+--------+---+---------------------------------------------------------+---+
| # O    | # |                                                         | # |
|        | # |                                                         |   |
| ##     | # |                                                         |   |
|        | # |                                                         | # |
|        |   |                                                         |   |
|        | A |                                                         |   |
|        | L |                                                         | # |
|        |   |                                                         | # |
|        | 2 |                                                         |   |
|        | 0 |                                                         |   |
|        | 0 |                                                         |   |
|        | 3 |                                                         |   |
|        | - |                                                         |   |
|        | - |                                                         |   |
|        | 7 |                                                         |   |
+--------+---+---------------------------------------------------------+---+
|        | * |                                                         |   |
|        | * |                                                         |   |
|        | O |                                                         |   |
|        | C |                                                         |   |
|        | C |                                                         |   |
|        | A |                                                         |   |
|        | D |                                                         |   |
|        | V |                                                         |   |
|        | I |                                                         |   |
|        | S |                                                         |   |
|        | O |                                                         |   |
|        | R |                                                         |   |
|        | Y |                                                         |   |
|        | L |                                                         |   |
|        | E |                                                         |   |
|        | T |                                                         |   |
|        | T |                                                         |   |
|        | E |                                                         |   |
|        | R |                                                         |   |
|        | * |                                                         |   |
|        | * |                                                         |   |
+--------+---+---------------------------------------------------------+---+
| ## Com |   |                                                         |   |
| ptroll |   |                                                         |   |
| er of  |   |                                                         |   |
| the Cu |   |                                                         |   |
| rrency |   |                                                         |   |
|        |   |                                                         |   |
| > A    |   |                                                         |   |
| dminis |   |                                                         |   |
| trator |   |                                                         |   |
| > of   |   |                                                         |   |
| > Na   |   |                                                         |   |
| tional |   |                                                         |   |
| >      |   |                                                         |   |
|  Banks |   |                                                         |   |
+--------+---+---------------------------------------------------------+---+
| ## Su  |   | ## Guidelines for Real Estate Lending Policies          |   |
| bject: |   |                                                         |   |
+--------+---+---------------------------------------------------------+---+

**TO:** Chief Executive Officers of All National Banks and National Bank
Operating Subsidiaries, Department and Division Heads, and All Examining
Personnel

##### INTRODUCTION AND PURPOSE

Recently, we have received numerous inquiries from bankers and examiners
about the OCC's real estate lending standards. \[12 CFR 34, Subpart D,
Appendix A\] These inquiries center on three issues:

-   The proper calculation of a loan-to-value (LTV) ratio when multiple
    properties secure a loan;

-   The supervisory LTV limit for a finished lot loan; and

-   Classifying high loan-to-value (HLTV) loans for reporting purposes.

This issuance reiterates and expands guidance contained in Appendix B of
the "Commercial Real Estate and Construction Lending" booklet of the
*Comptroller's Handbook* (pp. 97--105), and defines a finished lot loan
for lending standard purposes. Risk management insurance products and
nonconforming loan amounts are also addressed.

#### Supervisory Loan-to-Value Limits

*Calculation of a loan-to-value ratio when multiple properties secure a
loan*

The calculation of the loan-to-value ratio is complicated when two or
more properties with different supervisory LTV limits secure a loan.
Appendix A of the lending standards states, "the appropriate maximum
loan amount under the supervisory loan-to-value limits is the sum of
each property, less senior liens, multiplied by the appropriate
loan-to-value limit for each property."

The confusion surrounding this calculation concerns the order in which
the arithmetic calculations are performed. The correct way to perform
this calculation is to multiply each property by the appropriate
supervisory LTV ratio, then deduct any existing senior liens associated
with the property, and finally add the individual results. If the total
exceeds the loan amount, the loan conforms to the supervisory limits. If
the results are less than the loan amount, a nonconforming HLTV loan
exists.

For example, if a collateral pool is comprised of raw land valued at
\$75,000 (subject to a \$25,000 prior lien), and an improved commercial
property valued at \$250,000 (subject to a \$125,000 prior lien) the
total aggregate amount that could be loaned against the collateral pool
and conform to the supervisory LTV limit is \$111,250.[^1]

That is:

(\$75,000 X 0.65) - \$25,000 = \$23,750

(\$250,000 X 0.85) - \$125,000 = [\$87,500]{.underline}

\$111,250

###### Supervisory LTV limit for finished and buildable lot loans

Questions also have arisen about the supervisory LTV for "finished lots"
and "buildable lots." The crux of the issue involves terminology and
timing. When the standards were issued in December 1992, loans for
finished lots and buildable lots were included in land development
loans.

A land development loan is defined in 12 CFR 34, Subpart D, as "an
extension of credit for the purposes of improving unimproved real
property prior to the erection of structures. The improvement may
include the laying or placing of sewers, water pipes, utility cables,
streets, and other infrastructure necessary for future development."
Finished lot loans and buildable lot loans are synonymous with land
development loans.

The supervisory LTV ratio for a land development loan, a finished lot
loan, or a buildable lot loan is 75 percent. The LTV ratio remains at 75
percent until construction of a permanent building commences.

The OCC has received inquiries concerning the conversion of a raw land
loan and when the 65 percent supervisory ratio level is increased to a
higher ratio. A bank may use the higher appropriate LTV ratio *when
actual construction begins on the next phase of development*. For
example, a bank may advance 65 percent for raw land and up to 75 percent
when converting the raw land into finished lots. A bank may advance up
to 80 percent of the appraised value when construction of a permanent
commercial, multifamily or other non-residential building commences or
up to 85 percent when construction of 1- to 4- family residences
commences.

*Classifying high loan-to-value (HLTV) loans for reporting purposes*

HLTV loans are loans that exceed the supervisory loan-to-value limits.
Because bankers and examiners continue to seek clarification on this
topic, we are providing a recap of what banks should do to comply with
the lending standards.

-   Banks are expected to identify and record all HLTV loans and report
    these loans to the board of directors at least quarterly. A loan
    continues to be designated HLTV until the LTV ratio falls below the
    supervisory limit either through principal reduction or collateral
    appreciation.

```{=html}
<!-- -->
```
-   The aggregate amount of a bank's HLTV loans (the bank's "basket" for
    nonconforming loans) should not exceed 100 percent of the bank's
    total capital as defined in 12 CFR 3.2(e).[^2]

```{=html}
<!-- -->
```
-   Within this basket of nonconforming loans, the aggregate amount of
    all *non-1- to 4-family residential loans* should not, collectively,
    exceed 30 percent of total capital. This segment is *generally
    described as the commercial basket*.

```{=html}
<!-- -->
```
-   The commercial basket includes the following types of loans:

```{=html}
<!-- -->
```
-   Raw land with a LTV ratio greater than 65 percent.

```{=html}
<!-- -->
```
-   Commercial land development with a LTV ratio greater than 75
    percent.

```{=html}
<!-- -->
```
-   Commercial, multifamily, and other nonresidential construction with
    a LTV ratio greater than 80 percent.

```{=html}
<!-- -->
```
-   Improved property[^3] with a LTV ratio greater than 85 percent.

```{=html}
<!-- -->
```
-   The remainder of the basket (up to 100 percent) is available for all
    categories of *nonconforming loans on 1- to 4-family residential
    property*, including:

```{=html}
<!-- -->
```
-   Raw land rezoned for development with a LTV ratio greater than 65
    percent.

```{=html}
<!-- -->
```
-   Land development loans with a LTV ratio greater than 75 percent.

```{=html}
<!-- -->
```
-   Construction loans with a LTV ratio greater than 85 percent.

```{=html}
<!-- -->
```
-   Loans on non-owner-occupied property with a LTV ratio greater than
    85 percent.

```{=html}
<!-- -->
```
-   Permanent mortgages and home-equity loans on owner-occupied property
    equal to or exceeding 90 percent LTV, without mortgage insurance,
    readily marketable collateral or other acceptable collateral.

**Nonconforming loan amounts**

Finally, the entire amount of a nonconforming loan is to be included in
the nonconforming basket, not just the portion exceeding the supervisory
LTV limit. Further, if a bank holds a first and second lien on a parcel
of real estate and the combined loans exceed the appropriate LTV ratio,
both loans should be included in a bank's basket. Refer to the
"Commercial Real Estate and Construction Lending" booklet of the
*Comptroller's Handbook*, November 1995, and OCC Bulletin 99--38, dated
October 13, 1999, for additional clarification on this matter.

**Insurance products for mortgages or home-equity loans**

Over the past few years, new insurance products have been introduced to
help banks mitigate the risks of HLTV loans. To date, the insurance
products have been confined to nonconforming 1- to 4- family residential
loans. Some of these products may provide sufficient credit enhancement
to reduce the LTV ratio to conform to the supervisory limits. Insurance
policies that reduce the LTV to 89.99 percent or lower on an individual
loan basis will generally be accepted by the OCC.

**ORIGINATING OFFICE**

Questions or inquiries concerning this issuance should be directed to
the Credit Risk Division at (202) 874-5170.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Barbara J. Grunkemeyer

Deputy Comptroller for Credit Risk

[^1]: 12 CFR 34, Subpart D, Appendix A establishes conforming
    supervisory LTV limits for different property types. The LTV limit
    for: raw land is 65 percent; land development -- 75 percent;
    commercial, multifamily and other nonresidential construction - 80
    percent; 1- to 4-family residential construction - 85percent;
    improved property - 85 percent; and owner-occupied 1- to 4-family
    and home equity -- less than 90 percent.

[^2]: Total capital means the sum of a national bank's core (Tier 1) and
    qualifying (Tier 2) capital elements.

[^3]: Farmland, ranchland, timberland or agricultural production
    facilities being actively managed; multi-family (5 or more units)
    residential units; completed commercial property available for
    occupancy; and other income-producing property available for
    occupancy.