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