The Office of the Comptroller of the Currency (OCC) this week issued new guidance to federally chartered banks and thrifts that are lending money to investors who buy REO with the idea of turning those units into rentals.
The new guidance advises lenders that the credit risk is similar to commercial real estate lending because the source of repayment is rental income.
OCC warns that such lending can be risky because REO investors may be highly leveraged with multiple sources of financing.
Banks and thrifts should consider additional controls and policies to monitor and mitigate risk of these investor-owned, one-to-four family residential (IORR) loans.
“These could include the use of loan covenants, requirements for periodic financial analysis, and the need for a willing and financially capable guarantor,” the OCC says.
In addition, lenders should establish underwriting standards pertaining to appropriate owner equity in the properties, acceptable appraisal methods, insurance requirements and ongoing collateral monitoring.
In terms of capital treatment, it appears many REO investor loans will still be treated the same as single-family loans to owner-occupants.
OCC notes that REO investor loans will continue to “qualify for the 50% risk-based capital category if certain regulatory requirements are met. IORR loans that do not meet the criteria will fall into a higher risk category.”