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FDIC Federal Register Citations First Carolina State Bank From: Timothy Taylor [mailto:Timothy.Taylor@fcsbank.com] At First Carolina State Bank, we have read with great concern the
proposed guidance on Concentrations in Commercial Real Estate Lending and as
community bankers, wish to provide some comments. The proposal, as written, will hamper our ability to provide these
lending services to our customers, primarily the owners of the small to
medium-sized business, who are core to the economic health of our community.
Specifically: The setting of arbitrary thresholds [1] for real estate exposure, which
if exceeded would subject the bank to heightened scrutiny and possibly
higher capital requirement levels, would not only discourage us from
providing well supported and documented real estate secured loans, but would
drive us to look for other areas or investments to deploy our funds. For
example, to sustain revenue growth we might be forced into lines of business
which are historically more risky (i.e., consumer lending, credit cards,
leasing) and more dependent on efficiencies of scale (i.e., consumer loans,
working capital loans). In addition, history has demonstrated that scarcity
of real estate loans in a community could very well cause the very
depreciation in real estate values that concern the agencies. The regulatory agencies are understandably attempting to avoid a repeat
of the real estate crisis that devastated the thrift industry. However,
regulatory guidelines to mitigate the underlying causes of that crisis such
as excessive advance ratios, undisciplined appraisers, equity interests and
fraud, are already in place. The setting of arbitrary limits for a geographic area most likely would
limit our ability to make “in-market” loans which is the primary reason for
the existence of community banks. Setting underwriting criteria to a “secondary market” standard would be
difficult, based on the limited number of secondary markets available to
community banks and would also severely limit the judgmental aspects of our
loan approvals. Better said, if all banks must underwrite to a specific
standard, is there a need for community banks? We are relationship bankers
who know our customers. We urge the regulatory agencies to consider such
“soft information” rather than making commercial real estate loans a
commodity. It seems ironic that we may be required to maintain higher levels of
capital because our portfolio is concentrated in the type of loans that the
bank is best equipped to underwrite. Logic would dictate that higher capital
levels would be necessary for banks that make loans outside of their
expertise or those loan types that have historically demonstrated higher
industry net loss experience. To force banks to have higher capital ratios
merely because they have concentrations in commercial real estate loans, one
of a community bank’s core competencies, seems misguided. We agree that “owner occupied” loans should be excluded from this
guidance. However, a clear definition of “owner occupied” should be rendered
that includes properties that are owned by principals that may be operating
through another entity such as a limited liability company. MIS and stress testing are clearly good tools for the management of a
loan portfolio, where the loans are underwritten using a model. However, in
community banking where judgmental decisions are made based on our intimate
knowledge of the market and the borrower (and the guarantors), stress
testing would be driven down to the loan level, making it cost prohibitive.
Tim Taylor
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| Last Updated 04/14/2006 | Regs@fdic.gov | |