Regulator Offers Guidelines On Real Estate Lending

The National Credit Union Administration recently sent a letter to credit unions describing how to make a sound real estate loan.

The regulator's letter advises institutions to develop written policies placing limits on loans to one borrower, on the amount of assets in any loan category, and on debt ratios for borrowers.

"Credit union boards of directors must clearly understand the risks and issues which must be addressed before becoming involved or expanding their involvement in real estate lending," states the 10-page letter signed by Roger W. Jepsen, NCUA chairman.

Increased Lending Prompted Letter

"These matters go far beyond the usual credit-risk evaluation process required for consumer loans."

Dave Marquis, deputy director of the regulatory agency's office of examination and insurance, said last week that increased real estate exposure prompted the action.

"Credit unions, in real estate lending, have grown substantially in the last few years," Mr. Marquis said, and the letter puts the agency views about it on the record.

Real estate loans by credit unions have increased more than 137% in the last five years, the agency said. Most of these loans are home mortgages.

Rather than setting lending requirements, the letter establishes guidelines, according to the agency.

Mr. Marquis said he is particularly concerned about asset liability management at credit unions. "They need to have a product mix that basically matches [the interest rates of] sources and uses of their funds," he said.

Credit unions seem to be headed in the right direction. About 35% of their assets are real estate-related. These realty portfolios, once dominated by fixed-rate loans, are now about half variable-rate loans, Mr. Marquis said.

Variable-rate loans are less risky, because their rates fluctuate along with the rates that institutions pay for funds.

Letter Is Intended to Encourage |Prudence'

In addition to making adjustable-rate loans, credit unions should make sure they can quickly sell fixed-rate loans into the secondary market, Mr. Marquis said.

The letter is not intended to discourage real estate lending as much as it is to urge prudence, regulators insist.

"Real estate loans are not a problem on credit union books right now," Mr. Marquis said. "I think they have to get more into real estate lending if they are going to continue to grow."

He added: "We want to make sure they head off in the right direction."

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