Seal of the Board of Governors of the Federal Reserve System
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM

WASHINGTON, D. C.  20551

DIVISION OF BANKING
SUPERVISION AND REGULATION


SR 93-11 (FIS)
March 11, 1993

TO THE OFFICER IN CHARGE OF SUPERVISION
          AT EACH FEDERAL RESERVE BANK


SUBJECT: Real Estate Lending Standards

                         On December 31, 1992, the Federal Reserve Board, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation published in the Federal Register1 the final uniform rule on real estate lending by insured depository institutions.  The final rule prescribes real estate lending standards as required by section 304 of the FDIC Improvement Act (FDICIA).  Since the publication of the final rule, Board staff has received several questions concerning the effective date and the application of the supervisory loan-to-value limits which warrant further clarification.

                         The final rule becomes effective on March 19, 1993.  Thus, as of this date, insured depository institutions are expected to have in place written policies that establish appropriate limits and standards for their real estate lending activity.  As prescribed in the real estate lending guidelines, an appendix to the regulation, institutions are expected to establish internal loan-to-value limits which should not exceed stated supervisory limits.

                         There has, however, been some confusion over whether these supervisory limits apply to existing credits.  In this regard, the final rule exempts extensions of credits (including legally binding, but unfunded, lending commitments) originated prior to March 19, 1993.  In the event that such a loan has a loan-to-value ratio (LTV) in excess of the supervisory LTV and is subsequently refinanced, renewed, or restructured, the loan will continue to be treated as an excluded transaction so long as there is no advancement of new funds or an increase in the line of credit (except for reasonable closing costs), or the loan involves a workout with a clearly defined and well-documented workout program.

                         A second question has arisen on what was meant by the language in the guidelines regarding the calculation for the maximum loan amount where there is a cross-collateralization of two or more properties with different supervisory LTVs.  The text states:

      "...the appropriate maximum loan amount under supervisory loan-to-value limits is the sum of the value of each property, less senior liens, multiplied by the appropriate loan-to-value limit for each property."

The current text may be misleading because the order of the arithmetical operations could be taken to imply that the collateral value should be reduced by the senior lien before applying the LTV limit.  This was not the intent of the agencies.  As intended by the agencies, the maximum loan amount is determined by first multiplying each property's collateral value by the loan-to-value ratio appropriate to that property and then deducting from that product any existing senior liens on that property.  The sum of the results of these calculations is the maximum loan amount that may be extended under cross-collateralization.

                         There also have been several requests to clarify the guidelines' capital limitations on loans in excess of supervisory LTV limits.  Institutions are expected to identify those loans in excess of the supervisory LTV limits (i.e., nonconforming loans) in their records.  The aggregate amount of such loans is not to exceed 100 percent of a bank's total risk-based capital (referred to as the nonconforming basket).  Within this limit, the aggregate amount of non-1-to-4 family residential loans (e.g., raw land, commercial, multifamily, and agricultural) that do not conform to supervisory LTV limits may not exceed 30 percent of total risk-based capital.  The remaining portion of the nonconforming basket includes the aggregate amount of 1-to-4 family residential construction loans and non-owner occupied 1-to-4 family residential loans with a LTV greater than 85 percent and owner-occupied 1-to-4 family residential loans with a LTV equal to or exceeding 90 percent without mortgage insurance or readily marketable collateral.

                         Reserve Banks should communicate these clarifications on the real estate lending rule and guidelines to insured depository institutions.  Attached is a suggested transmittal letter that may be used for this purpose.

                         If there are any questions, call Virginia Gibbs 202- 452-2521 or Fred Teuscher 202-452-3007.

Frederick M. Struble

Associate Director

ATTACHMENT TRANSMITTED ELECTRONICALLY BELOW

Cross Reference:  SR 93-1 (FIS)


Footnotes

1.  Federal Reserve Board 12 CFR Part 208.  Federal Register 57 FR 62890  (December 31, 1992).  Return to text


ATTACHMENT

Real Estate Lending Standards

SUGGESTED TRANSMITTAL LETTER TO

STATE MEMBER BANKS AND BANK HOLDING COMPANIES

TO THE CHIEF EXECUTIVE OFFICER OF STATE MEMBER BANKS AND BANK HOLDING COMPANIES

                        On December 31, 1992, the Federal Reserve Board, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation published in the Federal Register1 the final uniform rule on real estate lending by insured depository institutions.  The final rule prescribes real estate lending standards as required by section 304 of the FDIC Improvement Act (FDICIA).  Since the publication of the final rule, the Federal Reserve has received several questions concerning the effective date and the application of the supervisory loan-to-value limits which warrant further clarification.

                        The final rule becomes effective on March 19, 1993. Thus, as of this date, insured depository institutions are expected to have in place written policies that establish appropriate limits and standards for their real estate lending activity.  As prescribed in the real estate lending guidelines, an appendix to the regulation, institutions are expected to establish internal loan-to-value limits which should not exceed stated supervisory limits.

                        There has, however, been some confusion over whether these supervisory limits apply to existing credits.  In this regard, the final rule exempts extensions of credits (including legally binding, but unfunded, lending commitments) originated prior to March 19, 1993.  In the event that such a loan has a loan-to-value ratio (LTV) in excess of the supervisory LTV and is subsequently refinanced, renewed, or restructured, the loan will continue to be treated as an excluded transaction so long as there is no advancement of new funds or an increase in the line of credit (except for reasonable closing costs), or the loan involves a workout with a clearly defined and well-documented workout program.

                        A second question has arisen on what was meant by the language in the guidelines regarding the calculation for the maximum loan amount where there is a cross-collateralization of two or more properties with different supervisory LTVs.  The text states:

      "...the appropriate maximum loan amount under supervisory loan-to-value limits is the sum of the value of each property, less senior liens, multiplied by the appropriate loan-to-value limit for each property."

The current text may be misleading because the order of the arithmetical operations could be taken to imply that the collateral value should be reduced by the senior lien before applying the LTV limit.  This was not the intent of the agencies. As intended by the agencies, the maximum loan amount is determined by first multiplying each property's collateral value by the loan-to-value ratio appropriate to that property and then deducting from that product any existing senior liens on that property.  The sum of the results of these calculations is the maximum loan amount that may be extended under cross-collateralization.

                    There also have been several requests to clarify the guidelines' capital limitations on loans in excess of supervisory LTV limits.  Institutions are expected to identify those loans in excess of the supervisory LTV limits (i.e., nonconforming loans) in their records.  The aggregate amount of such loans is not to exceed 100 percent of a bank's total risk-based capital (referred to as the nonconforming basket).  Within this limit, the aggregate amount of non-1-to-4 family residential loans (e.g., raw land, commercial, multifamily, and agricultural) that do not conform to supervisory LTV limits may not exceed 30 percent of total risk-based capital.  The remaining portion of the nonconforming basket includes the aggregate amount of 1-to-4 family residential construction loans and non-owner occupied 1-to-4 family residential loans with a LTV greater than 85 percent and owner-occupied 1-to-4 family residential loans with a LTV equal to or exceeding 90 percent without mortgage insurance or readily marketable collateral.

                        If there are any questions, contact (Reserve Bank staff member).


Footnotes

1.   Federal Reserve Board 12 CFR Part 208.  Federal Register   57 FR 62890 (December 31, 1992). Return to text


SR letters | 1993