The OCC stresses that a solid commercial real estate (CRE) lending program must have sufficient levels of available capital as well as sound risk management standards. While individual loans carry an inherent risk, CREs expose financial institutions to an additional burden. Once it has been determined that such a risk is possible because of the CRE concentration, a set of focused risk management procedures must be implemented.
CRE loans that pose an increased credit risk for financial institutions are those that have risk factors in common that make them sensitive to particular financial, business or economic developments.
Interest rate: The structure of the CRE’s loan portfolio as well as factors such as the loan’s amortization, tenor and pricing, affect the lending institution’s risk level and revenue to interest rate changes.
Credit: A myriad of uncontrollable issues could negatively affect the financial institution’s repayment timeline. CRE loans are especially susceptible to factors such as regulatory changes, construction issues, environmental liability, market conditions and interest rates.
ADC: ADC presents an increased challenge and risk for lending institutions beyond the operational risks typically associated with other types of services and products. Effective systems need to be implemented from the start to ensure the proper monitoring of construction progress and property performance. A competent strategy of loan disbursement and repayment must be tailored to ADC to ensure that this type of CRE lending portfolio does not inflate the lending institution’s risk unnecessarily.
Liquidity: In ordinary circumstances, CRE loans lack liquidity, however a conversion to cash is possible using one of following five methods:
Lending institutions that fail to comply with the regulations and statutes enacted by the OCC pose a potentially serious risk to its capital and earnings. Failing to effectively develop and implement a sound CRE lending strategy that provides the oversight needed to ensure compliance can increase the financial institution’s risk profile and adversely affect its reputation and credit.
The OCC maintains certain expectations of banks in the areas of risk identity, measurement, monitoring and control in the form of a competent and sound risk management system. Such a system is subject to scrutiny by examiners based on its processes, personnel, control systems and policies.
Lending institutions need to effectively understand their risk profile across numerous lending categories. CLOUDecision Advance provides users with the ability to source and aggregate real-time data across multiple systems including Core, Commercial, and Consumer, that enables them to identify inconsistencies, analyze trends and monitor performance. Shock testing, stress testing and full oversight reporting is instantly available as is the ability to drill CRE lending profiles down to their loan level. Register today for a free demo and discover how customized risk management solutions can reduce risk and ensure compliance with all regulations.