Last month, the Office of the Comptroller of the Currency published the Commercial Real Estate Lending handbook (August 2013). The 128 page handbook gives guidance to bank examiners and bankers on risks inherent in commercial real estate (“CRE”) lending. It replaces a 95 page version published in 1995 (and revised in 1998). For this new school year and since commerical real estae lending is increasing in the “recovering” economy, I expected the OCC’s CRE lending handbook to grade-out with an “A+.” Instead, it is a solid, gentleman’s “C.” Make that a fraternity “C.” And probably make that a “C” for your company, too. Like the OCC’s handbook, in many companies there is a disconnect or chasm between the business platform and legal issues undergirding the platform. The “C” grade is NOT limited to the OCC and the banking sector. The OCC’s Commercial Real Estate Lending handbook takes an inconsistent approach in the role or importance of basic legal issues as a subset of risk management. The approach swings from:
- “legal light”: a few topics list legal issues and mention lawyers, but the topics are limited in number –
- in the context of environmental risks, handbook lists specific legal issues (p. 71)
- the term “counsel” appears 5 times:
- in the review of (ground) lease documents (p. 53)
- in assessing environmental risks (p. 70)
- in the review of loan docs and other agreements “to determine if the improvement” comply with applicable laws and restriction (p. 104)
- in the review of takeout agreements (p.107)
- in the review of completion insurance bonds (p. 108)
- “I know it when I see it – but you have to guess what I see”: some topics include the use of the phrases “legally bound” and “legally enforceable,” but with no guidance on “how” an examiner or banker is to verify or arrive at these legal conclusion (assuming the examiner or banker is not an experienced commercial real estate lawyer) –
- what do these phrases mean or require? They are not defined in the Glossary (Appendix C). Are legal opinions required? Does this require hiring a lawyer? If “yes,” this sidesteps the reality that most Companies are seeking ways to spend LESS money on lawyers.
- similarly, the handbook contains references to “appropriate” loan documentation and “loan documentation policies.” Again, what do these phrases mean or require? Broad generalizations give no guidance on loan document provisions, and are not helpful in addressing or mitigating risk.
- neglect: most topics simply do not include any reference to anything legal –
- maybe for purposes of the OCC handbook, legal issues simply are outside the scope of the OCC handbook. If this is the OCC’s approach, then legal issues should be disclaimed, with no mention of legal issues.
- one of my problems with this “neglect” approach is that it denies reality. Legal issues are part of the DNA of safe and sound lending, and risk management. Banks and the OCC acknowledtge this by spending millions of dollars on legal services. Indeed, guidance might even help to control legal fees.
My expectation was that the handbook would give lists of “no” change provisions, or a list of legal topics that need to be addressed (with the ability of a bank to explain any deviation from the provisions or list). Clearly, either I misunderstand the uses of the handbook, or the OCC missed an opportunity to give more meaningful guidance. Perhaps the gentleman’s “C” is too gentle. In future posts, I’ll describe a few of my favorite “no-no change” provision, and give an overview on current legal topics covered at several recent seminars. Please post your comments and perspectives below.