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Updated CRE Loan Workout Guidance

June 29, 2023

The federal banking regulators finalized updates to guidance on commercial real estate loan accommodations. The updates do not represent a significant regulatory policy change and have been in process since 2022. 

Today, the Federal Reserve, FDIC, the Office of the Comptroller of the Currency (OCC), and the National Credit Union Administration jointly released a final policy statement on commercial real estate loan accommodations and workouts. The updates were originally proposed in 2022, and the final statement is largely the same as when proposed.

Why it matters: The interagency policy statement provides guidance to bank examiners and banks on addressing distressed CRE loans. The guidance was originally issued in 2009, and the updates are not in response to the current CRE market conditions.

Yes, but: As before, the policy guidance does not mandate any particular treatment or playbook for loans, and regulators are careful to emphasize that each accommodation or workout is “case-specific”.

The agencies’ risk management expectations as outlined in the final Statement remain generally consistent with the 2009 Statement, and incorporate views on short-term loan accommodations, information about changes in accounting principles since 2009, and revisions and additions to the CRE loan workouts examples. 

Go deeper: The proposal and the final policy statement focused on three main updates.

• Short-Term Loan Accommodations: The update adds a new discussion of short-term and less complex accommodations for borrowers experiencing financial stress. This draws on some of the experience during COVID where certain properties had a temporary downturn but the lender and borrower saw a path back to performing.
• TDR Phased Out: The statement updates accounting references due to the implementation of the Current Expected Credit Loss (CECL) accounting methodology. The Financial Accounting Standard Board (FASB) began phasing out Troubled Debt Restructuring (TDR) designations in 2022, and the CRE workout guidance is being aligned to the current accounting practices.
• Updated CRE Workout Examples: The 2009 guidance contained numerous scenarios of a distressed property, the bank’s proposed treatment, and the examiner’s response. The update includes three new examples. The guidance clarifies, “All examples in the final Statement are intended to illustrate the application of existing rules, reporting instructions, and supervisory guidance on credit classifications and the determination of nonaccrual status.”

The bottom line: Banks have always been encouraged by regulators to pursue prudent loan workouts and the updates do not reflect a new mandate or outlook on the industry. For accounting policy, banks had started the transition to CECL and phaseout of TDRs in 2022, and the updated guidance now reflects the CECL accounting treatment most lenders use.

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