The OCC recently issued guidance to national banks and federal savings associations on credit risk management practices for investor-owned, one- to four-family residential real estate (“IORR”) lending where the primary repayment source for the loan is rental income. The guidance, published on September 17 in OCC Bulletin No. OCC 2012-27, recommends consistent risk management practices for IORR lending and summarizes the applicable requirements for regulatory capital and call reports for IORR lending. The OCC recognizes that some institutions manage IORR loans in a similar manner to owner-occupied one- to four-family residential loans. However, the OCC takes the view that the credit risk presented by IORR lending is similar to that associated with loans for income-producing commercial real estate (“CRE”). Because of this similarity, the OCC said that it expects banks to use the same types of credit risk management practices for IORR lending that are used for CRE lending. The guidance clarifies that the OCC’s credit risk management expectations do not change the regulatory capital, regulatory reporting, and Home Owners’ Loan Act requirements for IORR.
Nutter Notes: The guidance recommends that institutions have IORR credit risk management policies and processes in place that cover loan underwriting standards, loan identification and portfolio monitoring expectations, allowance for loan and lease losses methodologies (ALLL), and internal risk assessment and rating systems. The guidance says that IORR lending should follow the federal banking agencies’ uniform regulations on real estate lending, including underwriting standards, portfolio administration, and supervisory loan-to-value limits. The OCC recognizes that borrowers may convert homes into rental units without notifying their lenders. The guidance recommends that institutions make every effort to properly identify, monitor, and structure IORR loan relationships. In terms of ALLL methodologies, the guidance provides that individually impaired IORR loans should be evaluated in accordance with ASC 310-10 (formerly FAS 114), and that loans that are not individually impaired may be evaluated as an ASC 450-20 (formerly FAS 5) pool. The OCC also expects banks to have credit risk management systems that produce accurate and timely risk ratings. A rating system similar to that used for CRE lending is generally appropriate for an IORR portfolio, according to the guidance.