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Loan Products with Special Regulatory Capital Requirements

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Under the latest capital regulations, most assets have a risk weighting of 100% which implies an 8% capital requirement.  However, certain assets (primarily investments and housing-related lending) have a lower capital requirement and other assets (primarily HVCRE loans and loans on non-accrual) have higher capital requirements.

When we set up the Risk Ratings for a client we include a minimum capital level, which generally starts at 6% for the very best rated credits and steps up to 8% for average rated credits and worse. There are some classes of loan products that should have different minimums capital levels, including:

  • HVCRE - Risk weighting is 150% for average rated borrowers and worse.
  • Municipal Loans - Risk weighting is 20% for a direct governmental obligation and 50% for other governmental entities and industrial-development zones.
  • 1-4 Family Residential First Lien Mortgages - Risk weighting is 50%.
  • Multi-family Housing - Risk weighting is 50%, subject to certain limitations.
    • Mixed use properties are dependent on the percentage that is multifamily.
  • Loans collateralized by cash and marketable securities - Risk weighting is between 20 and 50% (assuming these are a first lien position). 
    • Assumes that the Cash and Marketable securities are at least equal to the loan balance.
  • Loans to foreign governments - Risk weighting is 0 to 20%.

 

The chart below shows our recommendations for the various loan classes discussed above. The High Pass category is meant to reflect higher quality loans that are not in the excellent or very good category. If your High Pass and the Average/Low Pass are combined, use the Average/Low pass capital levels. The Watch group would be a non-pass rating.

 

Risk Rating Commercial  HVCRE Municipal/Govt MultiFamily* 1-4 Family* Cash Secured* Foreign Govt
Excellent 6.0% 10.0% 4.0% 4.0% 4.0% 4.0% 4.0%
Very Good 7.0% 11.0% 5.0% 5.0% 5.0% 5.0% 5.0%
High Pass 8.0% 12.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Average/Low 8.0% 12.0% 6.0% 5.0% 5.0% 6.0% 6.0%
Watch 8.0% 12.0% 8.0% 8.0% 8.0% 8.0% 8.0%

*First Lien Position --- NOTE: 1-4 Family assumes owner occupied

 

Setting up Minimum Capital Level in PrecisionLender

Minimum Capital Level (Minimum Capital Allocation) is configured at the Product level. To configure Minimum Capital Level:

  1. Navigate to 'Administration' and click 'Products'
  2. Once you see the product screen, search for and select the product to which you would like to assign Minimum Capital Levels.

3. Once you are on the product page, click 'Risk Ratings'. The Minimum Capital Allocation is at the top of each Risk Rating.

4. If you would like to add or edit the Minimum Capital Allocation for any or all of the Risk Ratings, click the 'Edit' () button in the upper left of the screen. 

5. Once you have made your edits, click the 'Save' () button in the upper left of the screen.

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