Issue

Regulatory Guidelines for Commercial Lending.

Position Statement

Commercial real estate (CRE) is critical to the lending programs of many institutions – particularly community banks – and it is essential to the health of communities in particular and the American economy in general. ABA believes that banks should have in place sound CRE underwriting and risk management practices and capital levels appropriate to the risk associated with their CRE portfolios. ABA objects to banking agency restrictions that unnecessarily constrain CRE lending.

Explanation

The banking agencies are concerned about potential risks associated with high and increasing concentrations of CRE in bank portfolios. On December 6, 2006, the federal banking agencies issued a controversial Final Guidance on Concentrations in Commercial Real Estate Lending. ABA expressed multiple objections to the proposed guidance that the agencies issued for comment earlier, in January 2006, including the imposition of thresholds to identify concentrations of CRE and significantly heightened regulatory scrutiny of banks' underwriting standards, risk management practices, and capital levels.

In the Final Guidance the agencies, particularly the OTS, made significant changes in response to comments from ABA and others, including a clarification that the Guidance does not establish a limit on an institution's CRE lending activity but rather was intended as a guide to further discussions with a bank about its risk management and underwriting programs.

Since the issuance of the final Guidance, ABA has talked with a number of member banks about their examination experience under the new Guidance.  Bankers report that they have not observed unreasonable application of the Guidance to their banks and that they have found the ABAWorks on Concentrations in Commercial Real Estate Lending very helpful in preparing for their examinations.  Nonetheless, ABA remains concerned about how the agencies will apply the new guidance when conducting regulatory examinations as the current credit problems in subprime mortgages impact the housing market. ABA will continue discussions with bankers and with the agencies regarding appropriate application of the Final Guidance and any undue restrictions on commercial real estate lending that may be imposed.

Contact for further information: Cecelia Calaby (202) 663-5325.