Large Bank Supervision Forum eBook

Internal Use Only

Loan Workout Programs should address the following items . . . 1. A prudent loan workout policy that establishes appropriate loan terms and amortization schedules and that permits the financial institution to reasonably adjust the loan workout plan if sustained repayment performance is not demonstrated or if collateral values do not stabilize; 2. Management infrastructure to identify, measure, and monitor the volume and complexity of the loan workout activity; 3. Documentation standards to verify a borrower’s creditworthiness, including financial condition, repayment ability, and collateral values; 4. Management information systems and internal controls to identify and track loan performance and risk, including impact on concentration risk and the allowance; 5. Processes designed to ensure that the financial institution’s regulatory reports are consistent with regulatory reporting requirements; 6. Loan collection procedures; 7. Adherence to statutory, regulatory, and internal lending limits; 8. Collateral administration to ensure proper lien perfection of the financial institution’s collateral interests for both real and personal property; and 9. An ongoing credit risk review function

45

© 2023 – FinPro, Inc.

Internal Use Only

Long-Term Loan Workout Arrangements should address the following items . . .

Consistent with safety and soundness standards, examiners will not criticize a financial institution for engaging in loan workout arrangements, even though such loans may be adversely classified, so long as management has: 1. For each loan, developed a well-conceived and prudent workout plan that supports the ultimate collection of principal and interest and that is based on key elements such as: a) Updated and comprehensive financial information on the borrower, real estate project, and all guarantors and sponsors; b) Current valuations of the collateral supporting the loan and the workout plan; c) Appropriate loan structure (e.g., term and amortization schedule), covenants, and requirements for curtailment or re margining; and d) Appropriate legal analyses and agreements, including those for changes to original or subsequent loan terms; 2. Analyzed the borrower’s global debt service coverage, including realistic projections of the borrower’s cash flow, as well as the availability, continuity, and accessibility of repayment sources; 3. Analyzed the available cash flow of guarantors; 4. Demonstrated the willingness and ability to monitor the ongoing performance of the borrower and guarantor under the terms of the workout arrangement; 5. Maintained an internal risk rating or loan grading system that accurately and consistently reflects the risk in the workout arrangement; and 6. Maintained an allowance methodology that calculates (or measures) an allowance, in accordance with GAAP, for loans that have undergone a workout arrangement and recognizes loan losses in a timely manner through provision expense and recording appropriate charge-offs.

46

© 2023 – FinPro, Inc.