Banking Agencies Provide Guidance on Commercial Real Estate Loan Accommodations

The OCC, Federal Reserve Board, FDIC and National Credit Union Administration (the "Agencies") finalized a policy statement for financial institutions on commercial real estate loan accommodations for borrowers during periods of financial stress.

In the final policy statement, the Agencies described supervisory expectations on financial institutions that handle loan accommodations and workout matters concerning risk management; loan classification; regulatory reporting; and accounting considerations.

The Agencies reaffirmed two key principles from the previous policy, that (i) financial institutions will not be "subject to criticism" for implementing prudent commercial real estate loan accommodations and workout arrangements after conducting a comprehensive review of a borrower's financial condition, "even if these arrangements result in modified loans with weaknesses that result in adverse classification"; and (ii) "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."

The Agencies also updated the policy statement to reflect changes to generally accepted accounting principles regarding the current expected credit losses methodology. Specifically, the Agencies provide guidance on estimating loan losses for financial institutions using the methodology.

Further, the Agencies included several additional commercial real estate workout examples to provide guidance on the application of existing rules, regulatory reporting instructions, and supervisory guidance for (i) credit classifications and (ii) determination of nonaccrual status.