The U.S. Government Accountability Office (“GAO”), an independent agency that investigates how the federal government spends taxpayer dollars, recommended in a recent report to Congress that the federal banking regulators enhance or supplement existing guidance on commercial real estate (“CRE”) lending concentrations. The federal banking regulators issued guidance on CRE loan concentrations and risk management in 2006 and supplementary guidance and statements on meeting credit needs of communities and conducting CRE loan workouts from 2008 to 2010 (together, the “CRE Guidance”). The May 19 GAO report identified inconsistencies in the ways federal bank examiners have applied the CRE Guidance. The report examines, among other issues, how the FDIC, Federal Reserve and OCC have responded to recent trends in CRE markets, the controls they have in place for ensuring consistent application of the guidance, and the relationship between the banking agencies’ supervision practices and CRE lending. The GAO also reported that federal regulatory officials have differing views on the adequacy of the CRE Guidance, and that some examiners and bankers believe that the guidance is not sufficiently clear.

Nutter Notes: The GAO report concludes that examiners and bankers may not have a common understanding about CRE concentration risks, and recommends that the federal banking regulators take steps to better ensure that CRE guidance is consistently applied. The GAO reported that a number of banks said that examiners have been applying the loan concentration and risk management guidance more stringently since the financial crisis began and believe that regulators have been too harsh in treatment of CRE loans. While the federal banking regulators have issued statements and guidance encouraging banks to continue lending to creditworthy borrowers and explaining how banks can work with troubled borrowers, some banks reported to the GAO that examiners’ treatment of CRE loans has hampered their ability to lend. The GAO report said that economic research on the effect of regulators’ examination practices on banks’ lending decisions is limited, but shows that examiners’ increased scrutiny during credit downturns can have an adverse impact on overall lending.