The FRB, FDIC, OCC, OTS, NCUA and the Federal Financial Institutions Examination Council State Liaison Committee (collectively, the “Bank Regulators”) jointly issued guidelines on commercial real estate workouts entitled “Policy Statement on Prudent Commercial Real Estate Loan Workouts” (the “Policy Statement”).  The Policy Statement updates and replaces the Bank Regulators’ existing guidelines on this topic and provides guidance for financial institutions and bank examiners who are addressing issues concerning commercial real estate (“CRE”) loan borrowers who are “experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties.”  The Policy Statement is designed to provide illustrations of sound risk management practices for CRE loan workouts.

The Bank Regulators recognize that in these difficult economic times, it is often preferable for financial institutions to restructure troubled CRE loans rather than to foreclose on the borrower.  The Policy Statement declares that banks that “implement prudent loan workout arrangements after performing comprehensive reviews of borrowers’ financial condition will not be subject to criticism for engaging in these efforts even if the restructured loans have weaknesses that result in adverse credit classifications.”  Moreover, performing loans made to creditworthy borrowers will not be downgraded simply because of a decline in the value of the underlying collateral.  In an extensive attachment to the Policy Statement, the Bank Regulators provide detailed examples of how the guidance should be applied to CRE workouts.

The Obama Administration announced an initiative to encourage small business lending by providing capital support to community banks.  Under the plan, community banks with less than $1 billion in assets will be given access to lower-cost capital, provided that they submit a plan explaining how the capital will allow them to increase lending to small businesses.  Participants would also be required to submit quarterly reports detailing their small business lending activities.  Banks will be eligible to receive capital totaling up to 2% of risk weighted assets.  The capital would be available at an initial dividend rate of 3%, compared to the Capital Purchase Program’s (the “CPP”) 5%, with the dividend rate increasing to 9% after five years to encourage timely repayment.  A bank’s participation will be subject to approval by its primary federal banking regulator.  Final details on the terms of the program — including the amount of capital available and how current CPP participants could replace existing capital with investments under this program — will be developed in the coming weeks by the Treasury in consultation with community banks and small businesses.

The staff of the SEC’s Division of Corporation Finance sent a letter (the “Letter”) to chief financial officers of certain publicly-held banking companies (the “Banks”) regarding public disclosure of the manner in which they account for their provision and allowance for loan losses.  The Letter recommends that the publicly traded Banks reassess, in light of the economic downturn and the increase in high risk loans, their loan loss and related disclosure in the Management’s Discussion and Analysis (“MD&A”) section of their SEC filings. [Read more →]

The Massachusetts Division of Banks (the “DOB”) issued a report entitled Compendium of Actions Taken Relative to Foreclosures and the Mortgage Industry (the “Report”), in which the DOB describes the administrative and legislative actions it has taken since 2006 to address foreclosure and mortgage lending issues in Massachusetts.  The Report describes: (i) improved standards within the mortgage industry; (ii) enhanced supervision and enforcement (the Report states that since 2006, the DOB has issued 230 informal and 147 formal enforcement actions against licensed mortgage lenders and brokers); (iii) assistance programs for homeowners and (iv) improved state and local cooperation in addressing foreclosure and related mortgage industry issues.  Click here for a copy of the Report.

The Financial Crimes Enforcement Network (“FinCEN”) issued guidance [FIN-2009-A001] to financial institutions on filing suspicious activity reports (“SARs”) regarding loan modification and foreclosure rescue scams. The FinCEN guidance noted an increasing amount of fraud relating to loan modification and foreclosure rescue scams and stated that unscrupulous persons and companies are targeting homeowners having difficulty in paying their mortgages. FinCEN also stated that the Home Affordable Refinance Program and the Home Affordable Modification Program, recently outlined by Treasury Secretary Timothy Geithner, may present an opportunity for abuse by unscrupulous persons or companies. [Read more →]

Sheila Bair, along with staff members from the FDIC, participated in a technical briefing call earlier this week to discuss the Legacy Loans Program. The transcript of the call can be viewed here.

Term Asset-Backed Securities Loan Facility

The FRB announced the creation of the Term Asset-Backed Securities Loan Facility (”TALF”), a facility that will support the issuance of asset-backed securities (”ABS”) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (”SBA”). The set of permissible underlying credit exposures of eligible ABS may be expanded to include commercial mortgage-backed securities, non-Agency residential mortgage-backed securities, or other asset classes. [Read more →]