On October 30, 2009, the FDIC and other financial regulators released a 33-page Policy Statement on Prudent Commercial Real Estate Loan Workouts describing how examiners should evaluate the efforts of financial institutions to renew or restructure loans to commercial real estate (“CRE”) borrowers. Some key points contained in this policy statement that should be of interest to lenders are set forth below:
- The policy statement applies to borrowers who “continue to be creditworthy customers who have the willingness and capacity to repay their debts” and is intended, among other objectives, to “ensure that supervisory policies and actions do not inadvertently curtail the availability of credit to sound borrowers.”
- Examiners are to take “a balanced approach” in assessing risk management in CRE workout situations.
- CRE workout arrangements that are “prudent” and that are based on a “comprehensive review of the borrower’s financial condition” should not be criticized “even if the restructured loans have weaknesses that result in adverse credit classification.”
- Such renewed or restructured loans that involve “reasonable modified terms” and “prudent underwriting standards” are not to be the subject of adverse classification solely because the collateral value has become less than the loan balance, and they “should not be adversely classified or criticized unless well-defined weaknesses exist that jeopardize repayment.”
- In connection with such renewed or restructured loans it may be necessary to obtain a new or updated appraisal that reflects “current project plans and market conditions that were considered in the development of the workout plan.”
- Assumptions that were recently made by qualified appraisers (and, as appropriate, by the lender) that are reasonable under the circumstances should be given a reasonable amount of deference by examiners.
- It may be permissible to enter into a “multiple note structure in which, for example, a troubled loan is restructured into two notes.” A note that is “reasonably assured of repayment and performance according to prudently modified terms...may be placed back on accrual status in certain situations.” A note “that is not reasonably assured of repayment (i.e., the second note) should be adversely classified and charged-off as appropriate.”
- Such renewed or restructured loans “need not be maintained in nonaccrual status” if “supported by a well-documented credit assessment of the borrower’s financial condition and prospects for repayment under the revised terms.”
Each bank’s situation is unique and the policy statement should be reviewed carefully as to its applicability to specific loans. In some instances, it may be necessary to confer with your primary federal bank regulator.
If you have questions, please contact Howard O. Hagen at 515-246-4543 or hhagen@dickinsonlaw.com or Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.
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