Risk Management Manual of Examination Policies - FDIC

LOANS Section 3.2
weaknesses or evidence of imprudent handling cannot be
identified, inclusion of such loans in Special Mention is not
justified.
Ordinarily, Special Mention credits have characteristics
which corrective management action would remedy. Often
weak origination and/or servicing policies are the cause for
the Special Mention designation. Examiners should not
misconstrue the fact that most Special Mention loans
contain management correctable deficiencies to mean that
loans involving merely technical exceptions belong in this
category. However, instances may be encountered where
technical exceptions are a factor in scheduling loans for
Special Mention.
Careful identification of loans which properly belong in
this category is important in determining the extent of risk
in the loan portfolio and providing constructive criticism
for bank management. While Special Mention Assets
should not be combined with adversely classified assets,
their total should be considered in the analysis of asset
quality and management, as appropriate.
The nature of this category precludes inclusion of smaller
lines of credit unless those loans are part of a large
grouping listed for related reasons. Comments on loans
listed for Special Mention in the Report of Examination
should be drafted in a fashion similar to those for adversely
classified loans. There is no less of a requirement upon the
examiner to record clearly the reasons why the loan is
listed. The major thrust of the comments should be
towards achieving correction of the deficiencies identified.
Troubled Commercial Real Estate Loan
Classification Guidelines
Additional classification guidelines have been developed to
aid the examiner in classifying troubled commercial real
estate loans. These guidelines are intended to supplement
the uniform guidelines discussed above. After performing
an analysis of the project and its appraisal, the examiner
must determine the classification of any exposure.
The following guidelines are to be applied in instances
where the obligor is devoid of other reliable means of
repayment, with support of the debt provided solely by the
project. If other types of collateral or other sources of
repayment exist, the project should be evaluated in light of
these mitigating factors.
• Substandard - Any such troubled real estate loan or
portion thereof should be classified Substandard when
well-defined weaknesses are present which jeopardize
the orderly liquidation of the debt. Well-defined
weaknesses include a project's lack of marketability,
inadequate cash flow or collateral support, failure to
complete construction on time or the project's failure
to fulfill economic expectations. They are
characterized by the distinct possibility that the bank
will sustain some loss if the deficiencies are not
corrected.
• Doubtful - Doubtful classifications have all the
weaknesses inherent in those classified Substandard
with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of
currently known facts, conditions and values, highly
questionable and improbable. A Doubtful
classification may be appropriate in cases where
significant risk exposures are perceived, but Loss
cannot be determined because of specific reasonable
pending factors which may strengthen the credit in the
near term. Examiners should attempt to identify Loss
in the credit where possible thereby limiting the
excessive use of the Doubtful classification.
• Loss - Advances in excess of calculated current fair
value which are considered uncollectible and do not
warrant continuance as bankable assets. There is little
or no prospect for near term improvement and no
realistic strengthening action of significance pending.
Technical Exceptions
Deficiencies in documentation of loans should be brought
to the attention of management for remedial action. Failure
of management to effect corrections may lead to the
development of greater credit risk in the future. Moreover,
an excessive number of technical exceptions may be a
reflection on management's quality and ability. Inclusion
of the schedule "Assets With Credit Data or Collateral
Documentation Exceptions" and various comments in the
Report of Examination is appropriate in certain
circumstances. Refer to the Report of Examination
Instructions for further guidance.
Past Due and Nonaccrual
Overdue loans are not necessarily subject to adverse
criticism. Nevertheless, a high volume of overdue loans
almost always indicates liberal credit standards, weak
servicing practices, or both. Because loan renewal and
extension policies vary among banks, comparison of their
delinquency ratios may be misleading. A more significant
method of evaluating this factor lies in determination of the
trend within the bank under examination, keeping in mind
the distortion resulting from seasonal influences, economic
conditions, or the timing of examinations. It is important
for the examiner to carefully consider the makeup and
reasons for the volume of overdue loans. Only then can it
Loans (12-04) 3.2-42 DSC Risk Management Manual of Examination Policies
Federal Deposit Insurance Corporation