Risk Management Manual of Examination Policies - FDIC

LOANS Section 3.2
be determined whether the volume of past due paper is a
significant factor reflecting adversely on the quality or
soundness of the overall loan portfolio or the efficiency
and quality of management. It is important that overdue
loans be computed on a uniform basis. This allows for
comparison of overdue totals between examinations and/or
with other banks.
The Report of Examination includes information on
overdue and nonaccrual loans. Loans which are still
accruing interest but are past their maturity or on which
either interest or principal is due and unpaid (including
unplanned overdrafts) are separated by loan type into two
distinct groupings: 30 to 89 days past due and 90 days or
more past due. Nonaccrual loans may include both current
and past due loans. In the case of installment credit, a loan
will not be considered overdue until at least two monthly
payments are delinquent. The same will apply to real
estate mortgage loans, term loans or any other loans
payable on regular monthly installments of principal and
interest.
Some modification of the overdue criteria may be
necessary because of applicable State law, joint
examinations, or unusual circumstances surrounding
certain kinds of loans or in individual loan situations. It
will always be necessary for the examiner to ascertain the
bank's renewal and extension policies and procedures for
collecting interest prior to determining which loans are
overdue, since such practices often vary considerably from
bank to bank. This is important not only to validate which
loans are actually overdue, but also to evaluate the
soundness of such policies. Standards for renewal should
be aimed at achieving an orderly liquidation of loans and
not at maintaining a low ratio of past due paper through
unwarranted extensions or renewals.
In larger departmentalized banks or banks with large
branch systems, it may be informative to analyze
delinquencies by determining the source of overdue loans
by department or branch. This is particularly true if a large
volume of overdue loans exist. The production of
schedules delineating overdue loans by department or
branch is encouraged if it will aid in pinpointing the source
of a problem or be otherwise informative..
Continuing to accrue income on assets which are in default
as to principal and interest overstates a bank's assets,
earnings and capital. Call Report Instructions indicate that
where the period of default of principal or interest equals
or exceeds 90 days, the accruing of income should be
discontinued unless the asset is well-secured and in process
of collection. A debt is well-secured if collateralized by
liens on or pledges of real or personal property, including
securities that have a realizable value sufficient to
discharge the debt in full; or by the guarantee of a
financially responsible party. A debt is in process of
collection if collection is proceeding in due course either
through legal action, including judgment enforcement
procedures, or, in appropriate circumstances, through
collection efforts not involving legal action which are
reasonably expected to result in repayment of the debt or
its restoration to a current status. Banks are strongly
encouraged to follow this guideline not only for reporting
purposes but also bookkeeping purposes. There are
several exceptions, modifications and clarifications to this
general standard. First, consumer loans and real estate
loans secured by one-to-four family residential properties
are exempt from the nonaccrual guidelines. Nonetheless,
these exempt loans should be subject to other alternative
methods of evaluation to assure the bank's net income is
not materially overstated. Second, any State statute,
regulation or rule which imposes more stringent standards
for nonaccrual of interest should take precedence over
these instructions. Third, reversal of previously accrued
but uncollected interest applicable to any asset placed in a
nonaccrual status, and treatment of subsequent payments as
either principal or interest, should be handled in
accordance with generally accepted accounting principles.
Acceptable accounting treatment includes reversal of all
previously accrued but uncollected interest against
appropriate income and balance sheet accounts.
Nonaccrual Loans That Have Demonstrated
Sustained Contractual Performance
The following guidance applies to borrowers who have
resumed paying the full amount of scheduled contractual
interest and principal payments on loans that are past due
and in nonaccrual status. Although a prior arrearage may
not have been eliminated by payments from a borrower, the
borrower may have demonstrated sustained performance
over a period of time in accordance with the contractual
terms. Such loans to be returned to accrual status, even
though the loans have not been brought fully current,
provided two criteria are met:
• All principal and interest amounts contractually due
(including arrearage) are reasonably assured of
repayment within a reasonable period, and
• There is a sustained period of repayment performance
(generally a minimum of six months) by the borrower,
in accordance with the contractual terms involving
payments of cash or cash equivalents.
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
DSC Risk Management Manual of Examination Policies 3.2-43 Loans (12-04)
Federal Deposit Insurance Corporation