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Shenandoah Valley National Bank
To illustrate from the previous example, the
new guidance requires that the entire $92,000 loan balance versus just the
$2,000 excess be measured against capital. If the same borrower were to
borrow $89,999.99 using the same real estate as collateral, then no
reporting or tracking is required. Prior to the August 2003 guidance, banks
tracked the $2,000 difference, as this is the real risk. Under the new
guidance issued by the OCC, the measurement of risk is illogical.
A similarly illogical result arises when you compare the potential risk of loss in typical large commercial real estate loan and a home mortgage loan. Assume that a bank made an $8,525,000 loan on a parcel of improved commercial real estate with an appraisal value of $10 Million. Under the guidelines, this loan would exceed the 85% supervisory LTV by $25,000, thereby requiring tracking the entire amount against capital. If the same bank makes a $200,000 home loan against real estate worth $100,000, the bank will be $110,000 over the 90% supervisory guidelines and will also track this loan against capital. The greater risk exists in the home loan ($110,000), not the commercial real estate loan ($25,000), yet the entire principal amount of both loans must be tracked against capital.
Finally, the new guidance severely limits the ability of small community banks to compete in the market place. Large banks have a larger capital base and can therefore track more non-conforming loans than small banks can. As a result, large banks have the ability and opportunity to market special loan products (e.g. 100% LTV home equity loans) to strong, creditworthy customers more often than community banks do. In this way, the guidance places a community bank at a competitive disadvantage without effectively addressing the actual risk involved in a nonconforming loan.
Mr. Ronald F. Miller
|Last Updated 05/19/2005||Regs@fdic.gov|