The Coming Regulatory Policy Modifications for CRE Workouts
Examples, accounting adjustments, and short-term loan accommodations are all modifications mentioned in a new policy statement.
Examples, accounting adjustments, and short-term loan accommodations are all modifications mentioned in a new policy statement.
According to a notice published in the Federal Register, the Office of the Comptroller of the Currency, Treasury, Federal Deposit Insurance Corporation, and National Credit Union Administration are debating a new policy statement. The change would modify a policy that was initially put into place in 2009 following the financial crisis of the time.
The announcement states “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).” The notification goes on, “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 focus of the proposed statement stresses the value 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)” and acknowledges that accommodations and workouts are frequently in the best interest of both parties.
Two important themes from the 2009 declaration continue to be supported by the statement, which is significant. One is that, even if the amended loans have flaws, a lending institution won’t face criticism for making a “prudent CRE loan accommodation.” The second is that because the value of the collateral is smaller than the loan total, the modified loans won’t be classified negatively as long as the borrower has the ability to repay under fair circumstances.
The suggested amendments would affect three areas. These arrangements are described 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” in a new section on short-term loan accommodations.
Secondly, beginning in 20009 there have been modifications to GAAP accounting, including CECL, or current anticipated credit losses. “In particular, the section for Regulatory Reporting and Accounting Considerations would be modified to include CECL references.”
The Financial Accounting Standards Board (FASB) “ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” is also mentioned. Financial institutions won’t be required to classify and account for loan modifications as troubled debt restructuring, once this standard is implemented.
Lasty, CRE exercise examples would be modified. “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.”
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