Regulatory Policy Changes for CRE Workouts Coming

There’s a new policy statement being considered by the Office of the Comptroller of the Currency, Treasury; Federal Deposit Insurance Corporation; and National Credit Union Administration, according to notification in the Federal Register. This would update a policy initially adopted in 2009 in the wake of the financial crisis at the time.

“The agencies are proposing to update and expand the 2009 Statement by incorporating recent policy guidance on loan accommodations and accounting developments for estimating loan losses (proposed Statement),” said the notification. “In developing the proposed Statement, the agencies consulted with state bank and credit union regulators. If finalized, the proposed Statement would supersede the 2009 Statement for all supervised financial institutions.”

The proposed statement still focuses on the importance of “working constructively with CRE borrowers who are experiencing financial difficulty and would be appropriate for all supervised financial institutions engaged in CRE lending that apply U.S. generally accepted accounting principles (GAAP).” It still notes that accommodations and workouts are still frequently in the best interest of both the borrower and the lender.

Importantly, the statement continues support for two key principles from the 2009 statement. One is that a lending institution implementing “prudent CRE loan accommodation” won’t be subject to criticism for doing so, even if there are weaknesses in the modified loans. The second, so long as the borrower has the ability to repay under reasonable terms, the modified loans won’t face adverse classification because the value of the collateral is less than the loan balance.

There are three areas of proposed changes. A new section on short-term loan accommodations identifies such arrangements as tools “to mitigate adverse effects on borrowers and would encourage financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations during periods of financial stress.”

Next, since 2009 there have been changes in GAAP accounting, including current expected credit losses, or CECL. “In particular, the section for Regulatory Reporting and Accounting Considerations would be modified to include CECL references.”

There is also a reference to the Financial Accounting Standards Board (FASB) “ASU 2022-02, ‘Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.’” When adopted, financial institutions won’t need to identify and account for loan modifications as troubled debt restructuring.

Third, there will be CRE workout examples. “The examples in the proposed Statement are intended to illustrate the application of existing guidance on (1) credit classification, (2) determination of nonaccrual status, and (3) determination of TDR status.”

Comments are due by October 3, 2022.