Seal of the Board of Governors of the Federal Reserve System

WASHINGTON, D. C.  20551


SR 99-24 (SUP)
September 29, 1999


SUBJECT: Loan Write-Up Standards for Assets Criticized During Examinations

                     The Federal Reserve continues to review its examination and supervisory policies and procedures to bring them into full conformity with a risk-focused examination approach.  As part of these efforts, this letter sets forth the minimum standards for information to be included in the examination report on assets subject to special mention or adverse classification.  Efforts have been made to maintain the consistency and strength of historical standards while realizing the efficiencies and effectiveness sought in the risk-focused approach.  Thus, the risk-focused approach to loan write-ups continues to require full write-ups on certain criticized assets, but allows the examiner to omit details that are of little benefit to banking organizations and Federal Reserve supervisory staff on the majority of adversely classified assets.  The new approach encourages a cooperative effort between examiners and bank management as well as the use of asset classification write-ups to illustrate loan administration criticisms.

                     The new standard requires a full loan write-up (see criteria below) for all significant or material classified or specially mentioned assets if:  (1) management disagrees with the disposition accorded by the examiner; or (2) the institution will be rated composite 3, 4, or 5.  The write-ups will be used to support the classifications to management and, in the case of problem banks, to support any necessary follow-up supervisory actions.  An abbreviated write-up may be appropriate for other loans to illustrate a credit administration weakness or to formalize certain decisions and clarify action plans for management.  For example, bank management and the examiner may have agreed to either collect or charge off a loan classified "doubtful" by the next call report date or to reverse interest accruals and place the loan on nonaccrual status.  These agreements may be expressed in the report through a brief comment under the classification.  An examiner may also wish to provide a brief statement explaining the rationale for a split classification or for items listed as special mention.

                     Although classifications and items listed for special mention may be listed alphabetically on the report page, examiners may elect to format the listing or write-ups in other ways to illustrate examination findings or conclusions.  For example, examiners may wish to group classifications into categories of weakness and to use these listings to support loan administration comments without providing a write-up for each classified item. 


                     A full write-up on items adversely classified or listed as special mention must provide sufficient detail to support the examiner's judgment concerning the rating assigned.  To ensure that the write-ups are written in a manner that provides a clear, concise, and logical discussion of material credit weaknesses, the following categories of information should be presented, preferably in the order listed:

    1. A general description of the obligation:
      • Amount of exposure (both outstanding and contingent or undrawn)
      • Location of obligor and type of business or occupation
      • Description and value of collateral
      • Notation if borrower is an insider or a related interest of an insider
      • Guarantors and a brief description of their ability to act as a source of repayment, especially if their financial strength has changed significantly since the initial guarantee of the credit facility (Refer to SR letter 91-24 for additional guidance in considering guarantees for credit analysis purposes.)
      • Amounts previously classified
      • Repayment terms and historical performance, including prior charge-offs, and current delinquency status (with notation if currently on nonaccrual status)
    2. A summary listing of weaknesses resulting in classification or special mention treatment.
    3. A reference to any identified deficiencies in the item which will support loan administration or violation comments elsewhere in the report.
    4. If management disagrees with the classification, a statement to that effect along with management's rationale.
    5. A concise description of management action taken or planned to address the weakness in the asset.

                     Questions regarding this letter should be addressed to Molly S. Wassom, Deputy Associate Director, at 202-452-2305, or Robert Walker, Senior Supervisory Financial Analyst, at 202-452-3429.

Richard Spillenkothen

Cross Reference:  SR letter 91-24

Supersedes:  SR letter 94-14

SR letters | 1999