Commercial Real Estate Guidance (CRE): Banker concerns relating to the proposed changes in commercial real estate lending guidance have typically revolved around risk-weighting and proposed capital levels. The Commercial Real Estate Lending Proposed Interagency Guidance is intended to increase awareness of CRE exposures at insured institutions and to reinforce the 1993 Interagency Guidelines For Real Estate Lending Policies, which can be found at the following link: http://www.fdic.gov/regulations/laws/rules/2000-8700.html#2000appendixatopart365

A background summary for the proposed guidance follows:

• Banks with high CRE concentrations suffered significant losses during the late 1980s.
• Many external factors contributed to the boom and bust in CRE in the 1980s, including tax law changes, deregulation of thrifts inexperienced in CRE lending, and unregulated appraisers.
• Today, CRE risk is mitigated by risk-based capital, real estate lending standards (including limits on high LTV loans), appraisal requirements, an active secondary market for CRE loans, improved information availability, and generally stronger underwriting in the industry.
• However, at year-end 2005, almost one-third of institutions reported CRE loans in excess of 300% of capital – significantly more than during the late 1980s/early 1990s real estate crisis.
• Although individual underwriting standards may appear reasonable, portfolio management practices may not be keeping pace with growth in banks' CRE portfolios.

A summary of industry reaction to the proposed guidance follows:

• The proposed guidance was generally interpreted as new requirements for banks involved in CRE lending – a staple of many bank portfolios.
• The FDIC received 1,011 comment letters from bankers, trade organizations, holding companies, state regulators and others.
• The comments generally addressed four areas: (1) Definition of CRE; (2) CRE Concentration Thresholds; (3) Risk Management Practices; and (4) Capital.
• The overwhelming reaction was negative.

The comment process is invaluable in the issuance of such guidance because it allows consideration of various interests to achieve a balanced approach. You may view comments received, which are posted without change, including any personal information provided, at the following site: http://www.fdic.gov/regulations/laws/federal/propose.html. Although the official date for responses has closed, the FDIC is still open to receiving comments. You may submit your comments via e-mail at comments@fdic.gov, or via U.S. mail at the following address:

Robert E. Feldman
Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429

The interagency working group continues to strive for consensus on final language regarding the thresholds. Implementation of the final guidance will be risk-focused, based on the risk profile of each institution. It is important to note that institutions with recent significant growth in CRE lending will receive closer regulatory review than those demonstrating a successful track record of managing the risks of CRE concentrations.

FDIC Chairman Sheila Bair addressed the status of the proposed guidance in her testimony on September 14, 2006, before the House Subcommittee on Financial Institutions and Consumer Credit of the Committee on Financial Services. Her complete testimony can be found at http://www.fdic.gov/news/news/speeches/chairman/index.html. An excerpt is included below:

"Banking institutions play a vital role in providing credit for business and real estate development, and the intent of the guidance is not to discourage institutions from originating commercial real estate loans. Conversely, the proposed guidance reminds institutions that there are substantial risks posed by a credit concentration and outlines the agencies' recommended best practices for recognizing and addressing those risks.

"The FDIC and the other banking agencies seriously considered commenters' views on the proposed guidance. The agencies agree with the need to emphasize that the stated thresholds are not limits, recognize that commercial real estate categories may have different risk characteristics, and stress that risk management practices should be commensurate with the complexity of the institution and its activities. It is important to note that the proposed guidance does not suggest changes to the risk weights that are applied to commercial real estate for risk-based capital purposes and the appropriateness of an institution's capital level will continue to be analyzed in light of its specific risk profile. With the above changes and clarification from the draft proposal, the final guidance should be a useful tool for banks that emphasizes fundamentally sound credit principles and industry best practices."

Deposit Insurance Reform: The FDIC Board of Directors has permanently adopted the final rule to implement provisions of the Federal Deposit Insurance Reform Act of 2005 pertaining to deposit insurance coverage. The final rule is unchanged from the interim rule, except that the preamble provides a more detailed explanation of the types of retirement accounts included in the rule changes. The final rule takes effect on October 12, 2006. The complete Financial Institution Letter (FIL) can be found at http://www.fdic.gov/news/news/financial/2006/fil06083.html.

Several bankers have asked how deposit insurance assessments, and assessment credits due to some insured depository institutions, will be calculated. The FDIC website home page at www.fdic.gov contains a link to an assessment rate calculator, as well as to a preliminary estimated one-time assessment credit for each eligible institution. The calculator allows well-capitalized and well-managed institutions to obtain estimates of assessment rates under the new proposal. Due dates and relevant time periods will be established after all comments have been received. Assistance is also available from the Assessment Rate Calculator Helpline at 1-800-759-6596 or at assessments@fdic.gov

Regulation CC: Bankers expressed increasing frustration with fraudulent cashier's check losses and the inability to obtain confirmations from issuing banks because of privacy concerns. Interagency Guidance on Financial Privacy includes a Q&A relating to checks drawn on individual accounts, which also applies to this topic of cashier's checks. According to a Division of Supervision and Consumer Protection policy analyst, "[B]asically, banks are allowed to verify funds on checks without violating privacy regulations. The disclosing bank should simply take steps to make sure that they're not being phished." The Q&A can be found in its entirety at http://www.fdic.gov/news/news/press/2001/pr9301a.html#I.

Competition: Several bankers have alleged a lack of FDIC analysis on new bank or branch applications concerning competition. The FDIC considers the following seven statutory factors in its evaluation of every application: Financial History and Condition, Adequacy of the Capital Structure, Future Earnings Prospects, General Character of Management, Risk to the Fund, Convenience and Needs of the Community to be Served, and Consistency of Corporate Powers.

The essential considerations in evaluating the "Convenience and Needs of the Community to be Served" factor are the deposit and credit needs of the community, the nature and extent of the opportunity available to the applicant in that location, and the willingness and ability of the applicant to serve those financial needs. The applicant must clearly define the community it intends to serve and provide information on that community, including economic and demographic data and a description of the competitive environment. The applicant should also define the services to be offered in relation to the needs of the community.

Among other things, the FDIC uses the information provided to evaluate the extent to which the proposal may serve to reduce competition. Overlays of the information may also affect other factors such as "Future Earnings Prospects" or "Adequacy of the Capital Structure."

Although competition is considered in de novo and branch analysis, it is not an overriding factor and is generally considered to be positive for the community. The FDIC is more concerned when competition is reduced in a community.

Real Estate Settlement Procedures Act (RESPA): Bankers occasionally ask if they should reflect real estate taxes on the Good Faith Estimate when the bank is not escrowing taxes. HUD guidance continues to require that taxes be reported because it is a requirement of the loan, regardless of whether the bank is escrowing for these expenses or not.

Compliance Manual: Some bankers have complained that the compliance manual on the FDIC website is outdated; however, a manual update is currently in progress.

FDIC Website: The FDIC's website is a primary information resource for much of the banking industry. The "Quick Links for Bankers" site includes links for "Conferences and Events" and a "Director's Corner." These links contain information on various outreach events sponsored by the FDIC to provide the industry with information on current topics and emerging issues such as the ones discussed in this report. They are a valuable source of information.

Some bankers expressed frustration with difficulties in navigating the FDIC website. On September 8, 2006, the FDIC released a new version of its website homepage. Changes to the website resulted from user feedback and testing, and represent an ongoing commitment to improvement and to an FDIC goal of making your visit to www.FDIC.gov a positive and valuable experience. Among changes to the page are the following items:

• "Quick Links by User" has been relocated to the left side of the page, allowing users to easily access this navigation tool.
• "What's New" and "Press Releases" contain more information describing these links.
• Special Features, Subscription, and Feedback boxes now appear in color to make items more accessible, to promote the use of our online subscription service, and to encourage user feedback.

NOTE: If you have comments or suggestions about this semiannual report, please contact FDIC Ombudsman Cottrell Webster at (703) 562-6040, or by e-mail at cwebster@fdic.gov. To receive e-mail notifications of future OO semiannual reports as soon as they are posted to the FDIC's Web site, follow the instructions at www.fdic.gov/about/subscriptions/index.html .