2nd UPDATE: US Regulators Urge Banks Help On Commercial Realty
(Updates with details from OCC document)
By Michael R. Crittenden and Jeff Bater
Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- U.S. banking regulators are urging banks to work with
commercial borrowers to modify their real estate loans, wary of the damaging
effect a high level of defaults could have on bank balance sheets.
The Federal Financial Institutions Examination Council, which includes the
Federal Reserve, Federal Deposit Insurance Corp. and others, said prudent
modifications to commercial real estate loans are frequently "in the best
interest" of both banks and their borrowers.
Regulators, in a significant step, also said they won't penalize banks for
performing loans where the value of the underlying property is now worth less
than the loan balance.
"Financial institutions that implement prudent [commercial real estate] 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," the agencies said in a policy statement.
The guidance comes as commercial real estate woes continue to cause headaches
for regulators and financial firms. Slower to develop than the significant
dislocation in the residential housing market, commercial real estate has shown
increasing weakness in recent quarters. The FDIC, in its most recent quarterly
analysis of the banking industry, said real estate construction and development
loans at least 90 days past due were up 16.6% in the second quarter.
The banking industry has complained that regulators have uneven expectations,
encouraging banks to be both prudent and to boost lending. Ann Grochala, vice
president of lending and accounting policy at the Independent Community Bankers
of America, said Friday's statement addresses some of the inconsistencies banks
have experienced when dealing with regulators.
"It's a positive in terms of getting both the bankers and the examiners on the
same page," Grochala said. "It provides a lot of clarification and addresses
many of the issues we've been hearing from bankers about."
Internally, federal regulators stressed to their personnel that lax
underwriting practices should not be tolerated. Timothy Long, the senior deputy
comptroller at the Office of the Comptroller of the Currency, rebuffed
criticisms that examiners are being "too tough" on banks in a memo to the
agency's examination staff Friday.
"We want you to take a balanced approach in your supervision," Long said,
telling examiners to encourage banks to make prudent loans to creditworthy
borrowers.
"Working with troubled borrowers, however, does not mean a bank can circumvent
prudent underwriting standards or defer recognition of losses," he continued. "
You need to continue to ensure that bank management appropriately identifies the
risks in their credit portfolios and makes appropriate loan classifications and
loan loss provisions."
-By Michael R. Crittenden, Dow Jones Newswires; 202 862 9273;
michael.crittenden@dowjones.com
(END) Dow Jones Newswires
10-30-091550ET
Copyright (c) 2009 Dow Jones & Company, Inc.
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