Regulators Act to Spur Real Estate Lending

WASHINGTON -- Moving to implement the Bush administration's plan for easing the credit crunch, four regulatory agencies on Thursday issued uniform guidelines that specify how real estate loans will be examined.

The guidelines emphasize that examiners should consider the long-term prospects for properties that serve as collateral for loans, rather than just the current market value. That should result in fewer loans being classified as bad risks.

Lifting the Lid on Realty

While the rules only reinforce previously announced policies, bankers and real estate experts hailed them as an important step toward increased realty lending.

"For the first time there is uniform, clearcut, straightforward guidance," said Steve Wechsler, president of the National Realty Committee. "This document should make it easier for banks to make loans to real estate when and where appropriate."

Robert Dugger, the American Bankers Association's chief economist, said: "This clarifies that the burden of proof for downgrading a loan is on the examiner, it's not on the lender to defend the loan."

Following a crackdown by regulators in late 1989, bankers complained that regulators were forcing them to write down loans as soon as the value of collateral fell, without taking into account the property's future value.

In some cases, loans fully up to date on interest payments were being classified as troubled.

In addition, there have been widespread complaints that examinations were inconsistent across regulatory agencies and in different regions.

Real estate lending in turn has dropped dramatically.

The guidelines issued Thursday were aimed at addressing those complaints and spurring loans.

For the first time, examiners at the Comptroller of the Currency, Federal Deposit Insurance Corp., Office of Thrift Supervision, and Federal Reserve Board will be using the same guidelines for valuing real estate loans.

Paul Fritts, executive director of supervision at the FDIC, said in an interview that the 18-page document's highlight is the reminder to examiners to take into account the likelihood that over time properties will attract more tenants and that rents will rise.

Mr. Wechsler of the National Realty Committee said the guidelines have "a balanced, realistic tone that reflects real estate as a long-term earning asset."

Wendy Samuel, general counsel at the National Council of Community Bankers, attended a separate briefing for about 25 representatives from the banking and building industries conducted by Treasury Deputy Secretary John Robson.

"Loans don't have to be written down solely because the security value has decreased," Ms. Samuel quoted Mr. Robson as saying. "And that is a change."

Ms. Samuel also said Mr. Robson told her group that examiners would consider loans separately and not be overly influenced by similar credits that are troubled.

It was also announced that 600 of the agencies' 8,000 examiners will convene Dec. 16 and 17 in Baltimore for a meeting to discuss the changes. Treasury Secretary Nicholas Brady had called for the gathering back in October, when the administration's plans for easing the credit crunch were announced.

Other steps include a new appeals process for bankers dissatisfied with exams and permitting banks to count additional preferred stock as core capital.

Regulators emphasized on Thursday that they plan to randomly audit examiners' decisions on real estate loans. The goal: "To determine how examiners review and analyze the assumptions contained in appraisals as part of their loan review process."

While applauding the guidelines, Ms. Samuel was skeptical they will get through to examiners in the field.

"The stuff in here is really good; the problem is with the implementation," she said.

"Bankers are quite skeptical because these things keep coming out of Washington and they don't see any changes."

Ms. Samuel said the Senate Banking Committee's rejection Wednesday of Robert L. Clarke's nomination for a second term as Comptroller of the Currency also puts examiners on edge.

She said it "sends a whole different message than this proposal: Regulators who make any attempt to work with the industry . . . are going to be hauled up to Congress, pilloried, and lose their jobs."

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