TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE BANK
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:
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.
Deputy Director
Cross Reference: SR 93-1 (FIS) Footnotes 1. Federal Reserve Board 12 CFR Part 208 (Regulation H). Federal Register 57 FR 62890 (December 31, 1992). Return to text |
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