FDIC Federal Register Citations

From: Judi Leege [mailto:jleege@dellsbank.com]
Sent: Tuesday, May 02, 2006 3:20 PM
To: Comments
Subject: Proposed Interagency Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices. FRB Docket No. OP-1248, OCC Docket No. 06-01, and OTS Docket No. 2006-01

Dear Mr. Feldmen,

Bank of Wisconsin Dells is a $300,000,000 community bank located in south-central Wisconsin with a primary focus on commercial lending and service to the businesses serving the tourism industry. We appreciate the opportunity to comment on the proposed interagency guidance on concentration in commercial real estate lending.

It is our understanding that this new proposed guidance seeks to create two new thresholds of CRE lending, which, if met, requires a financial institution to heighten its risk management practices and maybe even increase its capital. While this bank has always strongly supported the importance of sound CRE lending, we recommend the proposed guidance be withdrawn and instead suggest the Agencies utilize current policies and examination procedures to better address the concerns of the Agencies. If the Agencies are unwilling to do so, the proposed guidance should then be modified to remedy the following concerns: (1) the definition of CRE is too broad; (2) the proposed thresholds are too restrictive; (3) the parameters which trigger an Agency’s use of the CRE guidance in an examination are not clearly defined; and (4) the proposed additional portfolio risk monitoring and assessment procedures are too burdensome for management.

The first issue we see with the CRE loan definition is that 1-4 family residential construction lending needs to be removed from the definition. Residential lending poses a lot less risk than do loans to investors and developers for condo projects and lending for construction and development of commercial offices with retail space, as examples.

Despite the clear difference of risk levels for such types of CRE lending mentioned above, the inclusion of 1-4 family residential construction results in a de facto (one-risk-fits-all approach). Simply put, the definition is much too broad. To remedy this issue, we would recommend the CRE definition be revised to exclude 1-4 family residential construction loans, as the risk for these loan transactions do not rise to a level requiring additional management review and certainly would not require increased capital reserves. The regulations need to take into consideration the types of lending that fit the needs of the service area of the community the institutions are in and look at the level of loan loss reserve, risk based capital, and overall performance on a case-by-case basis. If the Agencies choose not to remove 1-4 family residential constructions from the CRE loans definition, the proposed thresholds should then be increased.

The Agencies have outlined in the proposed guidance two thresholds for determining whether a financial institution has a concentration in CRE lending warranting use of heightened risk management practices. The first threshold is identified as total reported loans for construction, land development, and other land which represents one hundred percent (100%) or more of the financial institution’s total capital. The second threshold is that of total reported loans secured by multifamily and non-farm nonresidential properties and loans for construction, land development, and other land representing three hundred percent (300%) or more of the financial institution’s total capital. Under the proposal, institutions exceeding these thresholds are deemed to have a concentration in CRE and must therefore have heightened risk management practices in place.

Again, at the risk of repeating, if 1-4 family residential constructions remain in the CRE definition, they will be included in the threshold calculations causing many institutions to quickly exceed these limits. This subjects institutions to additional burdens proposed in the guidance regardless of how well the institution is managed and controlling risks related to CRE lending.

Additionally, these two proposed thresholds fail to take into consideration the location or size of the institution, or its total loan portfolio makeup. Under the proposed guidance, any institution falling into either proposed threshold would be subject to additional management scrutiny and increased capital requirements with no consideration for the institution’s existing risk management and internal controls used to monitor its lending practices and control risk. Modification of the guidance must be made to recognize an institution’s existing risk management strategies and internal control mechanisms, and to ensure that all institutions are impacted fairly, taking into account their location, size, current internal procedures, and employee resources.

It is also very important that the Agencies clarify the terms “sharp increase,” “short period of time,” and “significant concentration” so institutions understand when the guidance will be applied in examinations. For instance, just what percentage increase in an institution’s loan volume constitutes a “sharp increase?” These terms in the proposed guidance need to be more clearly defined.

The Agencies have provided a laundry list of activities that an institution’s board of directors and staff must actively review and implement when the institution determines a high CRE threshold has been met. In particular, the proposal calls for: (1) review of market condition reports; (2) director-issued guidance; (3) review of risk exposure limits; (4) CRE strategic plans; (5) additional risk assessment and monitoring of CRE loans; (6) enhanced underwriting and much more. This additional regulatory burden is required without recognition of current internal procedures and controls, review of history of losses, current management of CRE portfolio, or current bank reserves.

In conclusion, for all the above stated reasons, we recommend that the Agencies reconsider implementation of this proposed guidance. If it is decided not to use current examination procedures and current policies to monitor CRE lending, but rather the Agencies decide to adopt the proposed guidance, then we strongly suggest: (1) revision of the CRE definition to remove 1-4 family residential constructions; (2) increase the threshold percentage calculations if 1-4 family residential construction is to remain in the CRE definition; (3) clearly indicate when the proposed guidance is to be used; and (4) shorten the number of additional management oversight requirements to make the guidance easier to implement and less burdensome.

On behalf of our Board of Directors, I thank you for allowing us to comment on this important proposal. We hope you will take our suggestions into consideration for the benefit of our industry.

Sincerely yours,

Gary L. Gilliland
Chairman/Chief Executive Officer