
                         Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: FRIDAY, April 12, 1991                   TAG: 9104120202
SECTION: BUSINESS                    PAGE: B5   EDITION: METRO 
SOURCE: Associated Press
DATELINE: WASHINGTON                                LENGTH: Medium

FDIC CHIEF URGES TOUGH REAL-ESTATE LENDING PRACTICES

Federal Deposit Insurance Corp. Chairman William Seidman on Thursday blamed deregulation of real-estate lending practices for major banking-industry losses and urged Congress to reinstate tougher rules.

"Many of the loans that have cost the FDIC the most money would have been illegal" prior to changes in banking law in 1982 and 1974, he told the House Banking Committee. "It is time for insured institutions to return to old-fashioned standards of safe-and-sound banking."

Seidman's call for rolling back the rules of lending by nearly 20 years took many panel members by surprise. The concept is not part of the Treasury Department's comprehensive plan to overhaul the financial system.

In fact, the Treasury Department's study on the subject opposes prohibiting particular types of loans.

"Categories of loans singled out for prohibition are usually yesterday's problem. Commercial real estate lending is a good example. The market and the regulators have already stopped banks from making the most speculative types of commercial real estate loans that have created so many losses," the department said.

Seidman said that sour real-estate loans, particularly for large commercial projects, have been the biggest problem in the two regions accounting for the bulk of bank failures - the Southwest and New England.

Borrowers were behind on $36 billion in real-estate loans industrywide in 1990, up from $22.5 billion a year earlier and $16.1 billion in 1988.

Federal law before 1974 prohibited nationally chartered banks from making loans to finance speculation on vacant land. It also required builders receiving construction loans to put up 25 percent of the money needed for their projects and placed an overall limit on banks' real estate lending. Also, many kinds of real-estate loans were limited to five-year terms.

"These mandatory real estate lending rules were repealed. The FDIC has been paying the consequences ever since," Seidman said. " . . . The restrictions lifted by Congress in 1974 and 1982 should be reinstated."

The Housing and Community Development Act of 1974 loosened the rules, and restrictions were all but abandoned in 1982 with enactment of the Garn-St. Germain Act, which also deregulated the savings-and-loan industry.

by CNB