FDIC Backs Away From Curbs on Bank Lending : Regulation: The Federal Deposit Insurance Corp. withdraws a proposal to strictly govern real estate loans.

WASHINGTON — In a big victory for banks and thrifts, the Federal Deposit Insurance Corp. has backed down from a proposal to set rigid restrictions on real estate lending.

Instead, the agency has agreed to issue general guidelines that will give banks more leeway in deciding when to make realty loans, according to regulatory sources.

The change came after arm-twisting by Deputy Treasury Secretary John Robson, who feared that the strict underwriting standards proposed in June would worsen the credit crunch.

The proposal, which said a loan could not exceed a specified percentage of the collateral’s value, was strongly opposed by lenders. Banks and thrifts deluged regulators with 1,500 comment letters, arguing that the measure would curtail lending.

Industry officials hailed the decision.

“Guidelines provide more flexibility and, let’s face it, what we have is a country that has many different markets and many different lending needs,” said James McLaughlin, director of agency relations at the American Bankers Assn.

Diane Casey, executive director of the Independent Bankers Assn. of America, said: “Banks can look to a guideline, but they won’t be precluded from making a loan that exceeds it.”

Strict real estate regulations--as opposed to guidelines--were ordered by Congress last year in the Federal Deposit Insurance Corporation Improvement Act. The reason: Losses on office buildings and apartment buildings had contributed to record bank failures.

To fulfill the law’s requirement, the regulatory agencies have decided to issue a “regulation” that requires banks to make safe and sound real estate loans. Accompanying “guidelines” will outline recommended loan-to-value ratios, the sources said.

The guidelines, which take effect March 19, will be released later this month.

Officials declined to disclose the suggested loan-to-value ratios, but sources said they are more lenient than the ones proposed in June.

Those proposals called for capping loans for raw land at 60% of value. Less risky real estate loans, such as residential mortgages, would have been capped at 95% of value.

Another change from the June plan will allow for “substantial expansion” of the number of loans a bank can make that do not comply with the ratios. The original proposal capped the amount of these loans at 15% of a bank’s capital.

Regulators missed a congressional deadline to propose new standards by Sept. 19 because they could not see eye to eye. The FDIC wanted to issue regulations, while the three other agencies--the Federal Reserve, the Office of the Comptroller of the Currency and the Office of Thrift Supervision--were pushing for the more flexible guidelines.

The debate ended Wednesday when Robson called representatives from all the agencies to a meeting and hammered out an agreement that all four agencies would adopt.

The FDIC is expected to discuss the guidelines at its board meeting next Tuesday, but a vote on the proposal may not come until Oct. 27.

That means the Fed is likely to act first, at its Oct. 21 meeting.

The Comptroller and the Office of Thrift Supervision are expected to publish their guidelines in the Federal Register before the end of October.