After nearly 3 years of deliberation, the major bank regulatory agencies issued long-awaited guidance on CRE lending last December.  The guidance demonstrated that regulators sometimes actually listen to their constitutencies.  The final guidance showed remarkable restraint on the part of the major bank regulators.  Even more astounding is that the OTS -- the primary regulator of Savings Banks -- parted company with its sister bank regulators, the OCC, Federal Reserve and FDIC.

One of bankers' central complaints about proposed regulation on CRE lending was the fear that the regulators would stifle growth in productive and lucrative commercial real estate lending.  After many months of negotiation, the bank regulators settled on a "guidance" level of 300% of capital for total CRE loans and 100 percent of capital for construction loans.  While these are not hard and fast limits, the fear amongst bankers was that regulators might eventually or arbitrarily use these targets as de facto limits.  

In steps the OTS.  The OTS opined that limiting CRE exposure to savings associations would be tantamount to curtailing one of their primary business lines.  The OTS opted out of the 300 percent/100 percent guidance levels, citing that CRE lending at its institutions was already limited by law to 400 percent of capital (the legal lending limit for all non-residential real estate loans).  

The OTS guidance, in all other respects, mirrors very closely the bank regulatory guidance.  In other words, savings associations with high concentrations in CRE loans are advised -- just as are commercial banks -- to have proper risk management practices, internal controls, and limits to manage their CRE exposure.  

So are regulators providing a big loop hole for some lenders?  Not really.  It turns out that banks are now more heavily invested in CRE loans than are the savings institutions.  This probably dates from the period when savings banks focused primarily on residential mortgages.  In reality, they only expanded their product line to commercial real estate in the past 20 years.  Of the approximately 7000 commercial banks, fully 35 percent fit the new regulatory definition of high CRE concentration.  On the other hand, only 20 percent of savings associations have CRE loans in excess of 300 percent of capital.  But then, the OTS doesn't recognize the 300 percent hurdle anyway.