Publication alert: OCC/FDIC/NCUA - Proposed Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts
We communicate that the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA) (the agencies) have published a Proposed Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts.
1. Context
On October 2009, the agencies adopted the Policy Statement on Prudent Commercial Real Estate Loan Workouts (2009 Statement) as a useful resource in understanding risk management and accounting practices for commercial real estate (CRE) loan workouts. Currently, more than 98 percent of banks engage in CRE lending, and CRE loans are the largest loan portfolio type for nearly half of all banks. In 2020, the COVID-19 pandemic led to stress across several CRE property types and has been compounded by other ongoing issues such as inflation, supply chain imbalances, labor challenges, and vulnerability to rising interest rates.
In this context, the OCC, the FDIC and the NCUA in consultation with state bank and credit union regulators, are inviting comment on a Proposed Policy Statement for prudent commercial real estate loan accommodations and workouts in order to assist financial institutions, given these challenges and risks related to CRE lending. The proposed statement updates and expands the 2009 Statement by incorporating recent policy guidance on loan accommodations and accounting developments for estimating loan losses.
2. Main points
The proposed Statement includes the following additional changes:
Addition of a new section on short-term loan accommodations. The proposed Statement would identify short-term loan accommodations as a tool that can be used 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. This section of the proposed Statement would incorporate principles consistent with existing interagency guidance on accommodations.
Information about changes in accounting principles since 2009. The proposed Statement also would reflect changes in generally accepted accounting principles (GAAP) including those in relation to current expected credit losses (CECL):
- The section for Regulatory Reporting and Accounting Considerations would be modified to include CECL references.
- Appendices 5 and 6 of the proposed Statement would address the relevant accounting and regulatory guidance on estimating loan losses for financial institutions that use the CECL methodology, or incurred loss methodology, respectively.
- The agencies have modified sections of the proposed Statement to reflect updates that have occurred pertaining to troubled debt restructuring (TDR), for financial institutions that are still required to report TDRs.
Revisions and additions to examples of CRE loan workouts. The proposed Statement would include updated information about current industry loan workout practices and revisions to examples of CRE loan workouts:
- The examples in the proposed Statement are intended to illustrate the application of existing guidance on: i) credit classification; ii) determination of nonaccrual status, and iii) determination of TDR status.
- (Appendix 2) The proposed Statement also provide an updated summary of selected references to relevant supervisory guidance and accounting standards for: i) real estate lending; ii) appraisals; iii) restructured loans; iv) fair value measurement, and v) regulatory reporting matters such as a loan’s nonaccrual status.
- (Appendix 3) The proposed Statement would retain information about valuation concepts for income-producing real property included in the 2009 Statement.
- (Appendix 4) The proposed Statement restates the agencies’ long-standing special mention and classification definitions that are referenced and applied in the examples in Appendix 1.
- Additionally, the Proposed Statement would be consistent with safety and soundness standards for insured depository institutions.
3. Next steps
Comments to this Proposed Statement should be submitted by 3 October 2022.