Federal Regulators Revise Commercial Real Estate Loan Accommodations and Workouts Policy in FDIC 2023 Policy Statement

The FDIC 2023 policy statement just came out- and it’s got echoes of similar guidance passed after the occurrence of the 2008 crash. On June 29, 2023, federal regulators adopted a new policy statement on Prudent Commercial Real Estate Loan Accommodations and Workouts.

This policy, enacted by the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Board of Governors of the Federal Reserve System (Fed), supersedes the previous guidance from 2009 and provides updated guidance for financial institutions and borrowers alike.

Table of Contents

FDIC 2023 Policy Statement: A New Era for Commercial Real Estate Loan Accommodations

The 2023 Policy Statement expands on the previous 2009 Commercial Real Estate Policy Statement, reaffirming the importance of working constructively with creditworthy borrowers during times of financial stress.

This new guidance brings forth fresh dialogues on short-term loan adjustments, broadens the advice on appraising guarantors and loan sponsors, integrates modifications to accounting standards since 2009, and refreshes the representative instances of commercial real estate loan restructuring.

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Short-Term Loan Accommodations: A Key Change

One of the significant changes in the 2023 Policy Statement is the introduction of short-term loan accommodations. These provisions, encompassing agreements to postpone payments, make fractional payments, abstain from pursuing overdue amounts, or provisionally alter a loan, are differentiated from long-term, more intricate workout and restructuring processes.

The policy encourages financial institutions to work prudently with borrowers experiencing financial stress by creating appropriate short-term loan accommodations, which can often be in the best interest of both parties.

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Evaluating Guarantors and Sponsors

The 2023 Policy Statement also expands the evaluation and assessment of guarantors to include loan sponsors. Examiners will now review the finances and incentives of sponsors that support a loan, recognizing their capacity, willingness, and incentives to pay debt service, make principal curtailments, or otherwise support a loan, similar to a guarantor.

Accounting Standards Updates

The new policy statement also addresses changes to accounting principles since 2009, including the addition of the Current Expected Credit Losses (CECL) methodology and the removal of troubled debt restructuring (TDR) accounting. These changes reflect the evolving landscape of financial accounting and regulatory guidance.

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Updated Loan Workout Examples

The 2023 Policy Statement updates and expands the illustrative examples of commercial real estate loan workouts, providing new scenarios in the context of loans secured by income-producing hotel properties, loans for the acquisition, development, and construction of residential properties, and loans secured by multifamily residential real estate.

2023 FDIC Policy Statement: The Bottom Line

The 2023 FDIC Policy Statement serves as a timely reminder for financial institutions to evaluate their risk management policies, internal controls, and regulatory reporting practices concerning loan accommodations, workouts, and restructurings.

While not groundbreaking, the statement increases supervisory flexibility and transparency and reaffirms the importance of financial institutions working prudently with commercial real estate borrowers through all economic cycles.

This communication holds significant relevance in today’s environment marked by escalating interest rates, inflationary forces, and ongoing disruptions in supply chains and labor, factors that are poised to affect the financial health and repayment abilities of certain commercial real estate borrowers.

July 2, 2023