Federal Banking Agencies Renew Emphasis on Prudent Risk Management for CRE LendingU.S. federal banking agencies — including the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency — have released a joint statement on prudent risk management for commercial real estate lending amid concerns that industry growth may tempt lenders to ease CRE underwriting standards.

The agencies reiterated their supervisory expectations as follows:

Have established adequate and appropriate loan policies, underwriting standards, credit risk management practices, and concentration limits that were approved by the board or a designated committee; lending strategies, such as plans to increase lending in a particular market or property type, limits for credit and other asset concentrations, and processes for assessing whether lending strategies and policies continued to be appropriate in light of changing market conditions; and strategies to ensure capital adequacy and allowance for loan losses that supported an institution’s lending strategy and were consistent with the level and nature of inherent risk in the CRE portfolio.

Have conducted global cash flow analyses based on reasonable (not speculative) rental rates, sales projections, and operating expenses to ensure the borrower had sufficient repayment capacity to service all loan obligations.

Have performed market and scenario analyses of their CRE loan portfolio to quantify the potential impact of changing economic conditions on asset quality, earnings, and capital.

Have provided their boards and management with information to assess whether the lending strategy and policies continued to be appropriate in light of changes in market conditions.

Have assessed the ongoing ability of the borrower and the project to service all debt as loans converted from interest-only to amortizing payments or during periods of rising interest rates.

Have implemented procedures to monitor the potential volatility in the supply and demand for lots, retail and office space, and multi-family units during business cycles.

Have maintained management information systems that provided the board and management with sufficient information to identify, measure, monitor, and manage concentration risk.

Have implemented processes for reviewing appraisal reports for sufficient information to support an appropriate market value conclusion based on reasonable market rental rates, absorption periods, and expenses.

The statement noted that banking agency supervisors would continue to focus special attention to potential risks associated with CRE lending and closely monitor those lenders that have experienced substantial growth in CRE lending activity.

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