This past Friday afternoon, I was waiting for the weekly notices from the FDIC concerning bank failures (I really need to get some better hobbies) when I received instead a press release from the FDIC concerning commercial real estate loan workouts. The FDIC guidance was made on behalf of a larger group known as the Federal Financial Institutions Examination Council (FFIEC) which includes the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the FFIEC State Liaison Committee, which would include the Louisiana Office of Financial Institutions. So it looks like all of the bank regulators are on board with the workout policy statement.
The policy statement “stresses that performing loans, including those that have been renewed or restructured on reasonable modified terms, made to creditworthy borrowers will not be subject to adverse classification solely because the value of the underlying collateral declined” and “provides guidance to examiners, and financial institutions that are working with CRE borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties.”
I believe this statement to be good news for bankers and borrowers struggling with marginally or underperforming projects and loans. The struggle for the borrowers is that some relief or restructure may be needed while the struggle for the bankers is fear that the bank regulators may criticize an institution for working with a borrower on restructuring a loan. Hopefully this guidance will allow the banks to work with borrowers under specific guidelines without fear of criticism.
The participating regulatory agencies “recognize that prudent loan workouts are often in the best interest of both financial institutions and borrowers, particularly during difficult economic conditions.” This policy statement details risk-management practices for loan workouts that “support prudent and pragmatic credit and business decision-making within the framework of financial accuracy, transparency and timely loss recognition.”
The press release promises that “financial institutions that implement prudent loan workout arrangements after performing comprehensive reviews of borrowers’ financial conditions will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse credit classifications.”
Given that many of us in the commercial real estate market are struggling with underperforming properties, and I mean that from both the banker and borrower sides, it may be good to look at the guidance in more depth. I will discuss the issue with bankers and borrowers and report back next week. If you just can’t wait, click here to read the full document.
And I might suggest that you get some better hobbies as well.
(Brian Andrews is a certified mortgage banker specializing in the financing of commercial real estate. His business is Andrews Commercial Mortgage and he can be reached at brian.andrews@acmla.com.)
