Real Estate Lending Standards
By: Stephen Rountree
During October 2021, the FDIC amended 12 CFR Part 365 to clarify the denominator in calculating the percent of loans that exceed Regulatory guidance as a percentage of bank capital2. The change will take effect 30 days after its publication in the Federal Register. Based on the FDIC’s assessment, there are 2,210 smaller FDIC institutions in which total real estate loans exceed Tier 1 capital + allowance (or reserve benchmark).
The final rule allows a consistent approach for calculating the ratio of loans in excess of the supervisory loan-to-value limits (LTV Limits) at all FDIC-supervised institutions, using a methodology that approximates the historical methodology the FDIC has followed for calculating this measurement without requiring institutions to calculate tier 2 capital. The final rule also avoids any regulatory burden that could arise if an FDIC-supervised institution subsequently decides to switch between different capital frameworks. The change will allow:
Banking organizations that have not adopted the current expected credit losses (CECL) methodology will use tier 1 capital plus the allowance for loan and lease losses (ALLL) as the denominator. Banking organizations that have adopted the CECL methodology will use tier 1 capital plus the portion of the allowance for credit losses (ACL) attributable to loans and leases.
The percentage of loans that exceed the Regulatory LTV limitations will remain unchanged. Total loans exceeding the Supervisory LTV limitation should not exceed 100% of total capital, and the 30% sub-limitation for all CRE, agricultural, multi-family & non-1-4 family residential remain unchanged.
Per the Regulation, “For the purposes of these Guidelines, for state non-member banks and state savings associations, “total capital” refers to the FDIC-supervised institution's tier 1 capital, as defined in § 324.2 of this chapter, plus the allowance for loan and leases losses or the allowance for credit losses attributable to loans and leases, as applicable. The allowance for credit losses attributable to loans and leases is applicable for institutions that have adopted the Current Expected Credit Losses methodology.”
2 https://www.fdic.gov/news/board-matters/2021/2021-10-21-notational-fr-b.pdf
The final rule allows a consistent approach for calculating the ratio of loans in excess of the supervisory loan-to-value limits (LTV Limits) at all FDIC-supervised institutions, using a methodology that approximates the historical methodology the FDIC has followed for calculating this measurement without requiring institutions to calculate tier 2 capital. The final rule also avoids any regulatory burden that could arise if an FDIC-supervised institution subsequently decides to switch between different capital frameworks. The change will allow:
Banking organizations that have not adopted the current expected credit losses (CECL) methodology will use tier 1 capital plus the allowance for loan and lease losses (ALLL) as the denominator. Banking organizations that have adopted the CECL methodology will use tier 1 capital plus the portion of the allowance for credit losses (ACL) attributable to loans and leases.
The percentage of loans that exceed the Regulatory LTV limitations will remain unchanged. Total loans exceeding the Supervisory LTV limitation should not exceed 100% of total capital, and the 30% sub-limitation for all CRE, agricultural, multi-family & non-1-4 family residential remain unchanged.
Per the Regulation, “For the purposes of these Guidelines, for state non-member banks and state savings associations, “total capital” refers to the FDIC-supervised institution's tier 1 capital, as defined in § 324.2 of this chapter, plus the allowance for loan and leases losses or the allowance for credit losses attributable to loans and leases, as applicable. The allowance for credit losses attributable to loans and leases is applicable for institutions that have adopted the Current Expected Credit Losses methodology.”
2 https://www.fdic.gov/news/board-matters/2021/2021-10-21-notational-fr-b.pdf