rating system provides a

foundation for the institution’s credit

risk review function to assess credit

quality and, ultimately, to identify

problem loans. Risk ratings should be

risk sensitive, objective, and appropriate

for the types of CRE loans underwritten

by the institution. Further, risk ratings

should be reviewed regularly for

appropriateness.

Supervisory Oversight

As part of their ongoing supervisory

monitoring processes, the Agencies will

use certain criteria to identify

institutions that are potentially exposed

to significant CRE concentration risk.

An institution that has experienced

rapid growth in CRE lending, has

notable exposure to a specific type of

CRE, or is approaching or exceeds the

following supervisory criteria may be

identified for further supervisory

analysis of the level and nature of its

CRE concentration risk:

tain criteria to identify

institutions that are potentially exposed

to significant CRE concentration risk.

An institution that has experienced

rapid growth in CRE lending, has

notable exposure to a specific type of

CRE, or is approaching or exceeds the

following supervisory criteria may be

identified for further supervisory

analysis of the level and nature of its

CRE concentration risk:

(1) Total reported loans for

construction, land development, and

other land 4 represent 100 percent or

more of the institution’s total capital;5

or

(2) Total commercial real estate loans

as defined in this Guidance 6 represent

300 percent or more of the institution’s

total capital, and the outstanding

balance of the institution’s commercial

real estate loan portfolio has increased

by 50 percent or more during the prior

36 months.

The Agencies will use the criteria as

a preliminary step to identify

institutions that may have CRE

concentration risk. Because regulatory

reports capture a broad range of CRE

loans with varying risk characteristics,

the supervisory monitoring criteria do

not constitute limits on an institution’s

lending activity but rather serve as high-

level indicators to identify institutions

potentially exposed to CRE

concentration risk. Nor do the criteria

constitute a ‘‘safe harbor’’ for

institutions if other risk indicators are

present, regardless of their

measurements under (1) and (2).

Evaluation of CRE Concentrations.

The effectiveness of an institution’s risk

management practices will be a key

component of the supervisory

evaluation of the institution’s CRE

concentrations. Examiners will engage

in a dialogue with the institution’s

management to assess CRE exposure

levels and risk management practices.

Institutions that have experienced

recent, significant growth in CRE

lending will receive closer supervisory

review than those that have

demonstrated a successful track record

of managing the risks in CRE

concentrations

the institution’s CRE

concentrations. Examiners will engage

in a dialogue with the institution’s

management to assess CRE exposure

levels and risk management practices.

Institutions that have experienced

recent, significant growth in CRE

lending will receive closer supervisory

review than those that have

demonstrated a successful track record

of managing the risks in CRE

concentrations.

In evaluating CRE concentrations, the

Agencies will consider the institution’s

own analysis of its CRE portfolio,

including consideration of factors such

as:

• Portfolio diversification across

property types.

• Geographic dispersion of CRE

loans.

• Underwriting standards.

• Level of pre-sold units or other

types of take-out commitments on

construction loans.

• Portfolio liquidity (ability to sell or

securitize exposures on the secondary

market).

While consideration of these factors

should not change the method of

identifying a credit concentration, these

factors may mitigate the risk posed by

the concentration.

Assessment of Capital Adequacy. The

Agencies’ existing capital adequacy

guidelines note that an institution

should hold capital commensurate with

the level and nature of the risks to

which it is exposed. Accordingly,

institutions with CRE concentrations are

reminded that their capital levels

should be commensurate with the risk

profile of their CRE portfolios. In

assessing the adequacy of an

institution’s capital, the Agencies will

consider the level and nature of

inherent risk in the CRE portfolio as

well as management expertise, historical

performance, underwriting standards,

risk management practices, market

conditions, and any loan loss reserves

allocated for CRE concentration risk. An

institution with inadequate capital to

serve as a buffer against unexpected

losses from a CRE concentration should

develop a plan for reducing its CRE

concentrations or for maintaining

capital appropriate to the level and

nature of its CRE concentration risk

riting standards,

risk management practices, market

conditions, and any loan loss reserves

allocated for CRE concentration risk. An

institution with inadequate capital to

serve as a buffer against unexpected

losses from a CRE concentration should

develop a plan for reducing its CRE

concentrations or for maintaining

capital appropriate to the level and

nature of its CRE concentration risk.

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Federal Register / Vol. 71, No. 238 / Tuesday, December 12, 2006 / Notices

Dated: December 5, 2006.

John C. Dugan,

Comptroller of the Currency.

By order of the Board of Governors of the

Federal Reserve System, December 6, 2006.

Jennifer J. Johnson,

Secretary of the Board.

Dated at Washington, DC, this 6th day of

December 2006.

By order of the Federal Deposit Insurance

Corporation.

Robert E. Feldman,

Executive Secretary.

[FR Doc. 06–9630 Filed 12–11–06; 8:45 am]

BILLING CODE 4810–33–P, 6210–01–P, 6714–01–P

DEPARTMENT OF THE TREASURY

Fiscal Service

Financial Management Service;

Proposed Collection of Information:

Claim Against the United States for the

Proceeds of a Government Check

AGENCY: Financial Management Service,

Fiscal Service, Treasury.

ACTION: Notice and request for

comments.

SUMMARY: The Financial Management

Service, as part of its continuing effort

to reduce paperwork and respondent

burden, invites the general public and

other Federal agencies to take this

opportunity to comment on a

continuing information collection. By

this notice, the Financial Management

Service solicits comments concerning

the Form FMS–1133 ‘‘Claim Against the

United States for the Proceeds of a

Government Check.’’

DATES: Written comments should be

received on or before February 12, 2007

ndent

burden, invites the general public and

other Federal agencies to take this

opportunity to comment on a

continuing information collection. By

this notice, the Financial Management

Service solicits comments concerning

the Form FMS–1133 ‘‘Claim Against the

United States for the Proceeds of a

Government Check.’’

DATES: Written comments should be

received on or before February 12, 2007.

ADDRESSES: Direct all written comments

to Financial Management Service,

Records and Information Management

Branch, Room 135, 3700 East West

Highway, Hyattsville, Maryland 20782.

FOR FURTHER INFORMATION CONTACT:

Requests for additional information or

copies of the form(s) and instructions

should be directed to Dawn Johns,

Manager, Check Claims Branch, Room

800D, 3700 East West Highway,

Hyattsville, MD 20782, (202) 874–8445.

SUPPLEMENTARY INFORMATION: Pursuant

to the Paperwork Reduction Act of 1995

(44 U.S.C. 3506(c)(2)(A)), the Financial

Management Service solicits comments

on the collection of information

described below:

Title: Claim Against the United States

for the Proceeds of a Government Check.

OMB Number: 1510–0019.

Form Number: FMS–1133.

Abstract: This form is used to collect

information needed to process an

individual’s claim for non-receipt of

proceeds from a government check.

Once the information is analyzed, a

determination is made and a

recommendation is submitted to the

program agency to either settle or deny

the claim.

Current Actions: Extension of

currently approved collection.

Type of Review: Regular.

Affected Public: Individuals or

households.

Estimated Number of Respondents:

53,000.

Estimated Time per Respondent: 10

minutes.

Estimated Total Annual Burden

Hours: 8,834.

Comments: Comments submitted in

response to this notice will be

summarized and/or included in the

request for Office of Management and

Budget approval. All comments will

become a matter of public record

w: Regular.

Affected Public: Individuals or

households.

Estimated Number of Respondents:

53,000.

Estimated Time per Respondent: 10

minutes.

Estimated Total Annual Burden

Hours: 8,834.

Comments: Comments submitted in

response to this notice will be

summarized and/or included in the

request for Office of Management and

Budget approval. All comments will

become a matter of public record.

Comments are invited on: (a) Whether

the collection of information is

necessary for the proper performance of

the functions of the agency, including

whether the information shall have

practical utility; (b) the accuracy of the

agency’s estimate of the burden of the

collection of information; (c) ways to

enhance the quality, utility, and clarity

of the information to be collected; (d)

ways to minimize the burden of the

collection of information on

respondents, including through the use

of automated collection techniques or

other forms of information technology;

and (e) estimates of capital or start-up

costs and costs of operation,

maintenance and purchase of services to

provide information.

Dated: December 1, 2006.

Janice Lucas,

Assistant Commissioner, Financial

Operations.

[FR Doc. 06–9639 Filed 12–11–06; 8:45 am]

BILLING CODE 4810–35–M

DEPARTMENT OF THE TREASURY

Office of Foreign Assets Control

Additional Designation of Individuals

Pursuant to Executive Order 13224

AGENCY: Office of Foreign Assets

Control, Treasury.

ACTION: Notice

e of services to

provide information.

Dated: December 1, 2006.

Janice Lucas,

Assistant Commissioner, Financial

Operations.

[FR Doc. 06–9639 Filed 12–11–06; 8:45 am]

BILLING CODE 4810–35–M

DEPARTMENT OF THE TREASURY

Office of Foreign Assets Control

Additional Designation of Individuals

Pursuant to Executive Order 13224

AGENCY: Office of Foreign Assets

Control, Treasury.

ACTION: Notice.

SUMMARY: The Treasury Department’s

Office of Foreign Assets Control

(‘‘OFAC’’) is publishing the names of

nine newly-designated individuals and

two newly-designated entities whose

property and interests in property are

blocked pursuant to Executive Order

13224 of September 23, 2001, ‘‘Blocking

Property and Prohibiting Transactions

With Persons Who Commit, Threaten To

Commit, or Support Terrorism.’’

DATES: The designation by the Secretary

of the Treasury of nine individuals and

two entities identified in this notice,

pursuant to Executive Order 13224, is

effective on December 6, 2006.

FOR FURTHER INFORMATION CONTACT:

Assistant Director, Compliance

Outreach & Implementation, Office of

Foreign Assets Control, Department of

the Treasury, Washington, DC 20220,

tel.: 202/622–2490.

SUPPLEMENTARY INFORMATION:

Electronic and Facsimile Availability

This document and additional

information concerning OFAC are

available from OFAC’s Web site

(http://www.treas.gov/ofac) or via

facsimile through a 24-hour fax-on-

demand service, tel.: 202/622–0077.

Background

On September 23, 2001, the President

issued Executive Order 13224 (the

‘‘Order’’) pursuant to the International

Emergency Economic Powers Act, 50

U.S.C. 1701–1706, and the United

Nations Participation Act of 1945, 22

U.S.C. 287c. In the Order, the President

declared a national emergency to

address grave acts of terrorism and

threats of terrorism committed by

foreign terrorists, including the

September 11, 2001, terrorist attacks in

New York, Pennsylvania, and at the

Pentagon

to the International

Emergency Economic Powers Act, 50

U.S.C. 1701–1706, and the United

Nations Participation Act of 1945, 22

U.S.C. 287c. In the Order, the President

declared a national emergency to

address grave acts of terrorism and

threats of terrorism committed by

foreign terrorists, including the

September 11, 2001, terrorist attacks in

New York, Pennsylvania, and at the

Pentagon. The Order imposes economic

sanctions on persons who have

committed, pose a significant risk of

committing, or support acts of terrorism.

The President identified in the Annex to

the Order, as amended by Executive

Order 13268 of July 2, 2002, 13

individuals and 16 entities as subject to

the economic sanctions. The Order was

further amended by Executive Order

13284 of January 23, 2003, to reflect the

creation of the Department of Homeland

Security.

Section 1 of the Order blocks, with

certain exceptions, all property and

interests in property that are in or

hereafter come within the United States

or the possession or control of United

States persons, of: (1) Foreign persons

listed in the Annex to the Order; (2)

foreign persons determined by the

Secretary of State, in consultation with

the Secretary of the Treasury, the

Secretary of the Department of

Homeland Security and the Attorney

General, to have committed, or to pose

a significant risk of committing, acts of

terrorism that threaten the security of

U.S. nationals or the national security,

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