Country Bank
From: Dana Frye
Sent: Friday, February 03, 2006 5:09 PM
To: Comments
Cc: Dwight Reynolds
Subject: Commercial Real Estate Lending - Proposed Interagency Guidance
Dear Robert E. Feldman:
I am responding to your request for input on the proposed guidelines for defining concentrations of credit in CRE lending. I believe the intention of this guidance is a solid lending practice that deserves monitoring and risk management. However, it is my opinion that your definition of CRE loan is too broad. You accumulate three classes of loans that exhibit different and unique loan tendencies. It is my opinion that the following classes should be separated and monitored separately for issues of concentrations of credit:
(1) Home Construction Mortgages (1-4 family residential construction): These loans are unique in that they are matched to pre-qualified takeout buyers who are contractually bound to close these credits upon completion. Though these construction loans have management elements that are similar to other construction loans, they are not speculative not dependent on sale of the housing unit.
(2) Raw Land, Land Development, Contractor Spec Home Construction, and Commercial Construction and Development: These are the real CRE. These loans share the same exposure to economic climate changes, interest rate shifts, occupancy and vacancy shifts, employment shifts, etc.
(3) Multi-family properties, assisted living complexes, rental complexes, apartments (loans with 50% of more of the source of repayment is due to third party lease): These loans are completed projects with established performance, occupancy, rent rolls, operating expenses, etc. These loans are common within the class, but are uncommon to #1 & #2 above. In reality, conditions that can affect a construction based economy can have an opposite effect on these properties (ex. when housing costs rise, rental units can establish a higher demand).
I just do not see the value in aggregating all these credits into CRE. When you elect to aggregate these credits you put the smaller bank at a greater disadvantage because we may not have the opportunity to be competitive with commercial and industrial deals and we do not have a diversified loan supply. However, we are a bedroom community, and we may have the opportunity to finance construction projects for contract homes or assisted living projects. When you artifically aggregate these loans, you place a unrealistic upper limit on our loan classes and force us to place these quality local credits to our participants and accept a 25 basis point participation return instead of a 400 bp direct loan margin.
I encourage you to separate these loan classes.
Thanks you for the opportunity to address this management practice in advance of implementation.
Dana Frye, EVP, Country Bank, Aledo, Illinois 61231
Contact: Regs@fdic.gov