Regulators Provide Additional Guidance on Commercial Real Estate Loan Workouts
On December 3, 2009, the Federal Deposit Insurance Corporation, the Federal Reserve, the Office of the Comptroller of the Currency and the Office of Thrift Supervision conducted a telephone seminar that provided additional guidance on the Policy Statement on Prudent Commercial Real Estate Loan Workouts, released on October 30, 2009 (Workout Guidance) and responded to questions submitted by financial institutions. The regulatory agencies reiterated their intent to encourage prudent CRE loan workouts and reaffirmed that lenders will not be subject to criticism for prudently structuring CRE loan workouts, even if the new loans are impaired. Some additional highlights are:
- Bank management must be actively involved with the risk management process related to CRE loan workouts. A prudent CRE loan workout process requires enhanced legal, collection and asset valuation skills and a strong risk management process to ensure that prudent loan disposition decisions are made. The loan workout process should be independent from the original underwriting decision.
- A prudent CRE loan workout process requires a thorough review of the borrower, guarantors and CRE project. This review includes realistic assessments of the borrower’s debt requirements, debt capacity and repayment ability and an accurate, current valuation of the CRE project.
- During bank examinations, examiners will review and consider all stages of the CRE loan workout process. Examiners will balance their review of the workout process with the realistic options of the borrower and will not criticize workout activities performed after substantial review by the bank.
- Classification of multiple note workout structures should be based on the borrower’s actual payment history and normal debt coverage standards, and lenders should not consider any pro forma financial information relating to the borrower or CRE project during the classification process.
- As part of a collateral portfolio management program, banks should implement policies to address the frequency, scope and quality of appraisals in light of the risk posed by CRE collateral, valuation trends and other market data. Large complex CRE projects that pose higher risks or require collateral liquidation for loan repayment are more likely to require more frequent appraisals.
This Workout Guidance presents banks with an excellent opportunity to review CRE and restructured loans in a manner that will have the least impact on the bank consistent with safe and sound loan practices. The FDIC will publish on its website a transcript of the telephone seminar on or about December 10, 2009.
For additional information regarding the Workout Guidance, please see the Troutman Sanders Client Alert “ FDIC Releases Commercial Real Estate Loan Workout Guidelines”, released on November 3, 2009. The Financial Institutions Practice Group at Troutman Sanders will continue to monitor developments regarding the Workout Guidance.
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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.