The four federal depository institution regulatory agencies have received more than 940 comment letters on their proposals to set loan-to value ratios for real estate lending by thrifts and banks. these are excerpts from comments by the American Bankers Association to the Federal Reserve Board (see The Mortgage Marketplace. Sept. 7. page 1).
If the Board decides to adopt the regulatory estab"shed LTV ratios in conformance with the proposed rule. then the ABA recommends adoption of Alternative One with significant modifications. This alternative establishes ranges of individual lender LTV ratio standards that allow limited fiexibility for financial institutions in the selection of an appropriate level for each category of real estate loan within the range. Alternative Two establishes uniform maximum LTV ratio standards applicable for all financial institutions regardless of any other aspect of the institution's market or operation. On the whole. use of a range. rather than a national. uniform standard. recognizes the differences in regional needs and prudent practices. as well as financial institution expertise in lending and service to customers.
Unfortunately. Alternative One places restrictions on the banks selection of a particular maximum level within the range. which makes the alternative basically unworkable and excessively burdensome for financial institutions. According to the proposal: "Each lending institution would be required to establish maximum LTV ratios for each category of loans within or below the specified range. The agencies would view the low end of each supervisory range as a benchmark LTV ratio for that category of loan. However. each institution would be permitted to establish a higher maximum LTV ratio. within the supervisory range. for each category of loan based on the institution's. demonstrated expertise in that particular type of lending. its assessment of local and regional market conditions. the institution's capital position. its asset quality and other ... considerations.'
The ABA urges the elimination of the language that would establish a benchmark at the low end of the range. At the same time. the ABA urges the Board to consider roodflying the upper end of the scale so as to reflect marketplace conditions and common lending practices of banks. As an exnmple. accommodation should be made to construction loans tied to takeout commitments for permanent financing supported by government agency programs. The LTV ratio standards for all components of such a program should be equivalent.
The ABA believes that the use of a benchmark at the lower end of the ranges is inappropriate and counterproductive. The upper ends of the ranges as proposed in Altematlve One are already reasonably conservative. Establishing a benchmark at the lower end of the ranges reflects an ultraconservative and restrictive approach to the employment of a LTV ratio standard. This bias at the lower end of ranges restricts banks' flexibility in adjusting their underwriting standards to meet marketplace conditions. In the current low-interest rate environment. adherence to the lower end of the ranges as a benchmark fails to recognize the enhanced ability of borrowers to meet their mortgage payments which. especially in the case of fixed rate loans. could be reflected in additional LTV flexibility without sacrificing banks' safety and soundness.
It is also important to note that the upper end of each of the ranges in Alternative One. with the exception of the one- to four- family residential property and the home equity categories, is only five percentage points greater than the maximum LTV ratio in Alternative Two. Thus R is quite possible that a bank which does not want to Justify a level above the benchmark will have to accept a level significantly lower than the maximum level offered by Alternative Two. In order to achieve a regulatory sanctioned level at the top of the range a bank would have to document that it meets all the tests identified in the proposal to the satisfaction of bank examiners. in doing so. the bank would only achieve at the most a five percentage point increase in what would otherwise be its maximum unfform level without the Justification process and documentation paperwork imposed on banks under Alternative One.
The ABA believes that this extensive Justification program is unnecess.'u-y and will only serve to discourage banks from seeking the higher end of the ranges for their own individual LTV ratios. This will ultimately result in the stagnation of local economic development. FD ICIA already imposes significant safeguards on banks in terms of proposed credit underwriting standards and extensive capital requirements. which obviate the need for a regulation as extensive as proposed. Banks should be able to select a prudential limit within each range category and document their deelslons without resorting to the extensive detail required by the proposal. In this regard. the Office of the Comptroller of the Currency and Office of Thrift Supervision. in their request for comment on their supplementary analysis of real estate lending standards as published in the Aug. 17, 1992. Federa/Register ('supplementan/analysis'). Identify the problems associated with selecting a level above the benchmark.
In discussing this procedure, the OCC and OTS state that "an Institution that decides to adopt one or more LTV ratio limits above the low end of the relevant range may need to provide support for this decision that results in a record keeping or reporting burden." The ABA believes that it is an understatement to indicate that Justification of the upper end of the range "rosy" result in a burden to the bank. Instead. the proposed benchmark will discourage banks from seeking the higher level because of the burden associated with such an attempt.
The onus is on the bank to Justify a higher level to examiners who, armed with an array of enforcement weapons, have demonstrated themselves to be highly conservative in many circumstances.
