Alert December 15, 2009

FDIC Posts Transcript of Regulators’ Audio Conference Concerning Interagency Policy Statement on Prudent CRE Loan Workouts

The FDIC made publicly available a transcript of the December 3, 2009 interagency audio conference (the “Audio Conference”) of the federal financial institutions bank regulatory agencies’ (the “Agencies”) Joint Policy Statement on Prudent Real Estate Loan Workouts (the “Policy Statement“) issued October 30, 2009.  The Policy Statement discusses banks’ efforts to renew and restructure “loans to creditworthy borrowers who are experiencing diminished operating cash flows, depreciated collateral values or prolonged delays in selling or renting commercial properties.”  The Policy Statement also sets forth the components of an effective loan workout program and provides examples of the appropriate classification, non-accrued and troubled debt restructuring treatment of restructured loans.

The senior regulators who were panelists at the Audio Conference first discussed generally the Agencies’ purposes in issuing the Policy Statement, appropriate bank risk management practices, general expectations of the Agencies for the manner in which a bank addresses its  loan workout arrangements, and classifications of loans.

Subsequently, the Agency panelists at the Audio Conference responded to questions regarding the Policy Statement.  Some of the important topics covered were:

Appropriate treatment of loans that are bifurcated into two notes—a Note A (as to which the borrower has the ability to cover the debt service) and a Note B (as to which the borrower is unable to cover the debt service)

  • At what point the Note A obligation may be returned to an accrual status
  • Appropriate means of analyzing a borrower’s global cash flow for purposes of projecting a cash flow surplus or deficit
  • Evaluations and treatment of guarantees
  • How lenders should determine and document a market rate of interest when reviewing an extension of credit
  • Appropriate monitoring of restructured loans
  • When substandard loans need not be placed on non-accrual status
  • When a bank can appropriately use interest-only terms in a restructuring
  • Monitoring collateral values and when new appraisals are required