Internal Control Questionnaires and Verification Procedures

Policies

  1. Has the board of directors, consistent with its duties and responsibilities, adopted written real estate loan policies that are consistent with safe and sound banking practice and appropriate to the size of the bank and to the nature and scope of its operations? In particular, do the bank’s policies:

    1. Identify the geographic areas in which the bank will consider lending?

    2. Establish a loan portfolio diversification policy and set limits for real estate loans by type and geographic market (e.g., limits on construction and other types of higher risk loans)?

    3. Identify appropriate terms and conditions by type of real estate loan?

    4. Establish loan origination and approval procedures, both generally and by size and type of loan?

    5. Establish prudent underwriting standards that are clear and measurable, including:

      • The maximum loan amount by type of property?

      • Maximum loan maturities, by type of property?

      • Amortization schedules?

      • Pricing structure for different types of real estate loans?

      • Pricing structure for different types of real estate loans?

    6. For development and construction projects, and completed commercial properties, do the bank’s underwriting standards also establish:

      • Requirements for feasibility studies and sensitivity and risk analyses (e.g., sensitivity of income projections to changes in economic variables such as interest rates, vacancy rates, or operating expenses)?

      • Minimum requirements for initial investment and maintenance of hard equity by the borrower (e.g., cash or unencumbered investment in the underlying property)?

      • Minimum standards for net worth, cash flow, and debt service coverage of the borrower or underlying property?

      • Standards for the acceptability of and limits on non-amortizing loans?

      • Standards for the acceptability of and limits on the financing of the borrower’s soft costs on a project?

      • Standards for the acceptability of and limits on the use of interest reserves?

      • Pre-leasing and pre-sale requirements for income-producing property?

      • Pre-sale and minimum unit release requirements for non- income-producing property loans?

      • Limits on partial recourse or nonrecourse loans and requirements for guarantor support?

      • Requirements for building and loan agreements for construction loans? Requirements for take-out commitments?

      • Minimum covenants for loan agreements?

    7. Has the bank also established loan administration policies for its real estate portfolio that address:

      • Documentation, including:

        • Type and frequency of financial statements, including requirements for verification of information provided by the borrower?

        • Type and frequency of collateral evaluations (appraisals and other estimates of value)?

      • Loan closing and disbursement procedures, including the supervised disbursement of proceeds on construction loans?

      • Payment processing?

      • Escrow administration?

      • Collateral administration, including inspection procedures for construction loans?

      • Loan payoffs

      • Collections and foreclosure, including:

        • Delinquency and follow-up procedures

        • Foreclosure timing?

        • Extensions and other forms of forbearance?

        • Acceptance of deeds in lieu of foreclosure?

      • Claims processing (e.g., seeking recovery on a defaulted loan covered by a government guaranty or insurance program)?

      • Servicing and participation agreements?

  2. Are procedures in effect to monitor compliance with the bank’s real estate lending policies?

    1. Are exception loans of a significant size reported individually to the board of directors?

    2. Are the numbers and types of exceptions monitored so that the loan policy and lending practices can be periodically evaluated?

    3. Are loans that are in excess of the supervisory loan- to-value limits identified in the bank’s records and their aggregate amount reported at least quarterly to the board of directors?

  3. Does the bank monitor conditions in the real estate market in its lending area to ensure that its real estate lending policies continue to be appropriate to market conditions?

  4. Are the bank’s real estate lending policies reviewed and approved by the board of directors at least annually?

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