UPDATED: Bank, credit union regulators propose update to CRE loan workout guidance

The first update in 13 years to regulators’ guidance to lenders on commercial real estate (CRE) loan workouts is being proposed with a 60-day public comment period that ends Oct. 3, according to a notice Tuesday in the Federal Register.

This “Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts” would update and supersede the regulators’ 2009 statement. It would incorporate recent policy guidance on loan accommodations and accounting developments for estimating loan losses; include a new section on short-term loan accommodations; and include revisions and additions to examples of CRE loan workouts.

The agencies – the Federal Deposit Insurance Corp. (FDIC), National Credit Union Administration (NCUA), and Office of the Comptroller of the Currency (OCC) – said their 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 that apply U.S. generally accepted accounting principles (GAAP).

While focused on CRE loans, they noted, the proposed statement also includes general principles “that are relevant to a financial institution’s commercial loans that are collateralized by a borrower’s real property or other business assets (e.g., furniture, fixtures, or equipment).” Among the questions on which regulators are seeking comment is whether the agencies should further address commercial and industrial (C&I) lending more explicitly.

Two key principles from the 2009 statement, they said, are reflected in the proposal:

  • financial institutions that implement prudent CRE loan accommodation and 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
  • modified loans to borrowers who have the ability to repay their debts according to reasonable 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 changes in the proposed statement include a new section on short-term loan accommodations; information about changes in accounting principles since 2009; and (3) revisions and additions to examples of CRE loan workouts. The statement also would include updated references to supervisory guidance and would revise language to incorporate current industry terminology, they said.

The agencies said they consulted with state bank and credit union regulators in developing the statement.