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How to Workout Distressed Commercial
Loans and Keep the FDIC Happy
Redistribution of FDIC: Policy Statement on Prudent Commercial Real Estate Loan Workouts
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Policy Statement on
Prudent Commercial Real Estate Loan Workouts
The financial regulators
1
recognize that financial institutions face significant challenges
when working with commercial real estate (CRE)
2
borrowers that are experiencing diminished
operating cash flows, depreciated collateral values, or prolonged sales and rental absorption
periods. While CRE borrowers may experience deterioration in their financial condition, many
continue to be creditworthy customers who have the willingness and capacity to repay their
debts. In such cases, financial institutions and borrowers may find it mutually beneficial to work
constructively together.
The regulators have found that prudent CRE loan workouts are often in the best interest
of the financial institution and the borrower. Examiners are expected to take a balanced
approach in assessing the adequacy of an institution’s risk management practices for loan
workout activity. Financial institutions that implement prudent CRE loan workout arrangements
after performing a comprehensive review of a borrower’s financial condition will not be subject
to criticism for engaging in these efforts even if the restructured loans have weaknesses that
result in adverse credit classification. In addition, renewed or restructured loans to borrowers
who have the ability to repay their debts according to reasonable modified terms will not be
subject to adverse classification solely because the value of the underlying collateral has declined
to an amount that is