Update on Regulatory Proposed Guidance Issues

Follow up on the Community Bank Web Survey Results regarding proposed Risk Based Capital Guidelines. Thanks to all who participated in the Community Bank Survey!

To solicit industry commentary from community banking organizations, RMA conducted a web-based opinion survey. The specific results and comments can be found in Appendix A of Regulatory Update entitled “Response to ANPR (Advance Notice of Proposed Rulemaking) for proposed revision to U.S. risk based capital guidelines” at www.rmahq.org.

To recap results from Pam Martin Director, Regulatory Relations & Communications: RMA received 120 responses to the survey, with 78 percent of the respondents representing institutions with less than $1 billion in assets. For institutions responding to the survey, 57 percent were familiar with the proposed revisions to risk-based capital guidelines outlined in the ANPR. Interestingly, 58 percent of the respondents stated that, “the guidelines will not materially impact my institution,” while 20 percent opposed adoption of the revisions proposed in the ANPR.

Nonetheless, 88 percent of respondents believed that “alternative capital requirements and approaches to calculating risk-based capital should be based on the complexity of the institution,” and 86 percent felt that there should be an asset size threshold below which banking organizations would be allowed to apply the existing risk-based framework if they so choose. The RMA Community Bank Council also reviewed the ANPR in considerable detail and unanimously agreed that institutions should have the option to remain under the current capital framework.

Martin forwarded RMA response to the applicable regulatory institutions in January. Should you have any comments Pam can be emailed at pmartin@rmahq.org. Further updates on this issue as it unfolds.

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CRE Concentrations - Proposed Guidance

Following are excerpts from RMA Comments on Proposed CRE Guidance by Pam Martin, Director of Regulatory Relations and Communications. Martin can be reached at pmartin@rmahq.org.

The Federal Regulatory Agencies are concerned with increasing commercial real estate loan concentrations and the vulnerability these concentrations may present an institution. Accordingly, the Agencies have proposed draft guidance with a request for industry comment, and The Risk Management Association invited Senior Associates, as well as other interested Associates from member financial institutions, to submit their responses in a WEB Survey in February 2006 to aid RMA in forming its response to the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, and the Federal Reserve System regarding increasing CRE concentrations. A total of 155 survey respondents represented institutions of all asset classes took part in this survey.

Overall, only 31% of survey respondents believe that the Proposed Guidance should be issued by the Agencies, while 87.7% of the respondents feel that current risk management practices are sufficient to manage the risk of increasing concentrations in real estate portfolios. If the Proposed Guidance were to be adopted by the Agencies, 39.7% of survey respondents believe that real estate lending volume would decline as a result. Finally, 55.5% of respondents do not believe that adoption of the Proposed Guidance would lead to improved risk management practices within their respective institutions.

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RMA comments on CRE Guidance

RMA has long promoted sound risk management practices within the financial services industry and believes that risk management practices within the industry have improved considerably over the past decade. The Proposed Guidance indicates that the Agencies are very concerned about increasing concentrations of commercial real estate lending at some institutions and RMA understands the Agencies desire to improve risk management of portfolio concentrations.

However, should the Agencies have concerns about the risk management practices of a particular institution, the Agencies currently have the authority to require any institution to both improve risk management practices and increase capital. It is for this reason that RMA, again, believes that the Proposed Guidance is unnecessary.

RMA is also concerned that the Proposed Guidance is overly prescriptive and does not take into consideration the existing risk profile of an institution’s unique CRE portfolio. Moreover, the Guidance states that, “the risk management and capital adequacy principles contained in this guidance are broadly prudent for all institutions in CRE lending.” This statement would imply that all the recommendations included in the Proposed Guidance would apply to any concentration, even if the 100% and 300% ratios had not been breached.

As the Agencies are well aware, the financial services industry is heavily regulated. The past few years have represented an acute increase in new regulation, from Sarbanes-Oxley requirements and the Bank Secrecy Act to Basel II implementation.

Institutions of all sizes report that they are almost overwhelmed by the intensity of the current regulatory environment. RMA is increasingly concerned that valuable time and resources are being redirected to compliance-related functions at the expense of ongoing business and management responsibilities. Now is simply not the time to impose yet another new set of regulatory mandates.

RMA provided these comments and results of the survey to the regulatory agencies April 2006. Thanks again to all who participated in the WEB Survey. Remember, your opinions can make a difference! Stay tuned for further regulatory updates! Again, any questions or comments should be directed to Pam Martin, Director of Regulatory Relations for RMA at pmartin@rmahq.org.

M. Jo Taylor
SVP, 1^st Mariner Bank

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CREDIT CORNER: Forbearance Agreements

If your borrower is experiencing financial difficulty, is willing but unable to make currently scheduled payments due to a temporary hardship, you may want to consider a forbearance agreement. Forbearance is any agreement whereby the lender agrees not to take action against the borrower that the bank would normally have a legal right to take. Forbearance may take several forms: the agreement may postpone a borrower’s monthly principal and interest payments for a period of time, the bank may “forbear” from filing a foreclosure action, suing on a note etc. Forbearance requests are subject to lender’s approval and documented by a lender agreement, amending existing loan documents, etc.

When to use a Forbearance Agreement
When you have a default under the existing loan documents, but the bank doesn’t want to take immediate action on that default, a Forbearance Agreement may be the answer. The Forbearance Agreement helps both parties to focus on the reasons for the default and allow both parties the time to correct deficiencies and provide solutions.

The agreement helps to identify the default as either an issue that can be resolved or is irresolvable. Lender will have the opportunity during this time to correct deficiencies in the existing documentation, preserve any defaults or obtain release of any claims arising from actions previously taken on the credit and /or allow restructuring of loan terms to make them more manageable for the borrower, while still providing acceptable debt service coverage. The borrower will have time to determine resolution and implement it (sell assets, improve collections etc).

The forbearance agreement permits steps that might eventually have to be taken for liquidation to be taken with enhanced and agreed-upon cooperation of the borrower and provides for an orderly, going-concern sale of borrower’s business or portions of it.

Forbearance Agreement Provisions
During this period, interest on the loan will continue to accrue and may be capitalized. Often, the forbearance is contingent upon additional documentation. For example, an interim financial statement, updated financials, proposed documentation i.e. lease, new tenant, commencement of new contract etc.

Additionally the forbearance agreement should confirm existing defaults, lenders collateral position and confirmation the lender is not waiving any defaults or any of its rights or remedies by entering into the workout agreement. Operating provisions should have affirmative and negative covenants. Further the forbearance should include an agreement by the borrower that it has no lender liability or other claims against the lender. It should also include admission by borrower that it has no valid defenses to an enforcement action brought by lender. It should reflect appropriate representations and warranties from the borrower.

If foreclosure has already commenced, agreement by the debtor that judgment can be entered and waiving of redemption rights. If borrower is in bankruptcy, consider including a “drop dead” clause. The forbearance agreement should be clear, accurate and prepared by counsel.

M. Jo Taylor, SVP
1^st Mariner Bank

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Upcoming RMA OpRisk Forums and Conferences

RMA is more focused than ever before on building a strong operational risk program. We have several initiatives underway, and we continue to plan our regularly scheduled events. Upcoming events:

KRI Conference, Cleveland, OH, June 8-9, 2006 (Conference is Free for existing or prospective members of KRI Library Services.)
Risk and Control Self-Assessments (Web Seminar)
Introduction to FDICIA and Sarbanes-Oxley (Web Seminar)
Introduction to RMA OPRISK TOOLS (Free Web Seminar!)

For more information on how to participate in our events and forums, please email Sylwia Czajkowska, sczajkowska@rmahq.org.

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RMA OPRISK Tools

The risk of a hurricane or a blackout, the risk of a misdirected wire transfer, the risk of fraud: these are examples of operational risks that financial institutions face. RMA provides information for RMA members and non-members about its operational risk program and about recent developments in this important new discipline. Check out RMA OPRISK TOOLS^sm for details including a look at these five modules:

• The Risk and Control Self Assessment module organizes and tracks the results of self assessments across an institution, so it can identify and assess all of its significant risks and control weaknesses;
• The Sarbanes-Oxley module provides a structure for testing and documenting financial reporting controls needed for SOX 404 compliance;
• The Integrated SOX/RCSA module combines both processes, cutting back on repeat work throughout an institution;
• The Internal Loss Event Data module can help an institution identify patterns of repeated loss, so it can anticipate and avoid larger ones;
• Issue/Action module helps in identifying and tracking operational risk management issues and their resolution.
  

YFP: An Inside Look At Credit Reporting

CCRMA's Young Financial Professionals for a delicious breakfast and a look at credit reports with Mary Green, who has 30 years of experience in the credit reporting industry at Equifax on Thursday, June 15, 2006. Many of us use credit reports every day, but are not quite sure how the credit scores are calculated. This presentation will give insights on how to understand credit scoring and maximize the usefulness of credit reports in decision-making and customer relationships. We’ll cover:

• The report from a lender's perspective
• Understanding the Beacon score
• Introduction to AdvantageScore
• Working with clients to improve their scores
• Length of bankruptcy, judgments, and other derogatory information
• Assisting customers in the dispute process

Kenneth Waldych
Senior Credit Officer & EVP
Provident Bank of Maryland

Sharon Wells
VP/Senior Credit Manager
Wells Credit Associates

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