Some financial institution policies are pretty easy to write and some are more difficult. One of the more difficult is a real estate lending policy. Once you have written it, you can push back your chair and say to yourself, “I will never have to do that again.” Not quite. Times change and your policies have to change with the times. If the last time your real estate lending policy was reviewed was during the real estate crisis, it is obviously out of date. The economy has improved, the market in which you lend has changed, your institution has grown, and your sophistication in real estate lending has improved. What was right for a different time, may not be right for today. Periodically, a financial institution should review all of its policies to see if they truly reflect current conditions.
Particularly, in regard to real estate lending, there are several issues that the regulations require that you address. Among the most important are:
- The geographic area in which the institution will lend
- Loan portfolio diversification with limits by type loan and geographic market
- Appropriate loan terms and conditions
- The institution’s loan origination and approval process
- The institution’s underwriting standards
- Review and approval standards
- Loan administration procedures
- Loan portfolio monitoring
- Loan to value standards based upon the type of real estate involved.
In crafting your policy and its standards, you need to include the different standards for each category of loans that you make. For example, your loan origination and approval process, including your underwriting standards and your review and approval standards, will be much different for commercial loans secured by an office building than it will be for a residential loan secured by a single family dwelling.
In my judgment, the most important element in writing a policy is to make it strict enough so that it really defines a policy, but at the same time flexible enough so that it does not shackle the ability to take advantage of a good opportunity. If your policy is too amorphous, then it really doesn’t amount to a policy. On the other hand, if it is too strict it may unduly limit the institution’s activities. Finding the right balance is difficult.
I am sometimes asked how frequently a financial institution should review its policies. That is really dependent on a change in conditions that affect the policy. If the policy is a compliance policy based on a particular regulation, then the policy should be reviewed at least every time that the regulation or the interpretation of the regulation changes. For example, your RESPA and Regulation Z policies had to change when the combined disclosures became effective. Your HMDA policy will have to change if the pending HMDA changes become effective.
If the policy is a business policy, it should be reviewed whenever there is a significant change in the economy or your market or your institution itself. If it is a management policy, it should be reviewed whenever there is an addition to or a change in management. For example, you may need to add to or delete from the list of persons who are executive officers of your institution under Regulation O.
In any event, don’t take the attitude that once a policy is adopted it is forever cast in stone. While policy review is not the most exciting thing to do, it is necessary to chart the future of an institution.