In February 2011 and October 2012, new FDIC regulations went into effect amending some of the definitions used to determine assessment rates for large and highly complex insured depository institutions. They particularly affected the ratio of higher risk assets to Tier 1 capital and reserves. Higher risk assets include construction & land development loans, non-traditional mortgages, high-risk consumer loans (subprime) and high-risk C&I (HRC&I) loans.
The primary criteria required for a loan to meet the HRC&I status are Total Debt to EDITDA greater than 4x, or Senior Debt to EBITDA greater than 3x. The ratio involving HRC&I accounts for about 17% of the determination of a large bank’s FDIC assessment rate. If HRC&I or any of the components listed in the prior paragraph become too large and lead to a higher ratio, your assessment of your total insured deposits can increase. Since the total insured deposits can be a very large number, even a one basis point increase can mean a significant change in the bank’s non-interest expense.
Because most HRC&Is are leveraged loans, you also need to comply with the Interagency Guidance on Leveraged Lending from March 2013. The regulatory agencies are looking for strong underwriting, pipeline management, stress testing, credit limits and other reporting requirements. By their nature these loans should have higher servicing costs than a “normal” C&I transaction.
We recommend setting up a product specifically for HRC&Is in PrecisionLender. This product would be set up similarly to a commercial installment or line of credit, with some important differences:
- These loans likely have higher risk profile. They may have different migration characteristics than other loan types. If there is sufficient volume in this product, you may want to consider developing a separate credit capital and annual loan loss data under the Risk Ratings section for this product.
- The Origination and Annual Servicing for these loans are likely higher than the typical C&I loan product. Different value from your C&I or PL default origination and servicing channel cost figures may be appropriate in this case.
- Similarly, the servicing figure used on deposits may need to be increased if you are originating or expect to bring on additional loans of this type, to reflect the higher FDIC assessment.
- Finally, the Target Return should be set appropriate to the level of the HRC&I loans combined with the other higher risk assets (non-traditional mortgages, construction and land development and high risk consumer loans). If the ratio of all these assets to tier 1 capital is approaching or above 135% a much higher Target Return may be called for. This would typically result in higher interest rate, fees, and perhaps a different structure to meet the target.
If you have administrative privileges, you can create a new HRC&I product or edit an existing one in the Administration section. For more information on setting up products, visit Setting Up Commercial Loan Products.