A little over a month has passed since six regulatory agencies issued their joint Policy Statement on Prudent CRE Loan Workouts. The regulatory flexibility encouraged by the statement has received much attention. Lenders, at least, are relieved to know that they will be allowed to work through these difficult times without having to write off their entire CRE portfolios (see WSJ article here).
The immediate and lasting impact of the statement, however, has little to do with flexibility. It has everything to do with the quality of information provided by borrowers.
Consider the heart of the statement’s guidelines. For an individual workout to be afforded safe harbor by regulators, the plan must include:
- Updated and comprehensive financial information regarding the real estate project, including current collateral valuations (though a new formal appraisal may not be required in all cases);
- Updated and comprehensive financial information regarding the borrower, including analysis of the borrower’s “global debt service” (i.e., the aggregate of a borrower’s financial obligations, including contingent obligations) that reflects a realistic projection of the borrower’s expenses; and
- Updated and comprehensive financial information regarding any guarantor, including analysis of the guarantor’s global debt service that reflects a realistic projection of the guarantor’s expenses.
In addition, a lender must be able to “monitor the ongoing performance of the borrower and guarantor under the terms of the workout” so that it can modify the workout plan in the future if repayment projections do not materialize or if collateral values do not stabilize.
Lenders cannot take advantage of the flexibility offered by the statement unless they secure this information. Practically speaking, how can they determine appropriate workout terms without it? But when lenders have good information in their files, the statement directs regulators to give deference to lenders’ decisions.
Borrowers, you are the ones who ultimately must comply. But instead of considering compliance a burden, think of it as an opportunity. Those borrowers who show themselves proactive and forthcoming with information will be treated better than those whose teeth lenders have to pull. Make your banker’s life easier by appeasing her examiner, and she’ll throw you a bone in return.
The statement merely encourages proper underwriting standards. Therefore, expect updated, comprehensive, ongoing financial information to become the norm in lending relationships.
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If you would like more information on how to compile and format your real estate and personal information for your lender and its regulators, please contact us at (205) 533-9261.