By: Robert Smith
Community Bank Minute: Federal Agencies Finalize Policy Statement on CRE Loan Accommodations and Workouts
On June 29, 2023, the Federal regulatory agencies issued a joint policy statement on prudent commercial real estate loan accommodations and workouts to update an existing policy statement released in 2009. The statement finalizes guidance proposed last year and addresses steps that financial institutions may take to work constructively with CRE borrowers that are experiencing financial stress.
These instructions are timely given the change in CRE valuations during the Federal Reserve’s interest rate tightening campaign. As reported by the Fed, year-over-year CRE valuations reached a high of 15.22% in the fourth quarter of 2021, but experienced a 1.75% reduction one year later. Demand for office space continues in a depressed state as large numbers of employees work from home. Compounding the issue is that many properties are financed with floating-rate loans that are set to mature. Collateral concerns, along with other factors, have caused most banks to limit growth in CRE exposures since 2022 and more closely monitor existing credits. Regulators have identified CRE exposures as a risky area for the foreseeable future.
The statement addresses prudent practices regarding short-term loan accommodations, risk management for loan workout programs, long-term loan workout arrangements, classification of loans and regulatory reporting and account considerations.
The statement confirms that institutions will not be subject to criticism if prudent CRE loan accommodations are implemented after a comprehensive review of a borrower’s financial condition, even where those steps result in modified loans with weaknesses that result in adverse classification. Additionally, the statement confirms that modified loans to borrowers who have the ability to repay will not be subject to adverse classification solely because the value of underlying collateral has dropped below the outstanding loan balance.
Click here to view the Joint Policy Statement
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