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Construction Law Today

FDIC Statement on Prudent Commercial Real Estate Loan Works-Outs

Posted in Construction Finance and Insolvency, FDIC & Bank Failures

workout.jpgNational Mortgage Professional Magazine just reported that the Federal Deposit Insurance Corporation, in conjunction with other federal financial regulators, just released this Policy Statement on Prudent Commercial Real Estate Loan Workouts.
According to this Policy Statement (Policy Statement No. FIL-61-2009), financial regulators recognize that prudent commercial real estate (“CRE”) loan workouts often serve the best interest of banks and creditworthy CRE borrowers.
This Policy Statement focuses on the essential elements of a prudent workout. And it provides illustrations of the analytical review process to ensure the credit risk in a loan workout is accurately identified and the arrangements receive appropriate regulatory reporting and accounting treatment.

Highlights from this Policy Statement:

  • Banks and borrowers confront reduced operating cash flows, lower collateral values, and prolonged sale and rental absorption periods. Financial regulators recognize that prudent CRE loan workouts often serve the best interests of both the affected banks and the affected borrowers
  • Banking regulators won’t “adversely classify” performing loans, including those renewed or restructured on reasonably modified terms, just because the value of the underlying collateral has declined below the loan balance
  • Banking regulators won’t criticize banks’ efforts to prudently workout CRE loans after the bank comprehensively reviews the borrower’s financial condition, even if the restructured loans have weaknesses that result in “adverse classification”
  • Banking examiners will take a balanced approach when assessing the adequacy of a bank’s risk management practices for loan workout activity
  • This Policy Statement identifies Model CRE loan workout structures, but they’re for illustrative purposes only
  • This Policy Statement replaces the Interagency Policy Statement on the Review and Classification of Commercial Real Estate Loans (November 1991)

To see more on how the FDIC affects construction and real estate lenders and borrowers, go here and scroll down.

  • Yeah, banks and borrowers confront reduced operating cash flows, lower collateral values, and prolonged sale and rental absorption periods.