Joint Policy Statement on Prudent Commercial Real Estate (CRE) Loan Accommodations and Workouts

October 1, 2022

Melane Conyers-Ausbrooks
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3428

Re: NASCUS Comments on Joint Policy Statement on Prudent Commercial Real Estate (CRE) Loan Accommodations and Workouts (Docket NCUA-2022-0123).

Dear Ms. Conyers-Ausbrooks:

The National Association of State Credit Union Supervisors (NASCUS)[1] submits the following in response to the National Credit Union Administration’s (NCUA’s) request for comments on the Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts.[2]  The proposal outlines an updated policy statement for prudent commercial real estate loan accommodations and workouts relevant to all financial institutions supervised by the NCUA, Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC).  The statement updates existing supervisory guidance on CRE workouts, distinguishes short-term and long-term workout accommodations and addresses accounting changes on estimating credit losses under Generally Accepted Accounting Principles (GAAP).  Finally, the statement provides updated examples relative to classification and accounting methodologies for modified or other affected credits undergoing loan accommodations or workout activity.

A key element of the guidance is the recognition that CRE borrowers, at times, may experience factors impacting their ability to meet credit obligations and yet remain creditworthy, thus requiring short-term or long-term accommodations as part of a prudent and appropriate lending program.  Further, consistent with appropriate safety and soundness standards, the statement also recognizes that an institution’s use of such accommodations is an essential element to a prudent credit risk management program and should not be criticized solely on the basis that such accommodations exist.  Finally, the update reflects specific accounting changes related to credit risk loss estimates and outlines that such changes, though required by GAAP, could diverge from regulatory classifications in the assessment of the adequacy of regulatory capital.

NASCUS concurs with the NCUA and the co-signed federal bank agencies (FBAs) that the proposed guidance is a sound update to previously issued CRE guidance and will help foster

industry understanding of supervisory review elements and should help ensure consistency in CRE related portfolio reviews across the financial institution industries and amongst regulators.

NCUA Examiners Guide[3] Should Be Updated to Highlight Classification Methodologies as Part of The Examination Loan Review Processes.

In its comment letters, NASCUS often encourages NCUA to align the agency’s regulation and guidance with its FBA peers where appropriate.  While NASCUS is encouraged NCUA continues to align the agency’s guidance on this issue, including the detailed examples of classification methodologies, there is some industry confusion relating to the NCUA’s stance on regulatory loan classifications more broadly.  While NCUA is a joint publisher of this policy statement, they are absent on other FBA pronouncements on loan classification methodologies.  Further, examiner and industry guidance in the Examiner’s Guide regarding the assignment of regulatory credit classifications where an institution’s assessment of credit risk exhibits material weakness relies on reference to the OCC Rating Credit Risk handbook.[4]

NCUA historically estimates credit losses, and therefore the adequacy of capital, with calculations based on reported delinquency and loan types.  However, as discussed in the guidance, delinquency may not always be the best measure of inherent credit risk exposure. Although aggregate CRE assets within the industry have historically remained relatively small, and even today represents approximately only 6% of assets under supervision with 1,685 institutions reporting such assets as of June 30, 2022; three hundred and thirteen of those institutions held exposures equal to or exceeding their net worth position.[5]   As credit unions further expand their role as commercial lenders within their communities these exposures will continue to increase.

With these factors in mind, more prominent NCUA guidance on loan classification review will foster improved supervisory discussions and a greater understanding of the nuance involved in all lending classification systems, particularly within developing commercial lending programs.  Finally, identification of potential exposure to the Share Insurance Fund, particularly in instances where such exposure may not be appropriately measured by GAAP or internal systems, would be integral to the performance of the NCUA’s fiduciary responsibilities to the fund and the industry itself.

Proposed Long-Term Workout Arrangements Guidance should be Enhanced.

The proposed rule contains guidance[6] that states loans in long-term workout may be classified consistent with safety and soundness standards, but a financial institution will not be criticized for engaging in loan workout arrangements if management has completed various analysis including:

  • Analyzed the borrower’s global debt service coverage that reflects realistic projection of the borrower’s available cash flow; and
  • Analyzed the available cash flow of the guarantors.

While NASCUS agrees these points are necessary, we feel the items should be enhanced to clearly outline that analysis of the various loan/project debt service coverage (DSC) and cash flows is a key aspect of underwriting to understand the global analysis.  While most examples found within the proposed rule include such analysis of project DSC and cash flow, we don’t believe the language provided ensures all reader’s full comprehension that such analysis is pivotal to the credit analysis and should be conducted to demonstrate where the repayment strengths and/or weaknesses exist and relate to the global cash flow and DSC analysis

NASCUS appreciates the opportunity to submit comments on the NCUA’s proposed Joint Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts. We agree the establishment of consistent and prudent loan accommodations is an integral part of effective risk management. We support the issuance of the proposed statement and are happy to discuss our recommendation further at your convenience.


John J. Kolhoff
Senior Vice President,
Policy and Supervision

[1] NASCUS is the professional association of the nation’s forty-five state credit union regulatory agencies that charter and supervise over 1900 state credit unions. NASCUS membership includes state regulatory agencies, state chartered and federally chartered credit unions, and other important stakeholders in the state system. State-chartered credit unions hold over half of the $2.2 trillion assets in the credit union system and are proud to represent nearly half of the 134 million members.

[2] “Policy Statement on Prudent Commercial Real Estate Loan Accommodations and Workouts” 87 No. 147 Fed. Reg. 47273 (August 2, 2022).

[3] NCUA Examiner’s Guide

[4] NCUA Examiner’s Guide; Loans, Commercial and Member Business Loans; Credit Risk Rating Systems; Credit Risk Rating Categories reference to OCC Rating Credit Risk handbook page 15.

[5] Data source NCUA’s publication of Quarterly Call Report Data for June 30, 2022.

[6] 87 No. 147 Fed. Reg. 47277 — Item IV (Long-Term Loan Workout Arrangements).