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Will It Help To Think Like A Bank?

By Robert Duplicki      Updated May 31, 2026

Much of a bank's success begins with the regulations they must follow, and the way those regulations are supervised. The Office of the Comptroller of the Currency (OCC) has much of that responsiblity. The OCC is a federal agency that charters, regulates, and supervises national banks, federally chartered savings associations,and federal branches of foreign banks in the United States. These organizations must comply with all applicable OCC rules and requirements.

In connection with the examination and supervision of banks, OCC examiners utilize part of the Comptrollers Handbook titled "Commercial Real Estate Lending." I've taken much of the reference material for this article from this resource. Unless otherwise noted, all sections in quotes below come from "Commercial Real Estate Lending."

"For purposes of this booklet, commercial real estate (CRE) lending comprises acquisition, development, and construction lending (ADC), and the financing of income-producing real estate. Income-producing real estate comprises real estate held for lease to third parties and nonresidential real estate that is occupied by its owner or a related party."

"This booklet addresses the risks inherent in CRE lending, risks unique to specific CRE lending activities and property types, and prudent risk management."

As you review this material consider how you manage your own process that deals with seller financing or private lending. Also consider what is helpful for you to know when you deal with bank financing.

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"Commercial Real Estate Lending" Overview

"Banks are subject to a uniform regulation on real estate lending. These regulatory standards apply to all extensions of credit that are secured by liens on or interests in real estate. The standards also apply to loans made for the purpose of financing the construction of a building or other improvements whether or not secured by real estate."

Risks Associated With CRE Lending

"From a supervisory perspective, risk is the potential that events will have an adverse effect on a bank’s current or projected financial condition and resilience. The OCC has defined eight categories of risk for bank supervision purposes: credit, interest rate, liquidity, price, operational, compliance, strategic, and reputation."

"Liquidity risk is the risk to current or projected financial condition and resilience arising from an inability to meet obligations when they come due."

Liquidity risk is something that note buyers evaluate when considering to buy a note. It's something to definitely keep in mind when structuring seller financing. How easy will it be to liquidate the note in the futere?

"CRE loans are ordinarily illiquid. Converting CRE loans to cash can be accomplished by (1) the bank using the loan as collateral for borrowings; (2) the bank selling the loan to an investor (either on a participation, whole-loan, or portfolio basis); (3) the bank securitizing the loan; (4) the borrower refinancing the loan with another lender; or (5) normal borrower repayment."

"Although the sale of loans through securitization can provide liquidity, there are differences in securitizing loans originated to be held by the bank versus those originated to be securitized. CRE loans originated for securitization employ underwriting, structures, and documentation that conform to standards established by market participants. This standardization permits an efficient due diligence process and results in better pricing. Loans originated to be held in the bank’s portfolio may not, however, meet the standards for this market, making securitization of these assets inefficient and likely to result in prices that represent a material discount to book value. Market disruptions after origination and before sale can reduce the liquidity of loans that were originated for securitization "

In a similar way, inadequately structured seller financing will lead to greater discounts when selling the note. Notice the difference in securitizing bank loans originated to be held by a bank, versus those originated to be securitized. In the same way when creating seller financed notes, the property seller may adjust the structure of the note based on the likelihood of selling the note eventually.

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Risk Management

"Each bank should identify, measure, monitor, and control risk by implementing an effective risk management system appropriate for the bank’s size, complexity, and risk profile."

So here is some of the viewpoint you face when applying to a bank for a commercial mortgage. When discussing seller financing the suggestion is often made, "be the bank." How is your viewpoint similar to a bank when considering seller financing? You're probably not being reviewed by a board of directors. That said, what standards have you established whether creating or buying real estate notes?

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Underwriting Standards

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Supervisory Loan-to-Value Limits

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Underwriting Practices

"An important part of the underwriting process is the analysis of the borrower’s overall financial condition and resources, the financial responsibility of any guarantor, the nature and value of any underlying collateral, and the borrower’s capacity and willingness to repay as agreed."

"Underwriting includes determining whether the borrower demonstrates the capacity to meet a realistic repayment plan from available cash flow and liquidity. Cash flow from the underlying property or other indicators of borrower capacity is evaluated to determine whether, and to what extent, the borrower can adequately service interest and principal on a prospective loan."

For more input on the connection between CRE bank underwriting and the option of seller financing, take a look at Commercial Real Estate Notes Get The Job Done.

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Underwriting Income-Producing CRE Loans

"The performance of income-producing CRE is significantly influenced by local and regional economic conditions. A bank must monitor conditions in the real estate market in its lending area to ensure that its real estate lending policies continue to be appropriate for current market conditions."

Likewise note buyers will look at regional considerations when evaluating notes for purchase. Some note buyers will avoid notes in states where the forclosure process is lengthy. A note broker can help you, by knowing which note buyers to approach to sell your notes.

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Income-Generating Capacity of CRE

"Repayment of loans that finance income-producing CRE typically depends on the property’s ability to service debt from cash flow. Because collateral value is largely determined by a property’s NOI, it is important to analyze and understand its income-generating capacity including whether cash flow and NOI projections are reasonable and supported. Inadequately supported or questionable analysis should be challenged."

Net Operating Income (NOI) is typically defined as all income derived from the property minus all operating expenses, excluding debt service. But "Commercial Real Estate Lending" from the OCC provides a more in depth definition that is worth reviewing:

"Net operating income (NOI): Annual gross income less operating expenses. Gross income includes all income generated through the operation of the property. In addition to rents, it may include other income such as parking fees, laundry, and vending. Tenant reimbursements may also be included if the reimbursed expenses are included in the operating expenses. Operating expenses are the costs incurred in the operation and normal maintenance of a property. They do not include interest, principal, or income taxes. Although operating expenses do not include depreciation or capital items, they do include a reserve for replacing capital items (replacement reserve). The replacement reserve is imputed for underwriting purposes irrespective of whether it is actually funded."

"To determine a property’s stabilized NOI for underwriting purposes, the analysis begins with determining the gross income that a property would generate when fully leased. This is then adjusted by the application of a vacancy factor to arrive at the effective gross income. The vacancy factor may be higher or lower than actual and represents an estimate of the vacancy the property is expected to experience throughout its existence. The selection of a vacancy factor should consider vacancies in comparable properties in the same market. Variable operating expenses that are directly related to occupancy may also be adjusted to reflect the vacancy assumptions."

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In 2026 Are Banks Relaxing LTV Standards?

Leveraged lending, widely used to fund mergers and other corporate deals, remains a key source of capital for highly indebted borrowers. Leveraged-lending guidance was introduced in 2013 by the OCC, the Federal Reserve and the FDIC to curb the riskiest loans made by banks.

Regulators said the 2013 rules made it harder for banks to use their normal risk-management practices. As a result, banks lost market share while non-bank lenders gained ground, pushing more of this lending outside regulators' oversight.

Reuters published "US Regulators Relax Leveraged-lending Guidance for Banks" December 5, 2025. They said " The U.S. Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation said on Friday they are withdrawing their guidance on leveraged lending issued more than a decade ago, a move that contributed to the rise of private credit.

The regulators said the framework had become "overly restrictive" and pushed lending activity into the non-bank sector. This move is expected to intensify competition between banks and private lenders, and potentially bring more leveraged lending back inside the regulated banking system."

This is one example of changing conditions in the banking marketplace. It sounds like part of the reason is to bring more lending into the regulated banking system. How will this help secure financing to purchase small businesses and commercial real estate? In these areas seller financing will continue to provide advantages for buyers and sellers.

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Appendix D: Underwriting Considerations by Property Type

If you are interested in learning more about the underwriting factors that banks consider for specific types of properties, take a look "Commercial Real Estate Lending." This is a 150 page PDF provided by the Office of the Controller of the Currency.

Starting on page 123 you will find information about the following types of properties: office, retail, industrial, multifamily, hospitality, residential health care, investor-owned real estate, ground leases, affordable housing loans, real estate investment trusts (REITS), and loans secured by owner-occupied properties.

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Have You Considered Selling A Note?

If you have a note for sale, get started now. Please submit a worksheet, and I will start working to produce a deal for you.

As a note broker I will work with you to give you the best value for your note. This involves a more in depth analysis of your needs, your note and the best funding sources to approach on your behalf. This also includes presenting your situation to note buyers in the most favorable way. And my approach will not be limited by any one note buyer's requirements and note pricing. So TAKE ACTION NOW!

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