LOANS Section 3.2 INTRODUCTION.............................................................. 3 Credit Card-related Merchant Activities ...................... 33 LOAN ADMINISTRATION ............................................. 3 OTHER CREDIT ISSUES .............................................. 34 Lending Policies ............................................................. 3 Appraisals .................................................................... 34 Loan Review Systems .................................................... 4 Valuation of Troubled Income-Producing Properties Credit Risk Rating or Grading Systems ..................... 4 ................................................................................. 35 Loan Review System Elements .................................. 5 Appraisal Regulation ............................................... 35 Current Expected Credit Losses (CECL) ....................... 6 Interagency Appraisal and Evaluation Guidelines ... 37 Allowance for Loan and Lease Losses (ALLL) ............. 6 Examination Treatment ........................................... 41 Responsibility of the Board and Management ........... 7 Loan Participations ...................................................... 41 Factors to Consider in Estimating Credit Losses........ 7 Accounting .............................................................. 41 Examiner Responsibilities .......................................... 8 Right to Repurchase ................................................. 42 Regulatory Reporting of the ALLL ............................ 8 Recourse Arrangements ........................................... 42 Accounting and Reporting Treatment ........................ 8 Call Report Treatment ............................................. 42 PORTFOLIO COMPOSITION .......................................... 9 Independent Credit Analysis .................................... 43 Commercial Loans ......................................................... 9 Participation Agreements ......................................... 43 General ....................................................................... 9 Participations Between Affiliated Institutions ......... 43 Accounts Receivable Financing ................................... 10 Sales of 100 Percent Loan Participations................. 43 Leveraged Lending ....................................................... 11 Environmental Risk Program ...................................... 44 Applicability ............................................................. 11 Elements of an Effective Environmental Risk General ..................................................................... 11 Program ................................................................... 44 Risk Management Framework ................................. 12 Examination Procedures .......................................... 46 General Policies ....................................................... 12 LOAN PROBLEMS ........................................................ 46 Participations Purchased .......................................... 12 Poor Selection of Risks ................................................ 47 Underwriting Standards............................................ 12 Overlending ................................................................. 47 Credit Analysis ......................................................... 13 Failure to Establish or Enforce Liquidation Agreements Valuation Standards ................................................. 13 ..................................................................................... 47 Risk Rating Leveraged Loans .................................. 14 Incomplete Credit Information .................................... 47 Problem Credit Management.................................... 14 Overemphasis on Loan Income ................................... 47 Reporting and Analytics ........................................... 15 Self-Dealing ................................................................. 47 Deal Sponsors........................................................... 15 Technical Incompetence .............................................. 48 Independent Credit Review ...................................... 16 Lack of Supervision ..................................................... 48 Stress Testing ........................................................... 16 Lack of Attention to Changing Economic Conditions . 48 Conflicts of Interest .................................................. 16 Competition ................................................................. 48 Oil and Gas Lending .................................................... 16 Potential Problem Indicators by Document ................. 48 Industry Overview .................................................... 16 SELECTING A LOAN REVIEW SAMPLE IN A RISK- Reserve-Based Lending ............................................ 17 FOCUSED EXAMINATION .......................................... 49 Real Estate Loans ......................................................... 22 Assessing the Risk Profile ........................................... 49 General ..................................................................... 22 Selecting the Sample ................................................... 49 Real Estate Lending Standards ................................. 22 Nonhomogeneous Loan Sample .............................. 50 Commercial Real Estate Loans ................................ 23 Homogeneous Pool Sample ..................................... 50 Real Estate Construction Loans ............................... 23 Determining the Depth of the Review ......................... 50 Home Equity Loans ...................................................... 25 Adjusting Loan Review ............................................... 51 Agricultural Loans ....................................................... 26 Accepting an Institution’s Internal Ratings ................. 51 Introduction .............................................................. 26 Loan Penetration Ratio ................................................ 51 Agricultural Loan Types and Maturities .................. 26 Large Bank Loan Review ............................................ 51 Agricultural Loan Underwriting Guidelines ............ 27 LOAN EVALUATION AND CLASSIFICATION ........ 52 Administration of Agricultural Loans ...................... 28 Loan Evaluation ........................................................... 52 Classification Guidelines for Agricultural Credit ..... 29 Review of Files and Records ....................................... 52 Installment Loans ......................................................... 30 Additional Transaction Testing ............................... 52 Lease Accounting ......................................................... 31 Loan Discussion .......................................................... 52 Direct Lease Financing............................................. 31 Loan Analysis .............................................................. 53 Lessor Accounting under ASC Topic 840................ 31 Loan Classification ...................................................... 53 Lessor Accounting under ASC Topic 842................ 31 Definitions ................................................................... 53 Examiner Consideration ........................................... 32 Special Mention Assets................................................ 54 Floor Plan Loans .......................................................... 32 Troubled Commercial Real Estate Loan Classification Check Credit and Credit Card Loans ........................... 32 Guidelines .................................................................... 54 RMS Manual of Examination Policies 3.2-1 Loans (11-20) Federal Deposit Insurance Corporation LOANS Section 3.2 Technical Exceptions ................................................... 55 Loan Covenants ........................................................... 74 Past Due and Nonaccrual ............................................. 55 Credit Rating Agencies ................................................ 74 Nonaccrual Loans That Have Demonstrated Sustained Overview of the Shared National Credit (SNC) Program Contractual Performance .............................................. 56 ..................................................................................... 75 Troubled Debt Restructuring - Multiple Note Structure Definition of a SNC ................................................. 75 ...................................................................................... 56 SNC Review and Rating Process ............................. 75 Interagency Retail Credit Classification Policy............ 56 SNC Rating Communication and Distribution Process Re-aging, Extensions, Deferrals, Renewals, or ................................................................................. 75 Rewrites ................................................................... 57 Appeals Process ....................................................... 76 Partial Payments on Open-End and Closed-End Additional Risks Associated with Syndicated Loan Credit ........................................................................ 58 Participations ............................................................... 76 Examination Considerations .................................... 58 CREDIT SCORING .......................................................