On Oct. 31, a new Financial Regulator Policy Statement announcing the ways in which banks and financial institutions address troubled Commercial Real Estate (CRE) loans was issued jointly by both the state and federal banking regulators.
It appears that the regulators are trying to encourage banks to actively work with their troubled and potentially troubled CRE borrowers. The new Policy Statement appears to present a more liberal view of what is and is not a nonperforming CRE loan. In theory, the new policy could reduce the number of bank write downs and provide banks greater latitude in managing CRE assets. There is some skepticism, however, as to whether this will provide a long-term solution for these distressed assets.
One reason for the skepticism may be that while the Statement deals more directly with loan classification and how regulatory examiners will look at troubled CRE loans, it does not change existing statutory reporting requirements (Call Reports), or other regulatory reporting requirements. Therefore, it is the implementation of this policy that will control the effectiveness of this Statement. As this is a Policy Statement assisting examiners, it can directly affect CAMELS ratings, particularly the capital, asset quality, management, and earnings portions. The ways in which future CRE workouts are approached in order to maximize the benefits to the bank could also be affected materially by the Statement.
Particularly interesting are the attachments included with the policy statement. Attachment 1 contains examples of CRE loan workouts illustrating the application of this new statement to credit classification, determination of accrual versus nonaccrual status, and identification and reporting of troubled debt restructurings. Attachment 2 lists a summary of references to relevant supervisory and accounting guidance for real estate lending, appraisals, allowance for loan and lease losses (ALLL), restructured loans, fair value measurement, and regulatory reporting matters such as nonaccrual status. The Statement says it should be used in conjunction with materials identified in Attachment 2 to reach appropriate conclusions regarding credit classification and regulatory reporting. Attachment 3 discusses valuation concepts for income producing real property.
For more information, please contact David Lemke, Chris Siderys or any member of Waller Lansden’s Finance and Restructuring practice at 800-487-6380.
The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.
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