Interagency Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts

Interagency Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts #Interagency #Policy #Statement #Prudent #Commercial #Real #Estate #Loan #Accommodations #Workouts Welcome to Lopoid


Summary:

The Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance
Corporation (FDIC), and the National Credit Union Administration (NCUA) (collectively, the
agencies), in consultation with state bank and credit union regulators, are inviting comment
on a policy statement for prudent commercial real estate loan accommodations and workouts.


Statement of Applicability: The contents of, and material referenced in,
this FIL apply to all FDIC-insured financial institutions.




Highlights:



On October 30, 2009, the agencies, along with the Federal Reserve, the Federal Financial
Institutions Examination Council State Liaison Committee, and the former Office of
Thrift
Supervision, adopted the Policy Statement on Prudent Commercial Real Estate Loan
Workouts
(2009 Statement) as a useful resource for both agency staff and financial institutions
in
understanding risk management and accounting practices for commercial real estate (CRE)
loan
workouts.

Currently, more than 98 percent of banks engage in CRE lending, and CRE loans are the
largest loan portfolio type for nearly half of all banks. Further, the dollar volume of
CRE
loans is at an historic high, recently peaking at more than $2.7 trillion.

In 2020, the COVID-19 pandemic led to stress across several CRE property types,
including
hospitality, office, retail, and the entertainment sectors. These and other CRE sectors
may
be more vulnerable to pressure from the current rising interest rate and overall
inflationary pressures in the economy.

The 2021 Shared National Credit Review reflected a higher classified rate for CRE as
well
as increasing levels of CRE loans listed for Special Mention. Additionally, the
delinquency
rates for Commercial Mortgage Backed Securities backed by hotel and retail properties
reached double digits in 2020, surpassing peak rates in the previous real estate cycle.


Challenges that arose during the pandemic remain, including inflation, supply chain
imbalances, labor challenges, and vulnerability to rising interest rates. These
additional
risks could adversely affect the financial condition and repayment capacity of borrowers
in
a variety of industries.

To assist financial institutions, given these challenges and risks related to CRE
lending,
the agencies, in consultation with state bank and credit union regulators, are proposing
to
update and expand the 2009 Statement by incorporating recent policy guidance on loan
accommodations and accounting developments for estimating loan losses (proposed
Statement).


The proposed
Statement discusses the importance of working constructively with CRE
borrowers who are experiencing financial difficulty and would be appropriate for all
supervised financial institutions engaged in CRE lending.

The proposed
Statement addresses sound principles and supervisory expectations with
respect
to a financial institution’s handling of loan accommodations and workouts on
matters
including (1) risk management, (2) classification of loans, (3) regulatory reporting,
and
(4) accounting considerations, and includes updated references to supervisory guidance.

The agencies recognize that prudent CRE loan accommodations and workouts are often in
the
best interest of both the financial institution and the borrower. Accordingly, the
proposed
Statement reaffirms the key principles from the 2009 Statement: (1) financial
institutions
that implement prudent CRE loan workout arrangements after performing a comprehensive
review
of a borrower’s financial condition will not be subject to criticism for engaging
in these
efforts, even if these arrangements result in modified loans that have weaknesses that
result in adverse credit classification; and (2) modified loans to borrowers who have
the
ability to repay their debts according to reasonably established terms will not be
subject
to adverse classification solely because the value of the underlying collateral has
declined
to an amount that is less than the loan balance.


The proposed
Statement includes the following additional changes: (1) addition of a new
section on short-term loan accommodations; (2) information about changes in accounting
principles since 2009; and (3) revisions and additions to examples of CRE loan workouts.


Comments on the proposed Statement
are due 60 days from the date of publication in the
Federal Register.

Policy Statement on Prudent
Commercial Real Estate Loan Accommodations and Workouts

Related Topic:

Credit


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