The federal banking agencies today issued a statement warning about eased commercial real estate loan underwriting and CRE risk management practices that cause “concern.” They added that supervisors will “continue to pay special attention” to CRE lending in exams in 2016 and reiterated existing interagency guidance on CRE concentration risk.
CRE markets are growing rapidly, the agencies noted, and banks’ CRE concentration levels are rising due to the strength of the market and the quality of CRE assets. Although the agencies noted strong demand and “reassuring trends in asset-quality metrics,” they cautioned that they have observed looser underwriting standards for CRE loans, including “less-restrictive loan covenants, extended maturities, longer interest-only payment periods, and limited guarantor requirements,” as well as more frequent exceptions to underwriting policies and “insufficient monitoring” of market conditions.
“Historical evidence demonstrates that financial institutions with weak risk management and high CRE credit concentrations are exposed to a greater risk of loss and failure,” the agencies said. They noted that successful CRE lenders maintained adequate loan policies and underwriting standards, held to appropriate lending strategies, conducted robust analysis of ability to repay, stress tested their CRE loan portfolio, kept their boards informed and ensured borrowers could repay on an ongoing basis as rates rise or as loan terms reset.
The agencies also said that their examiners will focus in particular on “those financial institutions that have recently experienced, or whose lending strategy plans for, substantial growth in CRE lending activity, or that operate in markets or loan segments with increasing growth or risk fundamentals,” adding that they may ask banks with “inadequate risk management practices and capital strategies” to develop plans to identify, monitor and manage their CRE concentrations or to raise additional capital. For more information, contact ABA’s Ashley Gunn.