Call Report
The FFIEC Call Report instructions do not specifically define “construction loan” in the glossary, but the instructions make clear that this type of loan should likely be reported as a construction loan. Under item 1.a (Construction, land development, and other land loans), the instructions state that “for purposes of this item, ‘construction’ includes not only construction of new structures, but also additions or alterations to existing structures and the demolition of existing structures to make way for new structures.” In that section, the instructions also state that this section of the Call Report should also include “loans secured by real estate the proceeds of which are to be used to acquire and improve developed and undeveloped property.” Based on these instructions, we believe that a loan secured by an existing structure should be reported as a construction loan when some of the loan proceeds will be used to make additions or alterations to the structure.
Supervisory Loan-to-Value Ratios
However, you may reach a different conclusion under the Supervisory Loan-to-Value (LTV) limits in the Interagency Guidelines for Real Estate Lending Policies (Appendix A to Part 34 for your institution, which is supervised by the OCC). The Supervisory LTV limit differs for construction loans secured by 1-to-4 family residential properties (85%), versus loans secured by such properties when they are completed and owner-occupied (90%). The guidelines define “construction loan” as “an extension of credit for the purpose of erecting or rehabilitating buildings or other structures, including any infrastructure necessary for development.”
To clarify whether an institution should apply the owner-occupied or the construction loan Supervisory LTV limits, we contacted the OCC. An OCC attorney told us that an institution should determine whether a loan is a construction loan by asking whether the loan would be supported by an as-is appraisal of the property. If the loan is supported by the property’s as-is appraisal value, then it would be treated as completed property. If the loan would not be supported by the as-is appraisal value, but it would be supported by the as-completed property value, then it should be treated as a construction loan.
If you determine that a loan should be treated as a construction loan, then the 85% Supervisory Loan-to-Value (LTV) ratio would apply. In the context of a construction loan, the OCC attorney advised us that the Supervisory LTV ratio would apply to the “as-complete” appraisal value of the property (meaning that the Supervisory LTV ratio could limit your lending to 85% of the as-complete appraised value). Once the renovations were complete, you could treat the property as an owner-occupied property, the 90% Supervisory LTV ratio for owner-occupied 1-to-4 family residential properties would apply.
The OCC attorney was also careful to stress that the Supervisory LTV ratios are not restrictions on lending, per se, and he recommended reading the OCC’s Commercial Real Estate Lending booklet for more guidance on the Supervisory LTV ratios. (The OCC also has a Mortgage Banking booklet, but it does not discuss the Supervisory LTV ratios.) The OCC booklet reiterates that it may be appropriate in some cases for loans to exceed the Supervisory LTV ratios, though there is an overall limit that applies to such “nonconforming” loans. The OCC booklet explains that any loans made outside of the Supervisory LTV ratios are placed in a separate basket with all other loans that exceed the Supervisory LTV limitations. Altogether, the loans in that basket should not exceed the bank’s total capital. See pages 13–14 in the OCC Commercial Real Estate Lending booklet.