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Construction Risk Management

Construction is inherently risky. Construction lending doesn't have to be with the right policies in place.

Bank Regulators

Dodd Frank regulations have created a much more rigorous regulatory environment. Regulators are asking banks more questions about their commercial real estate loan underwriting practices, as well as their loan monitoring practices. Chief Credit Officers are being asked to re-write and update their bank’s underwriting policies. This extends to issues like construction risk management.

In these areas of construction policy writing, Partner can be a great resource. Partner has written policy for over 20 lenders, including some of the largest lenders in the country. Joseph Derhake, PE leads our policy writing services, combining his technical expertise gained from 20 years of due diligence experience, his business expertise and knowledge of the world of real estate finance. For existing clients, Partner can assist for no additional fee.

The first question is, “Who is your regulator?” The regulatory environment is slightly different from regulatory institution to institution. Some of the largest regulatory institutions in the United States are:

  • Office of the Comptroller of the Currency (OCC)
  • Federal Deposit Insurance Corporation (FDIC)
  • National Credit Union Administration (NCUA)
  • The Federal Reserve

Regulation Documents for Construction Policy Writers

  • The Comptroller’s Handbook, Commercial Real Estate Lending, August 2013
  • The Comptroller’s Handbook, Other Real Estate Owned, September 2013
  • OCC Bulletin on Third Party Relationships, Risk Management Guidance, October 2013
  • Construction Lenders Risk Management Rountable

Lender Tools to Manage Construction Risk

Lenders should recognize some if not all of these tools in their construction policy document. Defining the tools used is an important step in building a sound construction risk management policy.

  • Document and Cost Review
  • Contractor Evaluation
  • Funds Control
  • Draw Inspections
  • Performance Bonds
  • Completion Commitments