Fed Supports Prudent CRE Loan Workouts

The Federal Reserve Board has adopted a policy statement supporting prudent commercial real estate (CRE) loan workouts. The policy statement, adopted by each of the financial regulators (including the Reserve's Board of Governors and FDIC), provides guidance for examiners and financial institutions that are working with CRE borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting properties.

The policy statement also details risk-management practices for these loan workouts. According to a Fed press release, a financial institution that implements a prudent loan workout arrangement after performing a comprehensive review of a borrower's financial condition won't be subject to criticism for engaging in the effort, even if the restructured loan has weaknesses that result in an adverse credit classification. A performing loan, including one restructured on reasonably modified terms, won't be subject to an adverse classification solely because the value of the underlying collateral declined.