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WASHINGTON, DC-The Federal Deposit Insurance Corp. has formalized a policy that supports “prudent” commercial real estate loan workouts. The policy statement, which FDIC developed in coordination with the other member agencies of the Federal Financial Institutions Examination Council (FFIEC), follows anecdotal reports that the agency had been inconsistent in its approach to distressed real estate asset sales.

The new policy statement stresses that performing loans made to creditworthy borrowers, including those that have been modified, will not be subject to an adverse classification solely because the value of the underlying collateral declined.

Last month, FDIC chairwoman Sheila Bair was questioned by the Senate Subcommittee on Financial Institutions on unevenly applied workout policies on the part of FDIC. Some of those reports are exaggerated, was Bair’s response. “I have heard reports that examiners are requiring banks to write down sound, performing loans,” she said. “I can assure you that that is not the policy of the FDIC. We support banks’ efforts to lend to credit-worthy borrowers and to work constructively with existing borrowers to restructure loans where appropriate.”

This policy statement provides guidance to examiners, and financial institutions working with CRE borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties, attempting to strike, it said, “the appropriate balance of prudent credit practices and meeting legitimate credit needs.”

Much of the ground covered in the policy statement restates already accepted policies. The document, though, also provides hypothetical examples of examiners’ analytical processes for credit classifications and accounting and reporting treatments for loans that needed to be restructured.

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