On December 18, 2015, the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (together the banking agencies) issued a joint Statement on Prudential Risk Management in Commercial Real Estate Lending (the Statement). As indicated in the press release accompanying the Statement, the banking agencies “have observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards.” As the CRE concentration levels have risen, so has the attention being paid to this line of business by the banking agencies – such is one reason for the friendly reminder from the banking agencies about prudent risk management practices. Other reasons include the revelation from examination work that there has been an “easing of CRS underwriting standards, including less-restrictive loan covenants, extended maturities, longer interest-only payment periods, and limited guarantor requirements.” Among other things, the Statement reminds institutions of the supervisory expectations for CRE lending and includes a very important and helpful listing of interagency regulations and guidance related to CRE lending. This listing is important because it guides institutions as to the precise analysis and expectations of the banking agencies. Failure to follow this public guidance may result in something far worse than a lump of coal in your stocking this holiday season.
The copy of the Statement on Prudential Risk Management in Commercial Real Estate Lending can be found at: http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20151218a1.pdf.