Board of Governors of the Federal Reserve System 

Federal Deposit Insurance Corporation 

National Credit Union Administration 

Office of the Comptroller of the Currency 

Interagency Supervisory Guidance Addressing 

Certain Issues Related to Troubled Debt Restructurings 

October 24, 2013 

Page 1 of 8 

Purpose 

This supervisory guidance for financial institutions [Footnote 1 

- For purposes of this guidance, the term "financial institution" or "institution" includes national banks, federal 

savings associations, and federal branches and agencies supervised by the Office of the Comptroller of the Currency 

(OCC); state member banks, bank holding companies, savings and loan holding companies, and all other institutions 

for which the Board of Governors of the Federal Reserve System (Federal Reserve) is the primary federal 

supervisor; state nonmember banks, state savings associations, and insured state branches of foreign banks for which 

the Federal Deposit Insurance Corporation (FDIC) is the primary federal supervisor; and federal credit unions and 

all other institutions for which the National Credit Union Administration (NCUA) is the federal insurer. End of Footnote 1.] 

addresses certain issues related to the 

accounting treatment and regulatory credit risk grade or classification [Footnote 2 

- Financial institutions are expected to develop and apply an internal loan grading system consistent with 

supervisory guidance. Banks and savings associations should maintain documentation that translates their system, if 

different, into the uniform regulatory classifications of substandard, doubtful, and loss. The NCUA does not require 

credit unions to adopt a uniform regulatory credit grading system. A credit union should apply an internal loan grade 

based on its evaluation of credit risk. The term "classify" within the credit union industry has typically meant 

"individually review to apply a percentage reserve" for allowance for loan and lease losses (ALLL) purposes. As 

used in this document, "classify" and "classification" in relation to a credit union's evaluation of a credit for risk 

mean "grade" and "assign a credit risk grade." End of Footnote 2.] 

of commercial and 

residential real estate loans that have undergone troubled debt restructurings (TDRs). [Footnote 3 

- According to U.S. generally accepted accounting principles (GAAP), a restructuring of a debt constitutes a 

troubled debt restructuring if the creditor for economic or legal reasons related to the debtor's financial difficulties 

grants a concession to the debtor that it would not otherwise consider. End of Footnote 3.] 

This 

document reiterates key aspects of previously issued regulatory guidance and discusses the 

definition of collateral-dependent loans and the circumstances under which a charge-off is 

required for TDRs. The guidance for these two concepts is included to provide further 

clarification and ensure consistent treatment. 

Background 

When conducted in a prudent manner, modifications of problem loans are generally in 

the best interest of both the institution and the borrower and can lead to improved loan 

performance and reduced credit risk. Such modifications may occur before, at, or after the 

maturity date of a loan. The Federal Reserve, the FDIC, the NCUA and the OCC (collectively, 

the agencies) encourage financial institutions to work constructively with borrowers and view 
Page 2 of 8 

prudent modifications as positive actions when they mitigate credit risk. The agencies generally 

will not criticize financial institutions for engaging in prudent workout arrangements, even if 

the modified loans result in adverse credit classifications or constitute TDRs. 

This guidance is consistent with the October 2009 interagency Policy Statement on 

Prudent Commercial Real Estate Loan Workouts and GAAP.

 [Footnote 4 

- For credit unions, this guidance complements and is consistent with recently revised 12 CFR Part 741 and new 

Appendix C as well as Letter to Credit Unions No. 13-CU-03 (April 2013), which transmitted Supervisory Letter 

No. 13-02 (March 2013), Examiner Review of Loan Workouts and Nonaccrual. End of Footnote4.] 

The principal source of guidance 

on accounting for TDRs under GAAP is Financial Accounting Standards Board (FASB) 

Accounting Standards Codification (ASC) Subtopic 310-40, Receivables - Troubled Debt 

Restructurings by Creditors. [Footnote5 

- The former reference is FASB Statement No. 15, Accounting by Debtors and Creditors for Troubled Debt 

Restructurings. End of Footnote5.] 

Impairment measurement for TDRs is addressed in ASC 

Subtopic 310-10, Receivables - Overall[Footnote6 

- The former reference is FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan. End of Footnote6.] 

For banks and savings associations, the Glossary 

section of the Federal Financial Institutions Examination Council's (FFIEC) Instructions for the 

Consolidated Reports of Condition and Income (Call Report), together with the Call Report 

Supplemental Instructions, provides additional guidance on accounting and regulatory reporting 

for TDRs.

 [Footnote 7 

- FFIEC Call Report materials are available at www.ffiec.gov/forms031.htm and www.ffiec.gov/forms041 .htm.End of Footnote7

.] 

Similar guidance for holding companies can be found in the Glossary section of the 

Instructions for the Preparation of Consolidated Financial Statements for Holding Companies 

(FR Y-9C) and its associated Supplemental Instructions.

 [Footnote 8 

- FR Y-9C materials are available at http://www.federalreserve. gov.End of Footnote8

.] 

For credit unions, the 5300 Call 

Report includes revised schedules and additional instructions capturing enhanced TDR data 

collections beginning with the quarter that ended December 31, 2012.

 [Footnote 9 

- 5300 Call Report materials are available at www.ncua.gov/DataApps/Pages/CRForm.aspx.End of Footnote9.] 

Supervisory Policy 

Accrual Treatment 

A loan that is modified and determined to be a TDR in accordance with GAAP can be in 

either accrual or nonaccrual status at the time of the modification. A loan modified in a TDR that 

is on nonaccrual at the time of the loan's modification need not be maintained for its remaining 

life in nonaccrual status, but can be restored to accrual status if the loan meets the return-toaccrual conditions set forth in the Call Report Glossary (for banks and savings associations) or 

12 CFR 741.3(b)(2) and Appendix C to Part 741 (for credit unions). 

To restore a nonaccrual loan that has been formally restructured in a TDR to accrual 

status, an institution must perform a current, well-documented credit analysis supporting a return 

to accrual status based on the borrower's financial condition and prospects for repayment under 

the revised terms. Otherwise, the TDR must remain in nonaccrual status. The analysis must 

consider the borrower's sustained historical repayment performance for a reasonable period prior 

to the return-to-accrual date, but may take into account payments made for a reasonable period 
Page 3 of 8 

prior to the restructuring if the payments are consistent with the modified terms. A sustained 

period of repayment performance generally would be a minimum of six months and would 

involve payments in the form of cash or cash equivalents.

 [Footnote10 

- For federally insured credit unions, a demonstrated period of repayment performance is defined as six consecutive 

payments and is limited to Member Business Loan restructurings. For further information, see Appendix C to 12 

CFR Part 741. End of Footnote10.] 

An accruing loan that is modified in a TDR can remain in accrual status if, based on a 

current, well-documented credit analysis, collection of principal and interest in accordance with 

the modified terms is reasonably assured, and the borrower has demonstrated sustained historical 

repayment performance for a reasonable period before the modification. 

Historical repayment performance in the form of interest-only payments may well raise 

questions about whether collection of loan principal is reasonably assured. Furthermore, a 

restructuring must improve collectibility of the loan in accordance with a reasonable repayment 

schedule. 

Regulatory Credit Risk Grade or Classification 

A modified loan's regulatory credit risk grade or classification and its TDR analysis are 

separate and distinct decisions, but the processes are related. A TDR designation means the loan 

is impaired for accounting purposes, but it does not automatically result in an adverse 

classification or credit risk grade. However, at the time of the modification, an assessment of the 

credit risk grade or classification should be made. All relevant factors, including the extent of the 

borrower's financial difficulty, should be considered when making the risk-rating assessment.

 [Footnote11 

- For banks and savings associations, adversely classified loans are those rated substandard, doubtful, or loss under 

the regulatory asset classification system. For credit unions, adversely graded loans are loans included in the more 

severely graded categories under the institution's credit grading system (that is, those loans that tend to be included 

on the credit union's "watch lists"). The NCUA does not require credit unions to adopt a uniform regulatory credit 

risk grading schematic of substandard, doubtful, and loss. See footnote 2. End of Footnote11.] 

Further, a TDR designation does not automatically mean that a loan should remain adversely 

credit risk graded or classified for its remaining life if it already was or becomes adversely credit 

risk graded or classified at the time of the modification. A TDR loan should be adversely credit 

risk graded or classified if the loan, as modified, is inadequately protected by the current sound 

worth and paying capacity of the borrower or the collateral pledged, if any. In determining the 

credit risk grade or classification of a TDR loan at the time of a modification or at a subsequent 

evaluation date, a well-documented assessment of the cash flows available to service the 

modified loan and the extent of any collateral protection and guarantor support should be 

performed to form the basis for determining whether an adverse credit risk grade or classification 

is warranted.

 [Footnote12 

- According to the October 2009 interagency Policy Statement on Prudent Commercial Real Estate Loan Workouts, 

cash flows should be assessed on a global basis that considers the borrower's total debt obligations. End of Footnote12.] 
Page 4 of 8 

Collateral-Dependent Loan Definition 

Under GAAP, any loan modified in a TDR is an impaired loan.

 [Footnote13 

- Under GAAP, a loan modified in a TDR is always considered impaired for impairment measurement purposes 

(even if the modified loan is no longer required to be disclosed as a TDR) because, based on current information and 

events, it is probable that the lender will be unable to collect all principal and interest due as scheduled according to 

the contractual terms specified by the original loan agreement. End of Footnote13.] 

Impaired loans must be 

evaluated to determine if they are collateral dependent. Evaluating whether an impaired loan is 

collateral dependent is important because, for regulatory reporting purposes, an institution must 

measure impairment on impaired collateral-dependent loans based on the fair value of the 

collateral rather than the present value of expected future cash flows. An impaired loan is 

collateral dependent if "repayment is expected to be provided solely by the underlying 

collateral,"

 [Footnote 14 

- See ASC Section 310-10-20. End of Footnote14.] 

which includes repayment from the proceeds from the sale of the collateral,

 [Footnote15 

- The sale of the collateral can be by the borrower or, after foreclosure or repossession, by the lender. End of Footnote15.] 

cash 

flow from the continued operation of the collateral, or both. Whether the underlying collateral is 

expected to be the sole source of repayment for an impaired loan is a matter requiring judgment 

as to the availability, reliability, and capacity of sources other than the collateral to repay the 

debt. Generally, repayment of an impaired loan would be expected to be provided solely by the 

sale or continued operation of the underlying collateral if cash flows to repay the loan from all 

other available sources (including guarantors) are expected to be no more than nominal. For 

example, the existence of a guarantor is one factor to consider when determining whether an 

impaired loan, including a TDR loan, is collateral dependent. To assess the extent to which a 

guarantor provides repayment support, the ability and willingness of the guarantor to make morethan-nominal payments on the loan should be evaluated.

 [Footnote16 

- For further guidance on evaluating guarantees, see the October 2009 interagency Policy Statement on Prudent 

Commercial Real Estate Loan Workouts. End of Footnote16.] 

The repayment of some impaired loans collateralized by real estate may depend on cash 

flow generated by the operation of a business or from sources outside the scope of the lender's 

security interest in the collateral, such as cash flows from borrower resources other than the 

collateral. These loans are generally not considered collateral dependent due to the more-thannominal payments expected to come from these other repayment sources. For such loans, even if 

a portion of the cash flow for repayment is expected to come from the sale or operation of the 

collateral (but not solely from the sale or operation of the collateral), the loan would not be 

considered collateral dependent. 

For example, an impaired loan collateralized by an apartment building, shopping mall, or 

other income-producing property where the anticipated cash flows for loan repayment are 

expected to be derived solely from the property's rental income, and there are no other available 

and reliable repayment sources, would be considered collateral dependent because repayment is 

expected to be provided only from the continued operation of the collateral. However, an 

impaired loan secured by the owner-occupied real estate of a business (such as a manufacturer or 

retail store) where the anticipated cash flows to repay the loan are expected to be derived from 

the borrower's ongoing business operations and activities would not be considered collateral 
Page 5 of 8 

dependent because the loan is not expected to be repaid solely from cash flows from the sale or 

operation of the collateral. Nevertheless, if the borrower's condition worsens so that any 

payments from the operation of the business are expected to be nominal and repayment instead is 

expected to depend solely on the sale or operation of the underlying collateral, the loan would 

then be considered collateral dependent. 

Impairment Measurement: Impaired Loan that is Collateral Dependent 

Pursuant to the FFIEC Call Report instructions and interagency guidance,

 [Footnote17 

- For example, see the October 2009 interagency Policy Statement on Prudent Commercial Real Estate Loan 

Workouts and the December 2006 Interagency Policy Statement on the Allowance for Loan and Lease Losses. End of Footnote17.] 

for regulatory 

reporting purposes an impaired collateral-dependent loan must be measured for the amount of 

impairment based on the fair value of the collateral regardless of whether foreclosure is probable. 

When the fair value of the collateral is used to measure impairment on an impaired collateraldependent loan and repayment or satisfaction of the loan is dependent on the sale of the 

collateral, the fair value of the collateral must be adjusted to consider estimated costs to sell. If 

repayment is dependent only on the operation of the collateral, the fair value of the collateral 

would not be adjusted for estimated costs to sell. 

Classification and Charge-Off Treatment: Impaired Loan that is Collateral Dependent 

Under GAAP, a credit loss on a loan, which may be for all or part of a particular loan, 

should be deducted from the ALLL, and the related loan balance should be charged off in the 

period in which the loan is deemed uncollectible.

 [Footnote18 

- See ASC paragraph 310-10-35-41. End of Footnote18.] 

The following discussion of the classification 

and charge-off treatment for impaired collateral-dependent loans is consistent with GAAP. 

Repayment from the Sale of the Collateral 

As a general regulatory credit risk grading or classification principle, for an impaired loan 

that is dependent solely on the sale of the collateral for repayment, any portion of the recorded 

investment in the loan exceeding the amount adequately secured by the fair value of the 

collateral less the estimated costs to sell

 [Footnote19 

- This regulatory credit risk grading and charge-off treatment is consistent with the October 2009 interagency 

Policy Statement on Prudent Commercial Real Estate Loan Workouts and supersedes the discussion of the treatment 

of selling costs in the answer to Question 10 in the December 2006 interagency Questions and Answers on 

Accounting for Loan and Lease Losses. End of Footnote19.] 

is deemed to be uncollectible and, therefore, should be 

credit risk graded or classified loss and promptly charged off. 

Any portion of the recorded investment in the loan not charged off generally should be 

adversely credit risk rated or classified no worse than substandard. The amount of the loan 

exceeding the fair value of the collateral, or portions thereof, should be adversely graded or 

classified doubtful when the potential for full loss may be mitigated by the outcomes of certain 

pending events, or when loss is expected but the amount of loss cannot be reasonably 

determined. If warranted by the underlying circumstances, a doubtful classification or credit risk 

grade may be used on the entire loan balance. However, as discussed in the October 2009 
Page 6 of 8 

interagency Policy Statement on Prudent Commercial Real Estate Loan Workouts, a doubtful 

classification or credit risk grade should be used infrequently and for a limited time to permit the 

pending events to be resolved. 

Repayment from the Operation of the Collateral 

A regulatory credit risk grade or classification of loss with partial charge-off requires 

judgment and may not be warranted for a collateral-dependent TDR loan if repayment is 

dependent only on the operation of the collateral provided the modification is in accordance with 

a prudent workout strategy,

 [Footnote 20 

- A loan workout is in accordance with a prudent workout strategy when current financial information supports the 

ultimate collectibility of the debt under reasonable modified terms, which means the best estimate of the expected 

future cash flows is sufficient to repay or otherwise satisfy the loan (both principal and interest). The expected future 

cash flows should be fully supported by a complete analysis and underwriting of the financial capacity and 

willingness of the borrower to repay the debt as defined in the credit policy of the institution. End of Footnote20.] 

which includes modified terms that are reasonable for the type and 

risk of the credit,

 [Footnote 21 

- See Attachment 1 of the October 2009 interagency Policy Statement on Prudent Commercial Real Estate Loan 

Workouts for examples that address the reasonableness of the modified terms for specific workout scenarios. End of Footnote21.] 

and the best estimate of the expected future cash flows supports the full 

collection of the recorded investment in the loan. In this case, the collateral-dependent TDR loan 

might not be adversely credit risk graded or classified depending on the facts and circumstances 

of the cash flow analysis. 

In other circumstances, a regulatory credit risk grade or classification of loss with a 

partial charge-off is warranted on a collateral-dependent TDR loan for which repayment is 

dependent only on the operation of the collateral. For example, this treatment may be warranted 

for such a loan when well-defined weaknesses exist in the credit that jeopardize full, orderly 

repayment, such as the modified terms are not reasonable for the type and risk of the credit or the 

expected cash flows do not support full collection of the recorded investment in the loan. 

While the amount of impairment for regulatory reporting purposes on a collateraldependent TDR loan where repayment is dependent on the operation of the collateral represents 

the difference between the recorded investment in the loan and the fair value of the collateral, the 

charged-off amount should be based on the amount of impairment deemed uncollectible. For 

such a collateral-dependent TDR, when determining the amount deemed uncollectible, and 

therefore credit risk rated or classified loss and charged off, the institution should use the 

collateral's market value

2 [Footnote 2 

- The term "market value" as used in an appraisal is based on similar valuation concepts as "fair value" for 

accounting purposes under GAAP. For both terms, these valuation concepts about the real property and the real 

estate transaction contemplate that the property has been exposed to the market before the valuation date, the buyer 

and seller are well informed and acting in their own best interest (that is, the transaction is not a forced liquidation or 

distressed sale), and marketing activities are usual and customary (that is, the value of the property is unaffected by 

special financing or sales concessions). The market value in an appraisal may differ from the collateral's fair value if 

the values are determined as of different dates or the fair value estimate reflects different assumptions from those in 

the appraisal. This may occur as a result of changes in market conditions and property use since the "as of' date of 

the appraisal. End of Footnote22.] 

conclusion that corresponds to the workout plan, provided it 
Page 7 of 8 

represents a prudent strategy.

 [Footnote 23 

- As discussed in the October 2009 interagency Policy Statement on Prudent Commercial Real Estate Loan 

Workouts, collateral valuations of commercial properties typically contain more than one value conclusion and could 

include an "as is" market value, a prospective "as complete" market value, and a prospective "as stabilized" market 

value. It is presumed that an "as completed" or "as stabilized" market value would be greater than the current "as is" 

market value. End of Footnote23.] 

For example, if the workout plan will bring a construction project 

for an income-producing property to completion, but not to a stabilized occupancy, the amount 

assigned a regulatory credit risk grade or classification of loss, if any, should be based on the 

collateral's prospective "as complete" market value using a new or updated appraisal or 

evaluation, as appropriate. If the workout plan will bring the construction project to completion 

and stabilization based on a reasonable lease-up period and market expectations, the regulatory 

credit risk grade or classification of loss, if any, should be based on the prospective "as 

stabilized" market value.

 [Footnote 24 

- In contrast, as previously noted, if the workout plan envisions an immediate sale or foreclosure, the amount of a 

regulatory credit risk grade or classification of loss should be based on the "as is" market value to determine the 

collateral's fair value less costs to sell. End of Footnote24.] 

Any portion of the recorded investment in the loan not charged off 

generally should be adversely credit risk graded or classified no worse than substandard.

 [Footnote 25 

- A doubtful classification may be used in certain circumstances for a limited period. End of Footnote25.] 

Impairment Measurement: Impaired Loan that is Not Collateral Dependent 

When measuring impairment on an impaired loan (including a TDR loan) that is not 

collateral dependent, an institution must use the present value of expected future cash flows 

method, except that as a practical expedient, the creditor may measure impairment based on the 

loan's observable market price.

 [Footnote 26 

- GAAP permits an entity to measure impairment of an impaired secured loan based on the fair value of the 

collateral only if the loan is collateral dependent. End of Footnote26.] 

An institution should determine its best estimate of these cash 

flows based on reasonable and supportable assumptions and projections. An institution should 

not presume that the contractual payment amounts required under the newly modified loan terms 

are the best estimate of the expected future cash flows. When making this estimate, an institution 

should consider default and prepayment assumptions, as well as existing environmental factors 

(for example, existing industry, geographical, economic, and political factors), relevant to the 

collectibility of the loan. 

When a contractual balloon payment is required at maturity under the modified terms of a 

TDR loan that is not collateral dependent, significant uncertainty may exist regarding the 

borrower's ability to refinance or repay the debt at maturity. When estimating expected future 

cash flows for impairment measurement purposes, all available evidence should be considered, 

with greater weight given to evidence that can be objectively verified. When no sources of cash 

flows are reasonably expected to be available to support the assumption that the borrower will be 

able to repay or refinance a secured loan at maturity, an acceptable approach for estimating 

expected future cash flows can be to base the expected payment at maturity on the current fair 

value of the collateral, less estimated costs to sell. If the contractual balloon payment at maturity 

is lower than the fair value of the collateral, less estimated costs to sell, the balloon payment 

amount should be used as the final cash flow in the impairment analysis. 
Page 8 of 8 

Classification and Charge-Off Treatment: Impaired Loan that is not Collateral Dependent 

Consistent with GAAP and as a general regulatory credit risk grading or classification 

principle, for an impaired loan (including a TDR loan) that is not collateral dependent, when 

available information confirms that a specific loan, or a portion thereof, is uncollectible, this 

amount should be classified loss and promptly charged off against the ALLL. 

Capitalized Costs 

Disbursements by an institution to protect its collateral position on a loan, such as 

payments of real estate taxes or hazard insurance premiums, may be capitalized (that is, added to 

the loan's recorded investment rather than expensed) provided the applicable loan agreement 

authorizes such capitalization. Capitalized protective advances on an impaired loan, including a 

TDR loan, increase the recorded investment in the loan. Therefore, the measurement of 

impairment on the loan and, accordingly, any valuation allowance (as well as any regulatory 

credit risk grade or classification of loss and partial charge-off, when appropriate) will be based 

on this higher recorded investment. 

Loan Renewals, Extensions, and Modifications Before a Payment Reset Date 

Loan renewals, extensions, and modifications that occur before a payment reset date or 

conversion to amortizing status are not automatically considered TDRs, but should be evaluated 

to assess whether they meet the criteria for a TDR under GAAP.

 [Footnote 27 

- See ASC paragraphs 310-40-15-5 and 310-40-15-13 through 20. End of Footnote27.] 

For example, a modification 

of the terms of a home equity line of credit before it approaches the date of a payment 

shock

2 [Footnote 8 

- Payment shock refers to a significant increase in the amount of a monthly or other regularly scheduled payment 

due to a contractual interest rate reset or payment reset. End of Footnote28.] 

should be evaluated to determine whether the modification meets the TDR criteria. In 

determining whether a borrower is experiencing financial difficulties, an institution generally 

should perform and document a current credit analysis. This analysis should include an 

evaluation of the borrower's willingness and ability to meet the loan terms assuming no 

modification takes place and the loan resets to the higher payment.

 [Footnote 29 

- See ASC paragraphs 310-40-15-20(a) and (e). End of Footnote29.] 

If the borrower is 

experiencing financial difficulties, an institution should also assess and document whether it has 

granted a concession to the borrower.