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Federal R eserve Bank
OF DALLAS
ROBERT

D. M C T E E R , J R .

P R E S ID E N T
AND

C H IE F E X E C U T I V E O F F I C E R

i
JUlV 9, 1993

DALLAS, TEXAS 75222

Notice 93-71
TO:

The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Interagency Policy Statements
on Additional Credit Initiatives
DETAILS

The Office of the Comptroller of the Currency, the Federal Deposit
Insurance Corporation, the Board of Governors of the Federal Reserve System,
and the Office of Thrift Supervision have announced further details on the
implementation of their March 10, 1993, program to increase credit availabil­
ity to businesses and individuals. The policy statements announce the
following additional credit initiatives:
•

Examination coordination and implementation guidelines;

•

Guidance on reporting in-substance foreclosures;

•

Guidance on returning certain nonaccrual loans to accrual status;

•

Fair lending initiatives;

•

Supervisory definition of "special mention" assets; and

•

Review and classification of commercial real estate loans.

The latest actions of the agencies brought to a close the first
phase of the President’s credit availability program. However, all four
agencies have emphasized that they will continue their efforts to reduce the
paperwork and the regulatory burden that impedes the flow of funds to credit­
worthy borrowers.
ATTACHMENTS
The interagency policy statements are attached.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

- 2 -

MORE INFORMATION
For more information, please contact Basil Asaro at (214) 922-6066
or Earl Anderson at (214) 922-6152. For additional copies of this Bank’s
notice, please contact the Public Affairs Department at (214) 922-5254.
Sincerely yours,

Office of the Comptroller of the Currency
Joint Statement
_____ Federal Deposit Insurance Corporation
_____________________ Federal Reserve Board
__________ Office of Thrift Supervision

Interagency Policy Statement on
Examination Coordination and Implementation Guidelines
June 10, 1993
This statement outlines a program for coordinating examinations of insured depository
institutions and inspections o f their holding companies by the federal financial regulatory
agencies. This program expands on existing interagency agreements, and responds to the
industry’s concern over the increased burden on organizations supervised by multiple regulatory
agencies.
The objective of the program is to minimize disruption and avoid duplicative examination efforts
and information requests, whenever possible. The significant elements of the program include:
■

Coordinating the planning, timing and scope of examinations and inspections of
federally insured depository institutions and their holding companies;

■

Conducting joint interagency examinations or inspections, when necessary;

■

Coordinating and conducting joint meetings between bank or
company management and the regulators;

■

Coordinating information requests; and

■

Coordinating enforcement actions, when appropriate.

bank holding

The program emphasizes full cooperation and coordination by the agencies in supervising large
banking organizations and organizations that are in a less than satisfactory condition. Additional
effort will also be made to reduce the regulatory burden on the remaining population of
depository institutions.
Guidelines for implementation of the program are attached.

IMPLEMENTATION GUIDELINES
1.

PURPOSE

These guidelines were developed to strengthen coordination and cooperation among the
federal banking agencies in examining and supervising banking organizations and to cany out
the provisions o f the March 10 Interagency Policy Statement intended to minimize the
disruptions and burdens associated with the examination process. The provisions are:
■

Eliminate duplication in examinations by multiple agencies, unless
clearly required by law;

■

Increase coordination o f examinations among agencies when duplication
is required; and

■

Establish procedures to centralize and streamline examinations in
multihank organizations.

These guidelines address the coordination o f the examinations by federal agencies of
depository institutions and the inspections of their holding companies. To achieve the desired
strengthening in the coordination of the federal agencies’ examination/inspection activities,
the guidelines focus on the planning, staffing, timing and conduct of examinations and
inspections; the conduct of joint management meetings to discuss inspection and examination
findings; and other areas o f mutual concern.

2.

PRIMARY SUPERVISORY AND COORDINATION RESPONSIBILITY

Examinations/inspections of a particular legal entity will be conducted by the federal
regulatory agency that has primary supervisory authority for that entity. In carrying out its
supervisory responsibilities for a particular entity within a hanking organisation, each
regulatory agency will rely on examinations/inspections conducted by the primary regulator
o f the affiliate to the extent possible, thereby avoiding unnecessary duplication and disruption
to the banking organization. In certain situations, however, it may be necessary for a
regulatory agency other than the entity’s primary supervisory authority to participate in the
examination or inspection of the entity in order to fulfill its regulatory responsibilities.
These guidelines provide procedures for handling such situations.
Primary supervisory authority and coordination responsibilities arc organized as follows:
OCC

national banks;

FDIC

state nonmember banks;

OTS

thrift holding companies and savings associations; and

FRB

parent bank holding companies, nonbank subsidiaries of bank
holding companies, the consolidated bank holding company and
state member banks.

The primary federal regulator is responsible for scheduling, staffing and setting the scope of
supervisory activities, including coordinating formal and informal administrative actions, as
necessary. In fulfilling these responsibilities, the primary regulatory agency should consult
closely with the other appropriate agencies when there is need for coordination.

3.

O V ERVIEW

The agencies will make every effort to coordinate the examinations and the inspections o f
banking organizations. Coordinated examinations and inspections may not be practical in all
cases because o f resource constraints, serious scheduling conflicts, or geographic
considerations; however, particular emphasis for implementing this program will be placed
on hanking organizations with over $10 billion in consolidated assets and those banking
organizations (generally, with assets in excess o f $1 billion) that exhibit financial weaknesses.

4.

PRE-EXAM INATION CO O RDINATION

Where multiple regulators have authority over a legal entity, representatives from the
appropriate supervisory offices should meet quarterly as necessary to discuss supervisory
strategies for specific banking organizations, and at least annually to review and establish
examination and inspection schedules, to plan for the next year, and to consider the need for
coordination in the following areas:
■

Sharing the strategy and scope o f each examination/inspection;

■

Determining if agencies other than the primary regulator o f a particular
entity should participate in the examination/inspection o f that entity;

■

Determining whether a consolidated request letter should be prepared to
avoid duplicative information requests;

■

Sharing examination/inspection work papers and resulting findings and
conclusions from prior examination/inspection efforts; or

■

Other areas as necessary.

2

5.

INTERAGENCY REVIEW OF BANK, NONBANK AND PARENT COMPANY
ACTIVITIES

Certain areas or functions transcend legal entity distinctions, such as internal audit, credit
review and the methodology for determining the allowance for loan and lease losses. Such
functions may be located at the bank or holding company level. The primary regulator of
the depository institution and the holding company may both have supervisory responsibility
to assess such functions. In these cases, examinations or inspections of such areas should be
conducted on a coordinated and concurrent basis to avoid duplicative reviews and
unnecessary disruption.
The primary regulator of the entity being examined/inspected should take the lead on such a
coordinated examination or inspection, unless there is mutual agreement that another agency
will serve as the lead agency. The responsibilities o f the lead agency, in consultation with
other appropriate agencies, include developing the scope o f the examination or inspection and
determining the staff requirements. The lead agency will also coordinate
examination/inspection scheduling and the presentation o f examination/inspection findings to
the appropriate management.

6.

COORDINATION OF MANAGEMENT MEETINGS

At the conclusion o f examinations and inspections conducted under these guidelines, the
agencies should coordinate and plan joint meetings with the board o f directors to discuss the
findings and conclusions. Agencies will be guided by the coordination responsibility
definitions outlined in Provision 2 of this program, unless otherwise agreed upon.

7.

PROCESS FOR HANDLING SIGNIFICANT DIFFERENCES BETWEEN THE
AGENCIES IN FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

Prior to forwarding examination and inspection results to management or boards o f directors,
every effort should be made to resolve any significant differences concerning major
findings, conclusions and recommendations.
Such differences should be resolved by examiners, or officials at the regional level, within 10
business days o f identification. If resolution cannot be achieved following full review and
communication between the regional offices, the matter should be referred to the national
level, where it will be resolved within a reasonable time frame.

8.

INSPECTION AND EXAMINATION REPORTS

The primary regulator will prepare the formal report of examination or inspection covering
the entity for which it is the primary federal regulator and in those cases for which it serves
as the lead agency. The report should be addressed and transmitted to the directors o f the
entity for which the regulator is the primary federal supervisory authority and, as necessary,
it may be sent to the directors of other entities that have a need for the information. The
agencies may mutually agree, if necessary and appropriate, to prepare a joint report.

9.

INFORMATION REQUESTS

Any request for information to be obtained from an entity for supervisory purposes should
normally be made through the entity’s primary regulator. The primary regulator should also
share relevant supervisory information with the other appropriate regulatory agencies.

10.

COORDINATING ENFORCEMENT ACTIONS

When enforcement action is contemplated by one or more regulatory agencies, consideration
should be given to initiating a joint enforcement action to address and correct deficiencies
within a hanking organization. At a minimum, each agency considering enforcement action
should inform other regulatory agencies. This provision reaffirms the existing interagency
enforcement agreement.

11.

OTHER MATTERS

The agencies will establish arrangements to monitor coordination efforts and to resolve any
differences that arise under this program.
The agencies will also endeavor to coordinate with state banking departments, where
appropriate and feasible.

June 10, 1993

4

Office of the Comptroller of the Currency
_____ Federal Deposit Insurance Corporation
Joint Statement
________________
Federal Reserve Board
___________________________________ Office of Thrift Supervision
For immediate release

Interagency Guidance on
Reporting of In-Substance Foreclosures
June 10, 1993

On March 10, 1993, the four federal banking and thrift regulatory agencies issued an
Interagency Policy Statement on Credit Availability. That statement indicated that the agencies
would seek to clarify the reporting treatment for in-substance foreclosures (I5>F) and would
work with the accounting authorities to achieve consistency between generally accepted
accounting principles (GAAP) and regulatory reporting requirements in this area.
Under existing accounting guidelines for determining whether the collateral for a loan has been
in-substance foreclosed, a loan is transferred to "other real estate owned" (OREO or REO) and
appropriate losses are recognized if certain criteria are met. Such OREO designations may
impede efforts to improve credit availability and may discourage lenders from working with
borrowers experiencing temporary financial difficulties.
The Financial Accounting Standards Board (FASB) recently issued Statement No. 114,
"Accounting by Creditors for Impairment o f a Loan," addressing the accounting for impaired
loans. This Standard also clarifies the existing accounting for in-substance foreclosures. Under
the new impairment standard and related amendments to Statement No. 15," Accounting by
Debtors and Creditors for Troubled Debt Restructurings" (FAS 15), a collateral dependent real
estate loan (i.e., a loan for which repayment is expected to be provided solely by the
underlying collateral) would be reported as OREO only if the lender had taken possession o f
the collateral. For other collateral dependent real estate loans, loss recognition would be based
on the fair value' o f the collateral if foreclosure is probable. However, such loans would no
longer be reported as OREO. Rather, they would remain in the loan category.
(more)

1 Fair value is defined in paragraph 13 of FAS 15.

Accordingly, the agencies have concluded that losses2 must be recognized on real estate loans
that meet the existing ISF criteria based on the fair value o f the collateral, but such loans need
not be reported as OREO unless possession o f the underlying collateral has been obtained. The
agencies believe that this interagency guidance, coupled with other agency actions currently
being taken, will reduce impediments to the availability o f credit.
U# # # #

2 Consistent with GAAP, loss recognition would consider estimated costs to sell.

Office of the Comptroller of the Currency
Joint Statement
_____ Federal Deposit Insurance Corporation
_____________________ Federal Reserve Board
_______________________ Office of Thrift Supervision
For immediate release

Revised Interagency Guidance on
Returning Certain Nonaccrual Loans to Accrual Status
June 10, 1993

Introduction
On March 10 1993, the four federal banking agencies issued an Interagency Policy Statement
on Credit Availability. That policy statement outlined a program o f interagency initiatives to
reduce impediments to the availability o f credit to businesses and individuals.
As part o f that program, the agencies are making two revisions to existing policies for
returning certain nonaccrual loans to accrual status. The revised policies should remove
impediments to working with borrowers who are experiencing temporary difficulties in a
manner that maximizes recovery on their loans, while at the same time improving disclosures
in this area.
The first change conforms the banking and thrift agencies’ policies on troubled debt
restructurings (TDRs) that involve multiple notes (sometimes referred to as "AVB" note
structures). The second change would permit institutions to return past due loans to accrual
—status, provided the institution expects to collect all contractual principal and interest due and
the borrower has demonstrated a sustained period o f repayment performance in accordance
with the contractual terms.
The revised policies are effective immediately. Thus, institutions may elect to adopt such
changes for purposes o f the June 30, 1993, Consolidated Reports o f Condition and Income
(Call Report) and Thrift Financial Report (TFR). Revised Call Report and TFR instructions
will be distributed as o f September 30, 1993.

2

TDR M ultiple Note Structure
The agencies are conforming their reporting requirements for TDR structures involving
multiple notes. The basic example is a troubled loan that is restructured into two notes where
the first or "A" note represents the portion o f the original loan principal amount which is
expected to be fully collected along with contractual interest. The second part of the
restructured loan, or "B" note, represents the portion o f the original loan that has been charged
off.
Such TDRs generally may take any of three forms. (1) In certain TDRs, the "B" note may be
a contingent receivable that is payable only if certain conditions are met (e.g., sufficient cash
flow from the property). (2) For other TDRs, the "B" note may be contingently forgiven (e.g.,
note "B"isforgiven if note "A" is paid in full). (3) In other instances, an institution would
have granted a concession (e.g., rate reduction) to the troubled borrower but the "B" note
would remain a contractual obligation o f the borrower. Because the "B" note is not reflected
as an asset on the institution’s books and is unlikely to be collected, the agencies have
concluded that for reporting purposes the "B" note could be viewed as a contingent receivable.
Institutions may return the "A" note to accrual status provided the following conditions are
met:
(1)

The restructuring qualifies as a TDR as defined by FASB Statement No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructuring," (SFAS
15) and there is economic substance to the restructuring. (Under SFAS 15, a
restructuring o f debt is considered a TDR if "the creditor for economic or legal
reasons related to the debtor’s financial difficulties grants a concession to the
debtor that it would not otherwise consider.")

(2)

The portion o f the original loan represented by the "B" note has been charged
off. The charge-off must be supported by a current, well documented credit
evaluation o f the borrower’s financial condition and prospects for repayment
under the revised terms. The charge-off must be recorded before or at the time
o f the restructuring.

(3)

The "A" note is reasonably assured o f repayment and of performance in
accordance with the modified terms.

(4)

In general, the
borrower must have demonstrated sustained repayment
performance (either immediately before or after the restructuring) in accordance
with the modified terms for a reasonable period prior to die date on which the
"A" note is returned to accrual status. A sustained period o f payment
performance generally would be a m inim um o f six months and involve
payments in the form o f cash or cash equivalents.

3

Under existing reporting requirements, the "A" note would be disclosed as a TDR. In
accordance with these requirements, if the "A" note yields a market rate o f interest and
performs in accordance with the restructured terms, such disclosures could be eliminated in the
year following the restructuring. To be considered a market rate o f interest, the interest rate
on the "A" note at the time o f the restructuring must be equal to or greater than the rate that
the institution is willing to accept for a new receivable with comparable risk.

Nonaccrual Loans That Have Demonstrated Sustained Contractual Performance
Certain borrowers have resumed paying the full amount o f scheduled contractual interest and
principal payments on loans that are past due and in nonaccrual status. Although prior
arrearages may not have been eliminated by payments from the borrowers, some borrowers
have demonstrated sustained performance over a period o f time in accordance with the
contractual terms. Under existing regulatory standards, institutions cannot return these loans
to accrual status unless they expect to collect all contractual principal and interest and the loans
are brought fully current (or unless the loan becomes well secured and in the process of
collection).
Such loans may henceforth be returned to accrual status, even though the loans have not been
brought fully current, provided two criteria are met: (1) all principal and interest amounts
contractually due (including arrearages) are reasonably assured o f repayment within a
reasonable period, and (2) there is a sustained period o f repayment performance (generally a
minimum o f six months) by the borrower, in accordance with the contractual terms involving
payments o f cash or cash equivalents. Consistent with existing guidance, when the regulatory
reporting criteria for restoration to accrual status are met, previous charge-offs taken would not
have to be fully recovered before such loans are returned to accrual status.
Loans that meet the above criteria would continue to be disclosed as past due (e.g., 90 days
past due and still accruing for Call Report and TFR purposes), as appropriate, until they have
been brought fully current.

Additional Guidance
The Financial Accounting Standards Board (FASB) recently issued Statement No. 114,
"Accounting by Creditors for Impairment o f a Loan," which establishes a new approach for
recognizing impairment on problem loans and for recognizing income on such loans. In
addition, the standard establishes new disclosure requirements for impaired loans for financial
reporting purposes. In light o f the significance o f those changes, the agencies are reevaluating
regulatory disclosure and nonaccrual requirements that will apply when the statement becomes
effective, and expect to issue revised policies at a later date.

## ## #

Office of the Comptroller of the Currency
Joint Release
_____ Federal Deposit Insurance Corporation
_____________________ Federal Reserve Board
___________________________________ Office of Thrift Supervision
For immediate release

Interagency Policy Statement on
Fair Lending Initiatives
June 10, 1993
The four financial institution regulatory agencies are announcing initiatives that they
will pursue over the next several months to e nhance their ability to detect lending
discrimination, to improve the level o f education they provide to the industry and to
their examiners, and to strengthen fair lending enforcement
Background
A number o f interagency efforts are already completed or are under way to improve fair
lending detection techniques, enforcement, and education. For example:
■

The agencies have issued a joint statement to financial institutions that reaffirms
their commitment to the enforcement o f the fair lending laws and provides the
industry with guidance and suggestions on fair lending matters.

■

The agencies are working on a revised supervisory enforcement policy for
dealing with violations o f the Equal Credit Opportunity and Fair Housing Acts.
This revised policy w ill replace a policy issued in 1981. The revised policy
specifies corrective actions for several different substantive violations o f the
ECOA and FHA.

■

The agencies are developing uniform fair lending examination procedures and
training programs. The agencies believe these new procedures will significantly
strengthen existing discrimination detection programs. These new examination
procedures w ill be publicly available this summer.

New Initiatives
The four agencies w ill pursue the following new initiatives over the next several
months:
(more)

-

1.

2

-

Fair Lending Training for Examiners
The agencies will develop a new training program in fair lending for
experienced compliance examiners that will be conducted on a regional basis.
A pilot program could be held as early as Fall 1993.

2.

Fair Lending Seminar for Industry Executives
The agencies will develop and sponsor regional fair lending programs for top
level industry executives (chief executive officers and executive vice presidents)
to explain their efforts to enforce fair lending laws and to foster additional
sensitivity and awareness among lenders about discrimination issues, specifically
subtle practices that impede the availability o f credit to low-income and minority
individuals. The first session o f this program could be held later this year.

3.

Alternative Discrimination Detection M ethods
The agencies will explore statistically-based discrimination analysis models.
These models may help identify loan applications files for review as part o f the
examination process. This will significantly enhance the agencies’ abilities to
identify loan applicants that may have received differential treatment

4.

Stronger Enforcement o f Fair Lending Laws
Each agency will implement an internal process for making referrals to the
Department o f Justice for violations o f the Equal Credit Opportunity A ct These
internal procedures will ensure that appropriate cases are being put forth for
consideration by senior management

5.

Improved Consumer Complaint Programs
The agencies believe that refinements to their consumer complaint systems can
also better promote the broad availability o f credit on a non-discriminatoiy basis.
During the next few months, each agency will evaluate the effectiveness o f its
consumer complaint system in detecting and correcting credit discrimination, and
alerting the agencies to industry practices that may inhibit the free flow o f
credit Each agency will announce its own specific initiatives in these areas.

#### #

Office of the Comptroller of the Currency
_____ Federal Deposit Insurance Corporation
Joint Statement
_____________________ Federal Reserve Board
___________________________________ Office of Thrift Supervision
For immediate release

Interagency Statement on the
Supervisory Definition of Special Mention Assets
Ju n e 10, 1993

The March 10, 1993 Interagency Policy Statement on Credit Availability indicated the federal
banking and thrift regulatory agencies would issue guidance clarifying use o f the Special
Mention definition for regulatory supervision purposes. The four agencies have agreed on the
definition o f "Special Mention" as staled below. This definition should also be considered by
an institution when performing its own internal asset review.
The definition o f Special Mention is as follows:
A Special Mention asset has potential weaknesses that deserve management’s
close attention. If left uncorrected, these potential weaknesses may result in
deterioration o f the repayment prospects for the asset or in the institution’s credit
position at some future date. Special Mention assets are not adversely classified
and do not expose an institution to sufficient risk to warrant adverse
classification.
In the past, the agencies used different terminology and definitions for Special Mention.
Supervisory reports and their contents also varied between agencies. The use o f a common
definition will lead to more consistent application o f supervisory procedures. The definition
will also enable examiners to more readily segregate Special Mention assets from those
warranting adverse classification. It will also ensure that the Special Mention category is not
used to identify an asset which has as its sole weakness credit data exceptions or collateral
documentation exceptions that are not material to the repayment o f the asset
The agencies are in the process o f developing examiner guidance explaining how the Special
Mention category will be used in the assessment o f the overall condition o f an institution. The
agencies have agreed to conform their policies and guidance to the following principles:

(more)

-

2

-

■

Classified assets, which by definition do not include Special Mention assets, will
be the standard measure used in expressing the quality o f a bank or thrift’s loan
portfolio and other assets. The agencies will not express asset quality in terms
o f "criticized assets," a term that is generally recognized as including both
Special -Mention and classified assets.

■

The agencies will ensure their policies, examiner guidance, and internal
monitoring systems do not call for internal reporting o f criticized asset totals or
percentages. However, examiners will continue to consider the level and trends
o f assets categorized as Special Mention in their analysis as appropriate.

■

In implementing Section 132 o f the FDIC Improvement Act, Standards for
Safety and Soundness, the agencies will use classified assets and not use
criticized assets as a measure o f asset quality.

■

Special Mention assets will not be combined with classified assets in reports o f
examination or in corporate applications.

Each agency will make appropriate revisions to its examiner guidance, and all will work to
ensure their guidance is consistent among the agencies. The guidance will emphasize that it
is inappropriate to use the Special Mention category to capture loans solely because o f their
nature or type, such as small business lending or affordable housing lending.
Implementation o f the revised definition will be effective immediately. Examiner guidance will
be forthcoming shortly.

#####

Office of the Comptroller of the Currency
Joint Release
_____ Federal Deposit Insurance Corporation
_____________________ Federal Reserve Board
_______ ____________________________ Office of Thrift Supervision
For immediate release

Interagency Policy Statement on
Review and Classification of Commercial Real Estate Loans
June 10, 1993

On March 10, 1993, the four federal regulators o f banks and thrifts issued an Interagency
Policy Statement on Credit Availability. This policy statement outlined a program of
interagency initiatives to reduce impediments to making credit available to businesses and
individuals.
One impediment to making credit available to commercial real estate borrowers may be
problems in evaluation of real estate collateral. The federal bank and thrift regulatory agencies
have been working with their examination staffs for some time to ensure that commercial real
estate loans are evaluated in accordance with agency policy. In issuing today’s policy
statement, the federal bank and thrift regulatory agencies are reaffirming the guidelines in the
November 7, 1991 Interagency Policy Statement on the Review and Classification of
Commercial Real Estate Loans. The November 7, 1991 policy statement provides clear and
comprehensive guidance to ensure supervisory personnel are reviewing commercial real estate
loans in a consistent, prudent and balanced manner. A copy o f that statement is attached.
The November 7, 1991 statement clarified regulatory policy on real estate valuation and
classification. The evaluation o f commercial real estate loans is based on a review o f the
borrower’s willingness and capacity to repay and on the income-producing capacity of the
underlying collateral over time. The value of collateral increases in importance as a loan
becomes troubled and the borrower’s ability to repay the loan becomes more questionable. The
statement emphasizes that it is NOT regulatory policy to value collateral that underlies real
estate loans on a liquidation basis. (See the discussion on "Examiner Review o f Individual
Loans, Including the Analysis o f Collateral Value," beginning on page 3 o f the policy
statement.)
Furthermore, the policy statement discusses management’s responsibility for reviewing
appraisal assumptions and conclusions for reasonableness. Appraisal assumptions should not
be based solely on current conditions that ignore the stabilized income-producing capacity of
the property.

-

2

-

Management should adjust any assumptions used by an appraiser in determining values that
are overly optimistic or pessimistic. The policy statement also indicates that the assumptions
used in a discounted cash flow analysis (such as discount rates and direct capitalization rates)
should reflect reasonable expectations about the rate o f return that investors require under
normal, orderly and sustainable market conditions. Unrealistic or unsustainable high or low
discount rates, "cap" rates, and income projections should not be used.
The use o f appropriate assumptions in a discounted cash flow analysis is particularly important
in determining the value of collateral for a troubled, project-dependent commercial real estate
loan (involving income-producing property). The agencies use this valuation for determining
the amount of the loan that is adequately secured by the value of the collateral. The November
7, 1991 Interagency Policy Statement indicates that generally, any portion o f the loan balance
that exceeds the amount adequately secured by collateral values and that can be clearly
identified as uncollectible should be classified "loss." The portion o f the loan balance that is
adequately secured by the value o f the collateral should generally be classified no worse than
"substandard." The policy statement also indicates that, when an institution has taken a chargeoff in sufficient amount so that the remaining recorded balance o f the loan (a) is being serviced
(based on reliable sources) and (b) is reasonably assured o f collection, classification of the
remaining recorded balance may not be appropriate.
The federal bank and thrift regulatory agencies will continue to ensure their examiners
implement the policy statement appropriately and uniformly. Each agency has an appeals
process for institutions with significant concerns about examinations, including any concerns
relating to the supervisory treatment o f commercial real estate loans.

Reference:

Interagency Policy Statement on Review and Classification o f Commercial Real
Estate Loans, November 7, 1991


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102