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Proposed Bank Regulations Favor Use of 504 Program

Jan 2007

Federal regulators have proposed guidelines limiting the amount of commercial real estate loans banks can hold without drawing further oversight. The 504 Loan Program offers an effective means to deal with this regulatory challenge.

The Federal Reserve, the office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation proposed thresholds that, when reached, would direct banks to take precautions including increasing their capital. Banks have opposed the thresholds out of fear that examiners would treat them as absolute limits on lucrative commercial real estate holdings.

The guidance is intended to help ensure that institutions pursuing a significant commercial real estate lending strategy remain healthy and profitable while continuing to serve the credit needs of their communities.

The agencies have observed that commercial real estate is an area in which some banks are becoming increasingly concentrated. This trend is particularly evident among small- to medium- sized banks that are facing strong competition in other business lines. The agencies support banks serving a vital role in their communities by supplying credit for business and real estate development. However, the agencies are concerned that rising commercial real estate loan concentrations may expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in commercial real estate markets.

The final guidance reinforces and enhances existing regulations and guidelines for safe and sound real estate lending. The guidance provides supervisory criteria, including numerical indicators to assist in identifying institutions with potentially significant CRE loan concentrations that may warrant greater supervisory scrutiny. These criteria do not constitute limits on CRE lending.

504 loans from FFCFC offer an effective way to minimize the effect of this new regulatory challenge. These loans permit a reduction in commercial real estate portfolio without any reduction in lending activity, either through reduced portfolio holdings per loan or through sale of first mortgages into the well-developed secondary market. When added to the superior portfolio quality of bank 504 loans (in which most of the risk of loss is born by the CDC/SBA), this offers an attractive strategy for dealing with regulatory tightening on commercial real estate lending. For questions regarding this issue, contact Todd Kocourek, FFCFC CEO at 850/681-3601 or todd@ffcfc.com.