On October 30, 2009, the Federal Deposit Insurance Corporation (FDIC) published its Policy Statement on Prudent Commercial Real Estate Loan Workouts. These guidelines were created by FDIC to assist institutional lenders facing significant challenges on loans secured by commercial real estate when borrowers experience diminished operating cash flows, depreciated security values, or prolonged sales and rental absorption periods. The guidelines focus in great detail on the following issues:
- Risk management elements for lenders engaging in commercial loan workout programs;
- Loan workout arrangements, including renewal or extension of loan terms, extension of additional credit, or restructuring with or without concessions;
- Borrower’s ability to repay loan, including borrower’s willingness and capacity to repay under reasonable terms;
- Cash flow potential of underlying security or business;
- Financial capability of guarantors, including their willingness to provide loan support through ongoing payments, curtailments, or re-margining;
- Value of security, including (1) review of current appraisals or valuations and (2) internal lender policies and procedures for re-evaluating security as market conditions change or borrower’s financial condition deteriorates;
- Institutional lenders’ duty to prepare regulatory reports according to generally applicable accounting standards, comply with regulatory reporting requirements, and adopt effective internal supervisory policies and procedures; and
- Adjustments to federal loan classification standards so that loans with the following characteristics are not adversely classified:
- Loans adequately protected by current sound worth and debt service capacity of borrower, guarantor, or underlying security;
- Loans to financially sound borrowers that are renewed or restructured in accordance with prudent underwriting standards, unless well-defined weaknesses exist that jeopardize repayment; or
- Loans previously made to borrowers associated with particular industries that are currently experiencing financial difficulties.
These strategies, as well as practical approaches, legal requirements, and negotiating points for loan modifications are available to CEB customers in California Mortgages, Deeds of Trust, and Foreclosure Litigation, chap 10 (4th ed Cal CEB 2009). In the January 2010 update to the book, CEB will provide several new state-of-the-art forms for commercial loan modification, deeds in lieu of foreclosure, and forbearance agreements, as well as expanding coverage on loan guarantor rights and obligations, Truth-in-Lending Act liability, and bankruptcy practice relating to secured loans.
For guidance from CEB, see California Mortgages, Deeds of Trust, and Foreclosure Litigation, (4th ed Cal CEB 2009).