On October 24th there was an Interagency Supervisory Guidance released pertaining to everyone’s favorite topic, TDR’s. After reading through the release CEIS felt that it may be beneficial to summarize the take away points from the document. CEIS’ Liz Williams has provided the following comments in an effort to assist clarification on the subject:
“The regulatory guidance provides some helpful clarification or reminders of certain accounting and related requirements associated with Troubled Debt Restructures (TDRs). However, it’s important to note that much of the guidance applies to the broader category of all impaired loans (not just to TDRs).
Some of the key points covered:
– Collateral-dependent loans are those where the repayment is expected to come solely from the sale or cash flow from the operation of the collateral. The fair value of collateral method must be used to measure impairment for collateral-dependent loans. If repayment is expected to come via operation of the collateral (such as with a Commercial Real Estate income property) where the bank does not plan on foreclosing, estimated selling costs should not be included in the impairment analysis.
– When using the present value of expected cash flows methodology to measure impairment, prospects for collection of a large balloon payment at maturity should be carefully evaluated. The guidance includes suggested approaches, including assessing the borrower’s prospects for repayment or refinance, or using the fair value of collateral relative to the balloon payment.
– Expenses incurred by the bank to protect its collateral interest (e.g., payment of past due taxes, etc) may be capitalized (added to the loan amount) only if the loan documents permit capitalization of such costs.
– Guidance specific to TDRs includes criteria for maintaining on or returning loans to accrual status, and risk rating considerations.”
Hopefully this will provide further clarification on this murky topic. If you have any specific questions pertaining to the topic please don’t hesitate to contact us.