US financial regulators, including the Federal Reserve, the National Credit Union Administration and the Federal Deposit Insurance Corporation, have issued a policy statement pointing out that commercial loan modification deals between the borrower and the lender could be beneficial for both parties. The policy statement points out that while the borrowers may be experiencing a decline in their financial situations, this does not necessarily mean that they have lost their creditworthiness. The statement goes on to declare that these borrowers may still be prepared and have the capability to repay the loans.
The regulators also stated that the examiners will not consider it as a negative factor for the bank if the result of such loan workout agreements are weaknesses that could lower their credit classifications. The policy statement also added that the credit classifications of the borrowers will not be degraded just because the market value of their properties have dropped to levels that are below their outstanding loan balance. The commercial loan modification can take various forms, including restructuring, provision of additional credit, the extension of the loan duration, and the renewal of certain loan terms.
However, the regulators also cautioned banks and lenders to ensure that the restructuring or renewal of the commercial real estate loans should be based on prudent lending practices. The banks should also follow all applicable reporting requirements. Some of the issues that should be addressed are the management infrastructure, internal controls, management information systems, documentation standards, loan collection processes, and regulatory reporting
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