Alert October 29, 2013

FRB, FDIC, OCC AND NCUA Issue Joint Supervisory Guidance Concerning Troubled Debt Restructurings

The FRB, FDIC, OCC and NCUA (collectively, the “Agencies”) jointly issued guidance to financial institutions entitled InterAgency Supervisory Guidance Addressing Certain Issues Related to Troubled Debt Restructurings (the “Guidance”).  In the Guidance the Agencies discuss certain issues concerning the accounting treatment and regulatory credit risk grade of commercial and residential real estate loans that have undergone troubled debt restructurings (“TDRs”).  Under generally accepted accounting principles (“GAAP”) the restructuring of debt is a TDR if the creditor grants a concession to the debtor (that it would not otherwise grant) “for economic or legal reasons related to the debtor’s financial difficulties.”  In the Guidance the Agencies state that they “continue to view prudent modifications as positive actions when they mitigate credit risk, and [the Agencies] will not criticize banks for engaging in prudent workout arrangements, even if the modified loans result in TDRs.”   The Agencies confirm that the Guidance is consistent with GAAP and with the FRB’s, FDIC’s and OCC’s joint guidance issued in 2009 that is entitled Policy Statement on Prudent Commercial Real Estate Loan Workouts.

The Guidance discusses accrual treatment of loans under GAAP and when a loan that is on nonaccrual may be restored to accrual status.  Next the Guidance explains the distinctions between a decision to modify a loan’s credit risk grade or classification and a decision to designate the loan as a TDR.  Every TDR is an impaired loan for GAAP purposes and the Guidance discusses the analysis that the Agencies expect a bank to conduct to determine whether the TDR is collateral dependent or is not collateral dependent. The Guidance then reviews the Agencies’ supervisory expectations regarding the ways banks will address the differences in impairment management and classifications and charge-off treatment for loans that are collateral dependent and for loans that are not collateral dependent.  The Guidance then discusses a bank’s right to capitalize expenses used by a bank to protect its position on a loan, e.g., by paying real estate taxes or hazard insurance premiums.  The Agencies also make it clear that the Guidance should be read in conjunction with prior guidance provided by the Agencies and the applicable accounting principles and standards issued by the Financial Accounting Standards Board.