Fed Sets out Bank OREO Rental Guidelines

A Federal Reserve statement issued yesterday reminds federally regulated banks that they are permitted to rent properties in their owned real estate (OREO) portfolios as a temporary substitute for selling them.  While the general policy of the Fed is that financial institutions should “make good-faith efforts to dispose of OREO properties at the earliest practicable date,” in light of the extraordinary market conditions that prevail, banks can rent residential properties without demonstrating a continuous active attempt to sell them. </p

In all circumstances the Fed says it expects a banking organization which is considering such rentals to evaluate the overall costs, benefits, and risks of renting, a decision which might depend on the condition of properties and local market conditions for rentals and owner-occupied housing.  The banks must also consider their capacity to engage in rental activity in a safe and sound manner consistent with applicable laws and regulations.</p

The statement sets forth conditions for framing a rental program based on the size of the bank’s OREO inventory.  Banks with small holdings, i.e. under 50 properties, should use a framework that appropriately records decisions and transactions in real time and preserves key documents and is otherwise sufficient to safeguard and manage individual assets.  Banks with larger inventories should use a framework that documents how they intent to meet the Feds supervisory expectations.  Such a framework should include:</p<ul