FDIC Federal Register Citations

From: Robert Terravecchia [mailto:robert.terravecchia@weymouthbank.com]
Sent: Monday, March 13, 2006 10:59 AM
To: Comments
Subject: Docket Number OP-1248

March 13, 2006

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

Re: Proposed Interagency Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices

Dear Executive Secretary Feldman:

My name is Robert Terravecchia, President & CEO of Weymouth Bank, a $150 million community bank located in Weymouth, Massachusetts. Weymouth Bank was formed in 1889 by a group of prominent citizens who had the foresight to make their town a better place, chartered the town's first cooperative bank - South Weymouth Cooperative Bank. Our original purpose was to allow people the opportunity to pool their savings and loan them to each other for the building or purchasing of their own homes. Today, Weymouth Bank has evolved from its humble but noble beginnings into a full-service community bank offering a broad array of residential, commercial, municipal, and consumer loan and deposit products and services. The purpose of my letter is to share with you some of my comments relative to the aforementioned proposed guidance.

Over the past fifteen years, the banking industry has changed tremendously. The proliferation of non-bank lenders and the emergence of the secondary mortgage market have transformed the 1-4 family loan business drastically. In fact, according to the Banker and Tradesman, under-regulated mortgage companies now account for more than 75 percent of all residential mortgage originations in Massachusetts. Where at one time 1-4 family lending accounted for nearly all of the Bank's loan portfolio, today, it accounts for only half. Like many community banks, Weymouth Bank began to diversify our loan portfolio many years ago with the introduction of new lines of business such as commercial real estate lending. The decision to engage in commercial real estate lending was not taken lightly and the Board engaged in significant due diligence prior to our entry into this market.

Weymouth Bank has slowly and steadily built our commercial real estate portfolio over the past ten years. Over time the bank has continued to allocate greater resources to help create the infrastructure necessary to support the growing portfolio. The department started with only one employee and no support staff and now has a senior loan officer and two full-time support staff. In addition, in order to ensure that the Bank was following industry best practices the Board of Directors began to periodically engage a consulting firm to conduct independent commercial loan reviews and quality control audits.

Over that same time period, the bank underwent a number of safety and soundness examinations. Although these examinations yielded a number of constructive suggestions to help enhance the bank's commercial lending practice, the vast majority of the improvements in this area were the result of common sense risk management from the Board of Directors and Senior Management and not regulatory mandates.

I am deeply troubled by the "one size fits all" approach of the proposed guidance for a number of reasons. First, the FDIC and the other Federal regulators already have the oversight authority to limit unsafe and unsound concentrations which would be far more effectively be applied on a case-by-case basis rather than uniformly. Quarterly Call Reports and periodic onsite Safety and Soundness Examinations afford regulators ample opportunity to ensure that banks are not engaged in lending practices which exceed reasonable concentrations. Scarce regulatory resources should be directed toward those institutions who are engaged in less than satisfactory lending practices based on first hand findings by examiners in the field.

I am also opposed to the proposed guidance because it will place a significant regulatory burden and cost to community banks without yielding the desired benefit. Much of the analytical requirements such as stress testing and market analysis are beyond the expertise of most community banks under $500 million and will simply require smaller banks to hire consultants at exorbitant rates which may ultimately be passed on to borrowers by way of higher lending rates or absorbed by banks resulting in weaker earnings. Although this additional regulatory analysis may provide interesting reading, I submit it will do little to help reduce credit risk which is the ultimate objective of the proposed guidance in the first place. In fact, the FDIC's own research suggests that community banks possess certain advantages as lenders to small businesses, small farmers, and other informationally opaque borrowers through their ability to assess the risks of borrowers who lack long credit histories, to process soft data such as borrower reputations, or to operate effectively in situations where the proximity of decision making to customers is important . How does the guidance plan to reconcile all of the "soft data" used by community banks with the purely analytical data yielded from market studies or portfolio stress testing?

Another troubling aspect of the guidance is that it makes blanket assumptions that certain types of commercial lending is more risky than others with no empirical data to support the assumption. For example, the guidance seems to suggest that somehow owner occupied commercial real estate lending is less risky than properties which rely on unaffiliated third party rental payments. I can site numerous examples, however, in which the existence of third party rent actually enhanced the credit quality of a particular loan request because the borrower was able to demonstrate multiple sources of revenue to support the debt service. Moreover, one could make an argument that a commercial real estate property in which a related operating entity is the sole source of the rental income actually exposes the lender to greater risk due to lack of diversification of income streams.

I also find the proposed guidance too ambiguous relative to capital adequacy which comes at a time when the agencies are also proposing changes to the capital system through the Basel I-A process. Moreover, the current Risk Based Capital scheme in place already requires commercial real estate loans to be classified at 100% risk-weighting, thus requiring banks which engage in this type of lending to maintain higher capital levels then non commercial real estate lenders. I find this additional layer of regulation cumbersome, unnecessary, and arbitrary.

In closing, I am deeply concerned that the continued onslaught of regulations is rapidly approaching the point whereby the average community bank will no longer be able to compete in the market place and comply with all the required regulations. This trend will, in my opinion, accelerate the consolidation of the industry which will ultimately be detrimental to the American consumer.

I would like to thank for the opportunity to comment on the proposed guidance and for considering my views.

Sincerely,

Robert W. Terravecchia, Jr.
President & CEO