The Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), and National Credit Union Administration (NCUA) (the agencies), in consultation with state bank and credit union regulators, are issuing a final policy statement for prudent commercial real estate loan accommodations and workouts. The statement is relevant to all financial institutions supervised by the agencies. This updated policy statement builds on existing supervisory guidance calling for financial institutions to work prudently and constructively with creditworthy borrowers during times of financial stress, updates existing interagency supervisory guidance on commercial real estate loan workouts, and adds a section on short-term loan accommodations. The updated statement also addresses relevant accounting standard changes on estimating loan losses and provides updated examples of classifying and accounting for loans modified or affected by loan accommodations or loan workout activity.
The final policy statement is available on July 6, 2023.
On October 30, 2009, the agencies, along with the Federal Financial Institutions Examination Council (FFIEC) State Liaison Committee and the former Office of Thrift Supervision, adopted the Policy Statement on Prudent Commercial Real Estate Loan Workouts (2009 Statement). The agencies view the 2009 Statement as being useful for the agencies' staff and financial institutions in understanding risk management and accounting practices for commercial real estate (CRE) loan workouts.
To incorporate recent policy and accounting changes, the agencies recently proposed updates and expanded the 2009 Statement and sought comment on the resulting proposed Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts (proposed Statement). The agencies considered all comments received and are issuing this final Statement largely as proposed, with certain clarifying changes based on comments received. The final Statement is described in Section II of the Supplementary Information.
The agencies received 22 unique comments from banking organizations and credit unions, state and national trade associations, and individuals. A summary and discussion of comments and changes incorporated in the final Statement are described in Section III of the Supplementary Information.
The risk management principles outlined in the final Statement remain generally consistent with the 2009 Statement. As in the proposed Statement, the final Statement discusses the importance of financial institutions working constructively with CRE borrowers who are experiencing financial difficulty and is consistent with U.S. generally accepted accounting principles (GAAP). The final Statement addresses supervisory expectations with respect to a financial institution's handling of loan accommodation and workout matters including (1) risk management, (2) loan classification, (3) regulatory reporting, and (4) accounting considerations. Additionally, the final Statement includes updated references to supervisory guidance and revised language to incorporate current industry terminology.
Consistent with safety and soundness standards, the final Statement reaffirms two key principles from the 2009 Statement: (1) financial institutions that implement prudent CRE loan accommodation and workout arrangements after performing a comprehensive review of a borrower's financial condition will not be subject to criticism for engaging in these efforts, even if these arrangements result in modified loans with weaknesses that result in adverse classification and (2) modified loans to borrowers who have the ability to repay their debts according to reasonable terms will not be subject to adverse classification solely because the value of the underlying collateral has declined to an amount that is less than the outstanding loan balance.
The agencies' risk management expectations as outlined in the final Statement remain generally consistent with the 2009 Statement, and incorporate views on short-term loan accommodations, information about changes in accounting principles since 2009, and revisions and additions to the CRE loan workouts examples.
A. Short-Term Loan Accommodations
The agencies recognize that it may be appropriate for financial institutions to use short-term and less-complex loan accommodations before a loan warrants a longer-term or more-complex workout arrangement. Accordingly, the final Statement identifies short-term loan accommodations as a tool that could be used to mitigate adverse effects on borrowers and encourages financial institutions to work prudently with borrowers who are, or may be, unable to meet their contractual payment obligations during periods of financial stress. The final Statement incorporates principles consistent with existing interagency supervisory guidance on accommodations.
B. Accounting Changes
The final Statement also reflects changes in GAAP since 2009, including those in relation to the current expected credit losses (CECL) methodology. In particular, the Regulatory Reporting and Accounting Considerations section of the Statement was modified to include CECL references, and Appendix 5 of the final Statement addresses the relevant accounting and supervisory guidance on estimating loan losses for financial institutions that use the CECL methodology.
C. CRE Loan Workouts Examples
The final Statement includes updated information about industry loan workout practices. In addition to revising the CRE loan workouts examples from the 2009 Statement, the proposed Statement included three new examples that were carried forward to the final Statement (Income Producing Property—Hotel, Acquisition, Development and Construction—Residential, and Multi-Family Property). All examples in the final Statement are intended to illustrate the application of existing rules, regulatory reporting instructions, and supervisory guidance on credit classifications and the determination of nonaccrual status.
D. Other Items
The final Statement includes updates to the 2009 Statement's Appendix 2, which contains a summary of selected references to relevant supervisory guidance and accounting standards for real estate lending, appraisals, restructured loans, fair value measurement, and regulatory reporting matters.
The final Statement retains information in Appendix 3 about valuation concepts for income-producing real property from the 2009 Statement. Further, Appendix 4 provides the agencies' long-standing special mention and classification definitions that are applied to the examples in Appendix 1.
The final Statement is consistent with the Interagency Guidelines Establishing Standards for Safety and Soundness issued by the Board, FDIC, and OCC, which articulate safety and soundness standards for financial institutions to establish and maintain prudent credit underwriting practices and to establish and maintain systems to identify distressed assets and manage deterioration in those assets. . . .