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.

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.

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:

  • A clear and credible approach for the ultimate sale of the property within the applicable holding-period.
  • A strategy for determining and complying with applicable federal, state, and local laws including for not limited to landlord-tenant laws, property maintenance standards, anti-discrimination laws, and the Fair Housing and Americans with Disabilities Acts.
  • Accounting for OREO assets in accordance with generally accepted accounting principles.
  • A documented rental strategy and operational standards such as keeping insurance in place and meeting tax obligations.
  • A rental plan establishing criteria for suitable rental properties, marketing, and addressing all risk management issues such as tenant's potential failure to make timely rent payments, dealing with vacancies, and liability and legal risks.
  • Policies and procedures for the use of third-party vendors such as property management companies and rental agents.

The Fed also states that, to the extent that renting OREO properties meets the definition of community development under the Community Reinvestment Act (CRA) regulations, the banks would receive favorable CRA consideration.