The FDIC Offers More Guidance on Loan Losses and Problem Loans
Carl Chatto, Managing Principal
The FDIC recently has offered some interpretations and published new information to banks regarding the allowance for loan losses and problem loans.
Guidance was provided to FDIC examiners addressing the Call Report instructions relating to an exception to the general rule on nonaccrual loans. A loan past due over 90 days does not need to be placed on nonaccrual status if it is both well-secured and in the process of collection. “In the process of collection” is now interpreted to mean “to be collected in full in the near future” and not just “in foreclosure.” Since foreclosures can take months and even years, well-secured loans just beginning the foreclosure process no longer meet the FDIC’s definition of “in the process of collection.” Some banks had interpreted “in the process of collection” to mean “in foreclosure,” so this will be a change for those banks.
Also, the FDIC issued a Financial Institution Letter regarding junior liens on residential properties. This will primarily affect home equity loans. The letter encourages segmenting your loan portfolio to capture exposure and loss history for these loans. The letter also reminds banks to make sure they comply with the Uniform Retail Classification and Account Management Policy which requires retail loans to be charged off (or charged down) when they are 180 days past due. It’s important to note that a specific allowance for these loans does not satisfy the Policy requirements; there must be a charge off taken.
Both of these points likely will come up in your next exam and you can expect examiners will look at your policies to see if they are updated to reflect these changes. Of course, once your policies are updated, your procedures must follow them. The changes should not be significant in most cases but getting policies and procedures in place should help you in the exam process.
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