Reasonableness of a loan workout strategy

Submitted by sevans on Thu, 11/20/2014 - 4:13pm

A loan workout is in accordance with a prudent workout strategy when current financial information supports the ultimate collectibility of the debt under reasonable modified terms, which means the best estimate of the expected future cash flows is sufficient to repay or otherwise satisfy the loan (both principal and interest). The expected future cash flows should be fully supported by a complete analysis and underwriting of the financial capacity and willingness of the borrower to repay the debt as defined in the credit policy of the institution.  

Conditions under which a loan is determined to be TDR

Submitted by sevans on Thu, 11/20/2014 - 4:11pm

A modified loan’s regulatory credit risk grade or classification and its TDR analysis are separate and distinct decisions, but the processes are related. A TDR designation means the loan is impaired for accounting purposes, but it does not automatically result in an adverse classification or credit risk grade. However, at the time of the modification, an assessment of the credit risk grade or classification should be made. All relevant factors, including the extent of the borrower’s financial difficulty, should be considered when making the risk-rating assessment.

Accrual and non-accrual status structuring for TDRs

Submitted by sevans on Thu, 11/20/2014 - 4:10pm

A loan that is modified and determined to be a TDR in accordance with GAAP can be in either accrual or nonaccrual status at the time of the modification. A loan modified in a TDR that is on nonaccrual at the time of the loan’s modification need not be maintained for its remaining life in nonaccrual status, but can be restored to accrual status if the loan meets the return-to-accrual conditions set forth in the Call Report Glossary (for banks and savings associations) or 12 CFR 741.3(b)(2) and Appendix C to Part 741 (for credit unions).

FAS 5 vs FAS 114 recognition of losses

Submitted by sevans on Tue, 11/18/2014 - 4:16pm

If the specific characteristics of the individually evaluated loan that is not impaired indicate that it is probable that there would be an incurred loss in a group of loans with those characteristics, then the loan should be included in the assessment of the ALLL for that group of loans under FAS 5. Institutions should measure estimated credit losses under FAS 114 only for loans individually evaluated and determined to be impaired.