Regulators have released a policy statement supporting what they call prudent commercial real estate (CRE) mortgage workouts.
The statement was issued by the Federal Financial Institutions Examination Council (FFIEC), an interagency body that includes the Federal Reserve Board, the Federal Deposit Insurance Corp, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the National Credit Union Administration.
Each of the regulators adopted the 33-page statement, which provides guidance for examiners and for financial institutions that are working with CRE borrowers who are experiencing diminished operating cashflows, depreciated collateral values or prolonged delays in selling or renting commercial properties.
"The financial regulators recognize that prudent loan workouts are often in the best interest of both financial institutions and borrowers, particularly during difficult economic conditions. This policy statement details risk-management practices for loan workouts that support prudent and pragmatic credit and business decision-making within the framework of financial accuracy, transparency and timely loss recognition," the FFIEC says.
The council goes on to explain that financial institutions that implement prudent loan workout arrangements after performing comprehensive reviews of borrowers' financial conditions will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse credit classifications.
Performing loans, including those renewed or restructured on reasonable modified terms, made to creditworthy borrowers, will not be subject to adverse classification solely because the value of the underlying collateral has declined, the FFIEC adds.
The council's statement includes examples of CRE loan workouts. The examples, provided for illustrative purposes only, reflect examiners' analytical processes for credit classifications and assessments of institutions' accounting and reporting treatments for restructured loans. The policy statement reiterates existing guidance that examiners are expected to take a balanced approach in assessing institutions' risk-management practices for loan workout activities.