On October 30, the FDIC and other member agencies of the Federal Financial Institutions Examination Council (the "FFIEC") adopted a policy statement supporting prudent commercial real estate ("CRE") loan workouts. In a press release on Friday, the FDIC acknowledged the importance of maintaining credit availability to businesses, noting the difficulty of doing so in troubled economic times. The FFIEC agencies found that predent CRE loan workouts often are in the best interest of both the lender and the borrower, but cautions that a renewal or restructuring should improve the lender's prospects for repayment.
The policy statement released on Friday offers guidance to examiners, and to financial institutions, for evaluating whether a given workout plan is "prudent." The statement provides lenders with some assurance that "an institution will not be criticized for engaging in loan workout arrangements so long as management has"
- a prudent workout policy that includes appropriate loan terms and allows the institution to modify the workout plan if necessary;
- a well-conceived and prudent workout plan for a particular credit that supports the ultimate collection of principal and interest;
- a realistic analysis of the borrower's global debt service obligations;
- the ability to monitor the borrower's (and any guarantors') ongoing performance under the workout's terms;
- an internal loan grading system that accurately and consistently reflects the risk in the workout arrangement; and
- a consistent and accurate "allowance for loan and lease losses" methodology that covers estimated credit losses in restructured loans.
The policy statement affirms that "loans to sound borrowers that are renewed or restructured in accordance with prudent underwriting standards" shouldn't be adversely classified unless examiners identify "well-defined weaknesses" that jeopardize repayment. In particular, a loan shouldn't be adversely classified simply on the basis that the borrower is involved in a troubled industry or solely because the collateral's value has declined to an amount that's less than the loan balance. There are those in the industry, however, who question whether the examiners will apply the policy statement's guidance in actual practice. The coming weeks and months will tell, as billions of dollars of CRE loans reach maturity in an environment in which refinance options are severely limited.
Those who would like to study the policy statement itself, which includes examples of CRE loan workouts, can find it at the FDIC website, by clicking here.
