EC - 259
EXAMINING ISSUANCE
Comptroller of the Currency
Administrator of National Banks
Type:  Examining Circular
Subject:  Discounted Cash Flow Model

TO: Deputy Comptrollers, Department and Division Heads and All Examining
    Personnel

PURPOSE

This issuance establishes the recently distributed Discounted Cash Flow
Model as the only one OCC examiners may use in evaluating loans supported
by real estate or other real estate owned. It outlines the appropriate use
of the model. More information on discounted cash flow and its use by the
federal financial institution regulators may be found in BB 91-43.

BACKGROUND

This OCC model provides national bank examiners with a tool to help credit
analysis. The focus of an examiner's review of a commercial real estate
loan is the borrower's ability to repay the loan. In evaluating the
overall risk associated with a commercial real estate loan, examiners
consider many factors. One such factor is the nature and degree of
protection provided by the cash flow and the value of the underlying
collateral. Similar factors are considered with respect to other real
estate owned.

A discounted cash flow analysis is an appropriate method for estimating
the value of income producing real estate property. The discounted cash
flow analysis is generally used for projects that have not obtained a
stable income stream, but also may be used for properties with complicated
lease structures or irregular income streams.

USE OF THE MODEL

Examiners should use only the most recently distributed version of the OCC
Discounted Cash Flow model and the associated documentation. Examiners
must discard any others they may have. This requirement is imposed to
ensure that all examiners are using a consistent approach that conforms to
the interagency guidelines on the valuation of real estate.

The OCC model is for use by national bank examiners. It does not replace
any model used by a bank or its appraiser to determine discounted cash
flow. It should be used by examiners following OCC examination procedures
presented in the Comptroller's Handbook for National Bank Examiners and BB
91-43.

Examiners should give reasonable deference to assumptions by qualified
appraisers and should not challenge assumptions that differ in only a
limited way from norms for similar properties. When the examiner
establishes that facts or assumptions are not reasonable, appropriate or
current, the model provides a way to develop an alternative estimate of
value for credit evaluation purposes. In such situations, the examiner
must be able to support alternative facts or assumptions he/she uses.
"Worst case" scenarios that are unlikely to occur are not appropriate.
Examiners should discuss any facts or assumptions they question with bank
management and attempt to resolve differences.

DOCUMENTATION

If, in the examiner's judgment, it is necessary to alter an assumption in
the analysis of a loan, that decision should be fully documented. The OCC
model provides a field to detail support for alternative assumptions.
Workpapers should also document why assumptions were altered. Finally, the
examination report should include a discussion of any material differences
and/or disagreements with management over the valuation assumptions.

RESPONSIBLE OFFICE

Questions concerning the valuation of real estate and discounted cash flow
should be directed to the Office of the Chief National Bank Examiner at
(202) 874-5190. Questions concerning the operation of the model should be
directed to the Supervisory Research Division at (202) 874-5630.


Donald G. Coonley
Chief National Bank Examiner

Date:  December 24, 1991