From: Linda Lavely [mailto:linda.lavely@brightoncommerce.com]
Sent: Friday, March 24, 2006 9:47 AM
To: Comments
Subject: Comment on Proposed Real Estate Lending Guidance
Linda Lavely
SVP Office Manager
Brighton Commerce Bank
8700 N. Second
Brighton, MI 48116-1282
March 24, 2006
Comment/Legal ESS Federal Deposit Insurance Corporation
Dear Comment/Legal ESS Federal Deposit Insurance Corporation:
RE: Proposed Guidance-Concentrations in Commercial Real Estate Lending,
Sound Risk Management Practices 71 FR 2302 (January 13, 2006)
Dear Sir or Madam:
As a banker, I appreciate the opportunity to comment on the Proposed
Guidance-Concentrations in Commercial Real Estate Lending, Sound Risk
Management Practices (“Proposed Guidance”) issued by the Office of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation, and the Office of
Thrift Supervision (“Agencies”). The Proposed Guidance will impose
additional regulation on financial institutions in a mechanical manner.
The proposed guidance adds additional scrutiny to banks with high
concentrations in commercial real estate loans with regard to their
underwriting standards, risk management practices, and capital levels.
Under the proposed guidance, financial institutions are deemed to have a
concentration in commercial real estate loans if one or both of the
following tests are met:
- Total reported loans for construction, land development, and other land
represent one hundred percent or more of the institution’s total capital,
or - Total reported loans secured by multi-family and nonfarm
nonresidential properties and loans for construction, land development,
and other land represent three hundred percent or more of the
institution’s total capital.
The proposed guidance would allow the banking regulators to require banks
to increase their capital levels simply because there is a concentration
of commercial real estate loans.
I believe that commercial real estate is vitally important to the lending
programs of our banks, to revitalize urban communities and to strengthen
the Michigan economy. Any guidance that imposes additional requirements
in a mechanical or arbitrary manner could lead to policy shifts in the
lending practices of our banks that could discourage commercial real
estate lending and encourage more risky types of lending.
The agencies should not impose rigid, arbitrary threshold tests that
ignore the actual risk factors associated with a particular loan.
Thresholds are not appropriate for the reason that different types of
commercial real estate have very different risk profiles. There are huge
differences in risk levels between loans for land development, raw land,
spec home construction, and commercial construction. These risk factors
should be evaluated individually, and not under a mechanical set of
guidelines that fail to account for the uniqueness of the project.
The proposed guidance allows the agencies to require banks to increase
their capital because of a concentration in commercial real estate loans.
The agencies should not have the discretion to arbitrarily require a bank
to increase its capital levels under these circumstances. Appropriate
capital levels should be determined based on a thorough analysis of the
individual bank. All factors should be included when making a
determination that a bank has sufficient capital, including the risk
associated with the bank’s lending practices, not just an arbitrary
standard.
Again, I appreciate the opportunity to comment on, and firmly oppose, the
Proposed Guidance-Concentrations in Commercial Real Estate Lending, Sound
Risk Management Practices.
Thank you.
Sincerely,
Linda K. Lavely
810 220 1199
SVP Office Manager
Brighton Commerce Bank
