On Dec. 18, banking regulators from the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation issued a a stern warning regarding commercial real estate lending in Kansas and nationwide. The agencies indicated they will be closely monitoring the CRE sector in 2016 due to a loosening of underwriting standards that threatens the stability of the market.
According to the warning, the regulators have noticed recent risk management practices at certain banks that have caused some concern, including insufficient market monitoring and a growing number of loan policy exceptions in commercial real estate lending. As a result, the agencies said they will "pay special attention to potential risks" in the area of CRE lending in 2016, particularly focusing on banks that are experiencing substantial growth in the CRE sector, that have plans to increase CRE lending or that do business in risky or expanding markets.
The regulators said banks can lower their risks by analyzing a loan applicant's ability to pay their debts as interest rates rise. They also said they may request that banks raise additional capital or make their lending standards stronger. They may also ask that banks provide better oversight for CRE loans.
Kansas investors who participate in the real estate market may benefit by consulting with an attorney before completing any commercial real estate transactions. An attorney familiar with commercial business laws could provide essential guidance regarding zoning laws, land use, commercial development, refinancing, contract negotiations, management agreements and other important legal issues.
Source: Reuters, "U.S. puts banks on notice about commercial real estate loans," Lisa Lambert, Dec. 18, 2015