On June 29, 2023, NCUA, along with several other federal regulatory agencies, issued an interagency Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts (“Statement”) in a Letter to Credit Unions, 23-CU-05, which provided updated guidance and calls for financial institutions to work “prudently and constructively” with creditworthy borrowers during times of financial stress.
The Statement is substantially similar to a proposal issued last year except for the added guidance on short-term loan accommodations and accounting changes when estimating loan losses. The Statement will replace the 2009 guidance that was previously adopted. The Statement addresses supervisory expectations with respect to a financial institution’s handling of loan accommodations and workouts including prudent risk management practices, the classification concepts for commercial real estate (“CRE”) loans, accounting considerations and examples of a CRE workout.
The Statement reaffirms two critical principles: financial institutions that implement the CRE loan accommodation and workout arrangements won’t be criticized for engaging in these efforts. Second, modified loans to borrowers who can repay their debts according to reasonable terms will not be adversely classified due to the underlying collateral. However, it is important to note that the burden remains on credit unions to employ prudent and appropriate internal controls to manage the risks associated with accommodated loans.
Loan Accommodation versus a Workout Program
A loan accommodation is a short-term or temporary agreement which can defer one or more payments, allow for partial payment, forbearance of delinquent amounts, modify a loan or contract, or provide other assistance or relief to a borrower who is experiencing a financial challenge. However, when a loan accommodation isn’t sufficient or wasn’t successful, credit unions can provide a longer-term or more complex loan arrangement under a formal workout program which can include renewing or extending loan terms, granting additional credit to improve prospects for overall repayment, or restructuring the loan with or without concessions.
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