Banking Regulators Urge Lenders To Work Out Short-Term Distressed Loan Accommodations

The Federal Deposit Insurance Corp., along with the Office of the Comptroller of the Currency, the Federal Reserve, and the National Credit Union Administration worked together to update, reinforce, and build on existing supervisory guidance calling for financial institutions to work prudently and constructively with creditworthy borrowers during times of financial stress.

The updated policy released in the past week includes a section on short-term loan accommodations that was not included in the agencies previous guidance. Short-term accommodations include an agreement to defer one or more payments, make a partial payment, or provide other assistance or relief to a borrower who is experiencing a financial challenge.

“The agencies recognize that financial institutions face significant challenges when working with commercial real estate borrowers who are experiencing diminished operating cash flows, depreciated collateral values, prolonged sales and rental absorption periods, or other issues that may hinder repayment,” according to the statement. “While such borrowers may experience deterioration in their financial condition, many borrowers will continue to be creditworthy and have the willingness and ability to repay their debts.”

The policy statement issued comes amid escalating loan distress brought about by rising interest rates, higher inflation and slowing transactions and commercial real estate space demand. Those issues are expected to affect the financial condition and repayment capacity of at least some commercial real estate borrowers.

And while the statement that updates guidance doesn’t represent a significant regulatory policy change, it signals how lenders are more likely to be dealing with borrowers facing difficulties in meeting loan obligations or refinancing conditions.

In such cases, financial institutions may find it beneficial to work constructively with borrowers, according to the agencies.

“When short-term accommodation measures are not sufficient or have not been successful in addressing credit problems, financial institutions could proceed into longer term or more complex loan arrangements with borrowers under a formal workout program,” the guidance stated.

Longer-term loan workout arrangements can take various forms, including renewing or extending loan terms, granting additional credit to improve prospects for overall repayment, or restructuring the loan with or without concessions.

The guiding factor in working with borrowers should be their ability to repay the loan including the borrower’s willingness to do so, according to the guidance.

When analyzing a commercial borrower’s repayment ability, examiners should consider the following factors: the borrower’s character, overall financial condition, resources, and payment history; protection provided by the cash flow from the borrower’s business operations or the underlying collateral; and relevant market conditions, particularly those on a state and local level, according to the guidance. Source: CoStar

Rick Ellis