Seal of the Board of Governors of the Federal Reserve System

WASHINGTON, D. C.  20551


SR 93-33 (FIS)
June 14, 1993


SUBJECT: Clarification on Real Estate Lending Standards

                        The Division of Banking Supervision and Regulation has received several requests to clarify the new Real Estate Lending Standards1 in two areas.  The first clarification relates to the calculation of the loan-to-value (LTV) ratio for all real estate loans and the second relates to the appropriate supervisory LTV for improved land loans and multiple phase real estate loans.  These supervisory LTV limits are set forth in the Interagency Guidelines for Real Estate Lending Policies which are an appendix to the regulation.

                        The loan-to-value (LTV) ratio is defined as the total amount of credit being extended divided by the value of the underlying property.  The total amount of any single credit extension must be combined with the amount of all senior liens in the numerator of the LTV ratio.  The amount of any readily marketable collateral or other acceptable collateral may be combined with the value of the underlying real property in the denominator of the ratio.  Other non-real estate collateral is considered acceptable, provided that:

    • The lender has a perfected security interest;

    • The collateral has a quantifiable value and is accepted by the lender in accordance with safe and sound lending practices;

    • The lender has appropriately discounted the value of the collateral consistent with the lender's usual practices; and

    • The collateral is saleable under ordinary circumstances with reasonable promptness at market value.

                        Examples of readily marketable collateral include: bullion, stocks, bonds, debentures, commercial paper, negotiable certificates of deposit, bankers' acceptances, and shares in mutual funds.  The lender may not consider the general net worth of the borrower, which might be a determining factor for an unsecured loan, as equivalent to other acceptable collateral for determining the LTV on a secured real estate loan.

                        If an institution has multiple loans to the same borrower with one on a secured basis and the other on an unsecured basis, examiners should generally treat the loans as separate loans for determining compliance with the supervisory LTV limits.  However, if the unsecured loan does not meet prudent underwriting standards, examiners should consider whether the institution has structured the transaction, in such a manner, in order to circumvent the supervisory LTV limits.  If it appears that the institution is attempting to circumvent the guidelines, examiners should in such cases treat the two loans as one for adherence to the supervisory LTV purposes.  In determining whether to treat the two loans as one, examiners should consider the similarities between the two loans with regard to origination dates and the use of borrowed funds.

                        The second clarification arises from requests for the appropriate supervisory LTV limit for improved land loans and multiple phase real estate loans.  The supervisory LTV table does not specifically set forth a loan category for improved land loans (e.g., an improved residential lot in an established development).  Improvements include:  streets, curbs and gutters, site grading, and access and connection to water, sewer, gas and electricity.  The applicable supervisory LTV for such loans is 75 percent which corresponds to the land development loan category. However, if there have been minimal improvements to the land, and the timeframe for construction of the dwelling or building has not been scheduled to commence in the foreseeable future, the loan generally should be considered a raw land loan with a 65 percent supervisory LTV.

                        The supervisory LTV limit applicable to an extension of credit funding multiple phases of a real estate project, subject to two or more categories of real estate loans, is the supervisory LTV limit applicable to the final phase of the project.  For example, where the loan is for the acquisition and development of land and the construction of an office building in continuous phases of development, the appropriate supervisory LTV for the project loan would be 80 percent (i.e., the supervisory LTV for commercial construction loan).  However, this does not imply that the lender can finance the total acquisition cost of the land at the time the raw land is acquired by assuming that this financing would be less than 80 percent of the project's final value.

                        The lender is expected to fund the loan in accordance with prudent disbursement procedures which set appropriate levels for the hard equity contributions of the borrower throughout the disbursement period and term of the loan.  As a general guideline, the funding of the initial acquisition of the raw land should not exceed the 65 percent supervisory LTV; likewise, the project cost to fund the land development phase of the project should generally not exceed the 75 percent supervisory LTV limit. In this regard, the borrower is expected to have a cash equity stake from the time of the first loan disbursement.

                        For a multiple phase 1-to-4 family residential loan where the lender is funding both the construction of the house and the permanent mortgage to a borrower who will be the owner-occupant, there is no supervisory LTV limit.  However, if the LTV equals or exceeds 90 percent, the bank should require an appropriate credit enhancement in the form of either mortgage insurance or readily marketable collateral.

                        Reserve Banks should communicate these clarifications on the real estate lending guidelines to insured depository institutions.  If there are any questions, please call Virginia Gibbs 202/452-2521 or Fred Teuscher 202/452-3007.

Stephen C. Schemering
Deputy Director

Cross Reference:  SR 93-1 (FIS)
                            SR 93-11 (FIS)


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

SR letters | 1993