Large Bank Supervision Forum eBook

Internal Use Only

Consistent with the Interagency Guidelines Establishing Standards for Safety and Soundness . . .

 Financial institutions that implement prudent CRE loan accommodation and workout arrangements after performing a comprehensive review of a borrower’s financial condition will not be subject to criticism for engaging in these efforts, even if these arrangements result in modified loans that have weaknesses that result in adverse classification.  In addition, modified loans to borrowers who have the ability to repay their debts according to reasonable terms will not be subject to adverse classification solely because the value of the underlying collateral has declined to an amount that is less than the outstanding loan balance

− Examiners will not criticize banks that modify CRE loans, even if these newly modified loans have weaknesses that result in adverse classification, if the bank performed a comprehensive review of the borrower’s financial condition before entering into a prudent loan accommodation or workout arrangement.

− Examiners will not adversely classify a modified CRE loan solely because there is insufficient collateral protection, assuming the borrower has the ability to repay the debt according to reasonable terms

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Internal Use Only

Short Term Loan Accommodations should incorporate the following items . . .

 When entering into an accommodation with a borrower, it is prudent for a financial institution to provide clear, accurate, and timely information about the arrangement to the borrower and any guarantor.  Any such accommodation must be consistent with applicable laws and regulations.  A financial institution should employ prudent risk management practices and appropriate internal controls over such accommodations. − Weak or imprudent risk management practices and internal controls can adversely affect borrowers and expose a financial institution to increases in credit, compliance, operational, or other risks. − Imprudent practices that are widespread at a financial institution may also pose a risk to its capital adequacy − Prudent risk management practices include

− developing and maintaining appropriate policies and procedures, − updating and assessing financial and collateral information, − maintaining an appropriate risk rating (or grading) framework, and − ensuring proper tracking and accounting for loan accommodations − Prudent internal controls related to loan accommodations include − comprehensive policies and practices, − proper management approvals, − an ongoing credit risk review function, and − timely and accurate reporting and communication

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