FDIC Releases Commercial Real Estate Loan Workout Guidelines
On October 30, 2009, the Federal Deposit Insurance Corporation, in coordination with other federal bank regulatory agencies, released guidelines on prudent commercial real estate loan workouts. The guidelines update and replace existing supervisory guidance on the impact of workouts on loan classifications and required loan loss revenues. The guidelines are intended to “promote supervisory consistency, enhance the transparency of commercial real estate loan workouts and ensure that supervisory policies and actions do not inadvertently curtail the availability of credit to sound borrowers.” Finally, the guidelines set forth a range of workout scenarios to demonstrate the examiner’s analytical review process under these guidelines.
The guidelines recognize that financial institutions often face significant challenges associated with nonperforming commercial real estate loans, and that workouts are often in the best interest of the financial institution and the borrowers. The following guidelines demonstrate that the FDIC and other federal bank regulatory agencies will view prudent commercial real estate loan workout programs favorably.
- Performing commercial real estate loans made to creditworthy borrowers, including loans that have been renewed or restructured on “reasonable” modified terms, will not be subject to adverse classification solely because the value of the underlying collateral has declined to an amount less than the loan balance.
- Commercial real estate loans to sound borrowers that are renewed or restructured in accordance with prudent lending standards should not be adversely classified or criticized unless well-defined weaknesses exist that jeopardize repayment.
The guidelines also state that financial institutions should maintain risk management practices for workout programs that are appropriate in light of the complexity and nature of the institution’s lending activity and are consistent with sound lending practices.
The new guidelines replace the Interagency Policy Statements on the Review and Classification of Commercial Real Estate Loans, originally released in November 1991, and Review and Classification of Commercial Real Estate Loans, originally released in June 1993. The new guidelines may be found here. The Financial Institutions Practice Group at Troutman Sanders will continue to monitor developments regarding the FDIC’s commercial real estate loan workout guidelines.
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The foregoing is only a summary of one of the many significant issues affecting bank holding companies and other financial institutions. If you have any questions about the foregoing or about other financial institution issues, please direct them to your regular contact at Troutman Sanders LLP or to any of the persons listed in the sidebar to this release.