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Questions and Answers 

For Federal Reserve-Regulated Institutions [Footnote 1 

-- For purposes of this Q&A document, "institution" refers to a financial institution regulated by the Federal Reserve, 

including state member banks, bank holding companies, and savings and loan holding companies. End of Footnote 1.] 

Related to the Management of 

Other Real Estate Owned (OREO) Assets 

June 27, 2012 

TABLE OF CONTENTS 

I. TRANSFERING AN ASSET TO OREO, page 2 

II. REPORTING TREATMENT AND CLASSIFICATION, page 3 

III. APPRAISAL CONCEPTS, page 5 

IV. ONGOING PROPERTY MANAGEMENT, page 7 

V. OPERATIONAL AND LEGAL ISSUES, page 10 

VI. SALE AND TRANSFER OF OREO, page 12 
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I. TRANSFERING AN ASSET TO OREO 

1. Q: When should an institution re-categorize its asset from "Loans and lease financing 

receivables" to "Other real estate owned" on the Consolidated, Reports of Condition and, 

Income (Call Report)? [Footnote 2 

-- While the Q&As reference the schedule and line item (shown in italics) on the Call Report, a holding company 

should refer to the corresponding schedule and line item in the Consolidated Financial Statements for Bank Holding 

Companies (FR Y-9C). End of Footnote 2.] 

A: In accordance with Call Report instructions, an institution should re-categorize its asset 

from "Loans and lease financing receivables" to "Other real estate owned" on the Call Report 

when the institution takes physical possession of the property, regardless of whether formal 

foreclosure proceedings have taken place. 

2. Q: At what value should an institution initially report an OREO asset? 

A: In accordance with Call Report instructions, when an institution receives an asset, such as 

real estate, from a borrower in full satisfaction of a loan, the institution initially reports the 

asset at its fair value less cost to sell. [Footnote 3 

-- For financial reporting purposes, fair value reflects the price that would be received to sell an asset in an orderly 

transaction between market participants at the measurement date (that is, the financial reporting date). End of Footnote 3.] 

Similarly, a real estate asset received in partial 

satisfaction of a loan should be initially reported as described above and the carrying amount 

of the loan should be reduced by the fair value less cost to sell of the asset at the time of 

foreclosure. [Footnote 4 

-- In accordance with Call Report instructions, if an institution sells the OREO asset shortly after foreclosure or 

repossession, it is generally appropriate to substitute the value received in the sale (net of cost to sell) for the asset's 

fair value (less cost to sell) which had been estimated at the time of foreclosure or repossession. End of Footnote 4.] 

The fair value less cost to sell becomes the "cost" of the OREO asset. The 

amount, if any, by which the carrying amount of the loan plus recorded accrued interest (that 

is, the recorded loan amount) exceeds the fair value less cost to sell of the OREO asset is a 

loss that must be charged to the allowance for loan and lease losses (ALLL) at the time of 

foreclosure or repossession. 

If the fair value less cost to sell of the OREO asset when taken into possession is greater than 

the recorded loan amount, the excess should be reported either as "Other noninterest income" 

on the Call Report or as "Recoveries on loans and leases" if there had been a prior charge-off 

of the loan. In a situation when the OREO asset appears to be worth more than the balance 

of the loan, the appraisal or other information on the property's value should be reviewed to 

understand why the borrower would risk losing the equity in the property. Additionally, in 

some states, lenders are required to return recovered amounts, in excess of the amount owed, 

to the borrower. 

3. Q: Do Call Report requirements differ when a borrower has the ability to redeem a 

property after foreclosure? 

A: Reporting requirements will depend on who has physical possession of the property after 

foreclosure. If state law allows the borrower to live in the property during the redemption 
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period, then the asset would remain in "Loans and lease financing receivables" on the Call 

Report until expiration of the redemption period and the institution takes physical possession 

of the property. However, if the institution has physical possession of the property during the 

redemption period (that is, the borrower has vacated the property or has been evicted from 

the property), then the asset would be moved to "Other real estate owned" on the Call Report. 

II. REPORTING TREATMENT AND CLASSIFICATION 

4. Q: When an institution forecloses on its subordinate lien position, how are the 

outstanding senior liens on the OREO asset treated for financial reporting purposes? 

A: In accordance with Call Report instructions, the amount of any senior debt (principal and 

accrued interest) to which an OREO asset is subject at the time of foreclosure is reported as a 

liability in "Other borrowed money" on the Call Report. 

5. Q: What are the reporting consequences when the value of an OREO asset changes? 

A: In accordance with Call Report instructions, an OREO asset is carried at the lower of 

(1) the fair value of the asset less the estimated cost to sell the asset or (2) the cost of the 

asset (that is, the OREO asset's fair value less cost to sell recorded at the time of foreclosure, 

as discussed in Question 2). 

Changes in fair value must be determined on each OREO asset individually. In subsequent 

periods, if the fair value of the OREO asset minus the estimated cost to sell is less than the 

cost of the asset, the deficiency must be recognized as a valuation allowance against the 

asset, which is created through a charge to expense. This valuation allowance is increased or 

decreased (but not below zero) through charges or credits to expense for changes in the 

OREO asset's fair value or estimated selling cost. On the Call Report, the balance reported 

for the OREO asset is net of any valuation allowances. 

6. Q: Should an OREO asset be adversely classified? 

A: As discussed in the "Classification of OREO," subsection of section 2200.1 "Other Real 

Estate Owned" of the Commercial Bank Examination Manual, an OREO asset is generally 

considered an adversely classified asset. For purposes of classification, any carrying value of 

the OREO asset in excess of its fair value, less cost to sell, should be classified as Loss, net 

of any applicable valuation allowance. The institution should periodically evaluate the 

OREO asset's carrying value and factors affecting potential recovery that may require 

classification of the asset's remaining book value. 

In determining the classification of the remaining book value, an institution may consider a 

pending sale of the OREO asset or rental income from the OREO asset. If the institution has 

a sales contract to sell the OREO asset to a third party and the net sale proceeds are expected 

to cover the carrying value, the institution may not need to classify the asset. The institution 

should be able to demonstrate that the purchaser has the financial resources to complete the 
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purchase and that the institution has no contingent liability to repurchase the property or 

guarantee the property's financial performance. 

With regard to residential rental OREO properties, a property with a lease in place and 

demonstrated rental cash flow sufficient to generate a reasonable rate of return would 

generally not be adversely classified. For further guidance, refer to SR letter 12-5/CA 

letter 12-3, "Policy Statement on Rental of Residential Other Real Estate Owned (OREO) 

Properties." 

7. Q: How should an institution report the operating income and expenses for an OREO 

asset on the Call Report? 

A: Operating income related to an OREO asset (for example, gross rental income) is 

recognized as "Other noninterest income" on the Call Report, while expenses are reported as 

"Other noninterest expense." Operating expenses include, but are not limited to, legal fees 

and direct costs incurred for foreclosure, property maintenance, and state and local 

government assessments. 

8. Q: How does an institution account for real estate taxes and insurance on an OREO 

asset? 

A: In accordance with generally accepted accounting principles (GAAP), real estate taxes 

and insurance would be expensed if the institution is merely holding the property for future 

sale. If an institution forecloses on an incomplete project and decides to complete 

construction, costs incurred for real estate taxes and insurance are capitalized during the 

construction period until it is substantially complete and ready for its intended use. Once the 

OREO asset is substantially complete and ready for its intended use, those costs are 

expensed. 

9. Q: If an OREO asset is partially completed and the institution decides to complete 

construction, how should the institution report these capital improvement expenses? 

A: In accordance with GAAP, capital improvement expenses clearly associated with the 

construction of the project should be capitalized as part of the cost of the OREO asset and 

reported on the balance sheet as part of the fair value less cost to sell of the asset. Once the 

property is ready for its intended purpose, subsequent carrying costs should be expensed as 

incurred. As noted in Question 5, each OREO asset must be carried at the lower of (1) the 

fair value of the asset less the estimated cost to sell the asset or (2) the cost of the asset. 

Therefore, while the capital improvements will increase the cost of the asset, the capitalized 

expenses may not increase the OREO asset's recorded value to an amount greater than the 

asset's fair value after improvements and less cost to sell. 
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III. APPRAISAL CONCEPTS [Footnote 5 

-- In this Q&A document, unless the discussion pertains to the Board's appraisal regulation, "appraisal" refers to both 

an appraisal and evaluation. The Board's appraisal regulation (12 CFR 225.62(a)) defines an "appraisal" as a 

written statement independently and impartially prepared by a qualified appraiser setting forth an opinion as to the 

market value of an adequately described property as of a specific date(s), supported by the presentation and analysis 

of relevant market information. An evaluation must comply with the requirements outlined in the attachment to SR 

letter 10-16, "Interagency Appraisal and Evaluation Guidelines." End of Footnote 5.] 

10. Q: What are the Federal Reserve's supervisory expectations for a regulated 

institution's practices to obtain an appraisal upon a property's transfer to OREO? 

A: In accordance with the regulatory appraisal exemption for an existing extension of credit 

in the Federal Reserve Board's appraisal regulation, [Footnote 6 

-- See the Board's Regulation H for state member banks (12 CFR 208, subpart E) and the Board's Regulation Y for 

holding companies (12 CFR 225, subpart G). End of Footnote 6.] 

a regulated institution is required at 

minimum to obtain an evaluation when a property is transferred to OREO through 

foreclosure or a deed in lieu of foreclosure. Although the appraisal regulation's minimum 

requirement is an evaluation, the regulated institution may decide to obtain an appraisal, 

considering the type, complexity, use, and location of the property, as well as current market 

conditions. Refer to SR letter 10-16, "Interagency Appraisal and Evaluation Guidelines," for 

a discussion of the development and content of an evaluation. While the Federal Reserve 

Board's regulation may not require an appraisal, a state member bank also needs to consider 

whether state banking laws and regulations require an appraisal at the time the state member 

bank forecloses or takes possession of the property. Refer to SR letter 95-16, "Real Estate 

Appraisal Requirements for Other Real Estate Owned (OREO)." 

11. Q: What are the supervisory expectations for an institution's practices to determine the 

value of a property upon transfer to OREO? 

A: In accordance with the Board's appraisal regulation, an institution must, at a minimum, 

have an evaluation or may elect to obtain an appraisal to determine the value of a property 

upon transfer to OREO. The evaluation or appraisal should reflect an opinion of the 

property's market value as defined in the Board's appraisal regulation (12 CFR 225.62 (g)). 

Market value is defined as: 

The most probable price which a property should bring in a competitive and open market 

under all conditions requisite to a fair sale, the buyer and seller each acting prudently 

and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in 

this definition are the consummation of a sale as of a specified date and the passing of 

title from seller to buyer under conditions whereby: 

(1) Buyer and seller are typically motivated; 

(2) Both parties are well informed or well advised, and acting in what they consider their 

own best interests; 

(3) A reasonable time is allowed for exposure in the open market; 
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(4) Payment is made in terms of cash in U.S. dollars or in terms of financial 

arrangements comparable thereto; and 

(5) The price represents the normal consideration for the property sold unaffected by 

special or creative financing or sales concessions granted by anyone associated with 

the sale. 

The term "market value" that is defined in the Board's appraisal regulation is based on 

similar valuation concepts as "fair value" for accounting purposes under GAAP. In 

accordance with GAAP, the term "fair value" reflects the price that would be received to sell 

an asset in an orderly transaction between market participants at the measurement date. 

Therefore, to comply with GAAP, an institution must initially report the fair value of the 

property less cost to sell on its financial statements, as discussed in Question 2. 

12. Q: How should an institution assess the adequacy of an appraisal (or an evaluation if 

permitted) to support its valuation of a particular OREO property? 

A: The appraisal should fully support the market value opinion of the OREO asset with 

sufficient information and analysis of the property's current "as is" condition (considering 

the property's highest and best use) and other relevant risk and market factors affecting the 

property's market value. This includes an assessment as to whether the appraisal's 

assumptions on market conditions, events, and trends are reasonable and supportable. Refer 

to SR 10-16 for further supervisory expectations for an institution's appraisal process. An 

institution should consider whether: 

• The appraisal addresses the current condition of the property and reflects any deferred 

maintenance. 

• For a property under construction, construction costs are reasonable and are adequate 

to cover completion of the project in accordance with plans and any possible 

contingencies. 

• The assumptions support any anticipated change in the permissible use of the 

property, supported by information on market conditions. 

• For a special-purpose property, the appraisal considers the value of the property under 

more conventional use and identifies the value of any special-purpose features and 

fixtures. 

• The sources of data are current and timely, recognizing that there are data lags when 

public records are used. 

• If there are few comparable sales, the appraisal addresses supply and demand factors, 

and identifies recently closed sales and not just properties listed for sale. 

• For an income-producing property, the appraisal provides information on and 

consideration of typical rental concessions. 

• The holding and absorption period to achieve stabilized occupancy or to sell-out the 

project are reasonable and supportable by current market conditions and trends. 
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• Terms and conditions of lease renewals consider the current market and rental rates 

and not just historical trends. 

• On an existing property, the appraisal explains whether contract rents differ from 

market rents and discloses the effect on the property's market value. 

• Capitalization and discount rates are realistic and reflective of current investor 

expectations. 

13. Q: What are the supervisory expectations for an institution's practices to monitor the 

value of OREO, including obtaining a new appraisal? 

A: While the Federal Reserve has no regulatory requirement governing when and how often 

to obtain a new appraisal for an OREO asset, SR 10-16 provides supervisory expectations 

that an institution should have policies and procedures for the monitoring of collateral values. 

Further, current market value information of an OREO asset is necessary to determine the 

property's fair value and support the carrying value of the OREO asset on the institution's 

financial statements. Therefore, a regulated institution should have a policy establishing 

procedures for monitoring the market value of the OREO property over the holding period. 

The institution's policy should consider whether the existing appraisal or collateral valuation 

information is still current. The policy should consider procedures for determining the 

validity of an existing appraisal or collateral valuation information, with which to determine 

whether the appraisal or collateral valuation reflect current market conditions, based on 

factors such as: the property type, current market supply and demand, current use of the 

property, and the passage of time since the most recent appraisal. Updated collateral 

valuation information is particularly important during rapidly changing market conditions 

(including both declining and improving markets), and when there are changes in project 

plans. 

A state member bank also needs to consider whether state banking laws and regulations 

require the state member bank to update the property's market value on an annual or periodic 

basis. These requirements vary by state and are addressed in state regulations on the booking 

and holding of other real estate or bank-owned real estate. 

IV. ONGOING PROPERTY MANAGEMENT 

14. Q: How long may a Federal Reserve-regulated institution hold an OREO asset on its 

books? 

A: Generally, the Federal Reserve allows bank holding companies to hold an OREO asset for 

up to five years, with an additional five-year extension subject to certain circumstances. [Footnote 7 

-- Refer to the Board's Regulation Y (12 CFR 225.22(d)(1)). End of Footnote 7.] 

Regardless of the allowable holding period, the Federal Reserve generally expects bank 

holding companies, their nonbank subsidiaries, and state member banks to seek to dispose of 
ORE O assets as soo n as pruden t an d reasonable , takin g into accoun t marke t conditions. [Footnote8 

-- See Commercial Bank Examination Manual, Section 2200.1, "Other Real Estate Owned," and Bank Holding 

Company Supervision Manual, Section 3030.0, "Section 4(c)(2) and (3) of the BHC Act (Acquisition of DPC 

Shares, Assets, or Real Estate)." End of Footnote 8.] 

Unde r difficult marke t conditions, Federa l Reserv e regulations and policies permit the rental of 

ORE O properties to third-party tenants as part of an orderly disposition strategy within statutory 

and regulatory limits. Fo r furthe r guidanc e o n this matter, refe r t o SR 12-5/C A 12-3. 

Saving s an d loa n holdin g companie s generall y ma y acquir e real estat e fo r renta l an d ar e no t 

subjec t t o th e same statutory an d regulator y restrictions a s ban k holdin g companies. [Footnote9 

-- See 12 U.S.C. 1467a(c)(2) and 12 CFR 238.53(b). End of Footnote 9.] 

Stat e membe r bank s an d license d branche s of foreig n bank s ar e subjec t t o th e holdin g period s 

a n d othe r limitation s o n ORE O activity establishe d b y their licensin g authority, whic h var y 

o n initial holdin g period, extension s of holdin g period, an d total lengt h of th e holdin g period, 

as well as requirements fo r th e write-dow n of th e ORE O carryin g value . 

15. Q: If a n institution decide s to ente r into a n agreemen t wit h a third part y to manag e or 

maintai n a n ORE O asset, wha t du e diligenc e shoul d th e institution's managemen t 

conside r befor e entering into a managemen t agreement, an d wha t ar e soun d practice s 

f o r entering into an d managin g outsourcin g arrangements fo r ORE O activities? 

A : T o manag e th e cost an d t o supplemen t its ow n resources, an institution ma y us e a thirdparty servic e provide r fo r propert y management , maintenanc e or improvements, complianc e 

wit h loca l laws an d regulations, or othe r services. However, th e outsourcin g of all or part of 

t h e ORE O managemen t functio n pose s risks tha t a n institution need s t o address, a s is th e cas e 

wit h an y outsource d function . Therefore , th e supervisor y guidanc e fo r managin g th e risk s 

associate d wit h othe r type s of outsourcin g arrangements [Footnote10 

-- See Federal Financial Institutions Examination Council IT Examination Handbook, "Outsourcing Technology 

Services Booklet;" SR letter 03-5, "Amended Interagency Guidance on the Internal Audit Function and its 

Outsourcing;" and SR letter 00-17, "Guidance on the Risk Management of Outsourced Technology Services." End of Footnote 10.] 

m a y b e use d as guidanc e fo r soun d 

risk managemen t practice s fo r th e selection, contrac t review, an d monitorin g of a third-part y 

provider. In enterin g int o thes e third-part y arrangements, a n institution should: 

• Identify , assess, an d monito r th e risk of th e outsourcin g arrangement. 

• Implemen t policie s an d procedure s fo r monitorin g an d managin g th e risk of 

outsourcin g ORE O activities, consisten t wit h th e institution's ORE O policie s an d 

procedures. 

• Perfor m du e diligenc e an d evaluat e vendors, considerin g suc h factors as competence , 

expertise , managemen t quality, financia l strength (fo r example , th e ability t o obtai n 

insuranc e an d bonding), an d professiona l accreditation. Othe r consideration s includ e 

t h e vendor's experienc e wit h a particula r propert y typ e or in a particula r geographi c 

market, an d presenc e of, or access to, specialized lega l expertise . 
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A contractual arrangement may address the following items: 

• Expectations and responsibilities under the contract for both parties. Among other 

things, vendor responsibilities should include providing information related to the 

work performed, expenses, compliance with all applicable laws and regulations, and 

other relevant activity or risk-exposure information necessary for sound risk 

management by senior management and directors; 

• The scope and frequency of, and the fees to be paid for, the work to be performed by 

the vendor; 

• The process for changing the terms of the contract or agreement, especially for 

expansion of work if significant repair or maintenance issues are found, and 

conditions of default and causes for contract termination; 

• The location(s) where OREO activity documentation will be maintained by the 

vendor, the length of time documents will be archived by the vendor, and provisions 

for the institution to have reasonable and timely access to the documents; 

• Audit and regulatory review of the vendor's services, including stipulations that 

examiners have access to records or documents prepared or maintained by the vendor; 

and 

• A process (for example, arbitration, mediation, or other means) for resolving disputes 

and for determining who bears the cost of consequential damages arising from errors, 

omissions, and negligence. 

16. Q: When an institution forecloses on a partially completed real estate project, what 

factors should be considered before deciding to finish the project or sell the project in 

its "as is" condition? 

A: While each situation presents varying challenges and risks, an institution should analyze 

the economic cost and risk before deciding to complete a project, considering the feasibility 

of the project under current market conditions. The institution should also consider whether 

it has the skill and management resources to manage a construction project. Furthermore, an 

institution should evaluate whether investing additional funds to complete the project will 

minimize its losses as compared to marketing and selling the property in its "as is" condition. 

17. Q: What steps should institutions take to ensure that a property is appropriately 

maintained after a notice of foreclosure is issued to the current homeowner but prior to 

the foreclosure being completed? 

A: Institutions are expected to have controls to ensure compliance with state and local laws 

related to entering properties during a foreclosure redemption period. Furthermore, 

institutions should secure properties to the best of their ability during the foreclosure process. 
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V. OPERATIONAL AND LEGAL ISSUES 

18. Q: What ownership risks or liabilities arise when an institution takes title to OREO, 

and what are the sound risk management practices associated with the ownership of 

foreclosed property (both occupied and vacant properties)? 

A: Based on its risk assessment, an institution should consider seeking legal advice on the 

risks posed by taking possession of the property. The risk assessment should be performed 

before the institution takes title to the property and should consider local market conditions 

and any local and state government requirements governing the institution's ownership, 

maintenance, and sale or disposal of the property. If the property is located outside of the 

institution's market footprint, the institution may need to retain experts with knowledge of 

local legal requirements and market conditions. 

Ownership risks and potential liability exposures include: 

• Obligations under property governing documents, tenant lease agreements, or 

contracts; 

• Requirements to provide a safe and secure environment to tenants; 

• Requirements to maintain or operate the property in conformance with federal, state, 

and local laws, including those addressing health and safety standards; 

• Payment of property taxes; and 

• Obligations to address possible environmental risks. 

Examples of risk management practices for vacant properties include: 

• Remediating obvious hazards to health and safety; 

• Securing exterior openings to the property and all exterior mechanical systems; 

• Adjusting utility services to a level appropriate to preserve the property; 

• Scheduling the property for periodic field inspection and maintenance; 

• Posting emergency contact information and ownership information on the main 

entrance door to the property, on a laminated waterproof notice; 

• Posting and executing "No Trespassing" signage at the front and rear of the property, 

and executing all required "No Trespass" documents in accordance with local law 

enforcement agencies; and 

• Analyzing the potential environmental liability to the institution and the implications 

for the property's value. 

19. Q: What are some potentially useful measures for monitoring and managing OREO 

risk? 

A: An institution should develop measures to assess and monitor the risk in its OREO assets 

that are consistent with the nature, extent, and complexity of its OREO portfolio. 
Page 11 of 19 

Management should have an information system to monitor and analyze OREO properties 

that is appropriate for the institution's OREO portfolio size and complexity. 

The following are examples of performance ratios that the institution may choose to monitor: 

• Net disposition proceeds as a percentage of original book value of the property 

• Valuation reserve as a percentage of OREO values 

• Volume and dollar amount of former OREO currently being financed 

• OREO holding and management costs as a percentage of OREO 

• Legal expense (since foreclosure) related to OREO as a percentage of OREO 

• OREO as a percentage of internally criticized assets (which include special mention 

and classified assets) plus past due 

• OREO (by type) as a percentage of corresponding loan type 

20. Q: What controls and processes should institutions have in place to ensure that 

properties in the OREO inventory are properly maintained and meet local codeenforcement ordinances and other laws? 

A: Institutions should have policies and procedures in place to ensure that properties are 

maintained in compliance with federal, state, and local laws, including laws governing health 

and safety, property preservation, fair housing, and property registration. An institution's 

failure to adhere to these legal requirements can result in fines, litigation, and reputational 

damage. Further, institutions engaging third-party vendors to carry out functions related to 

these requirements should ensure that vendors maintain appropriate compliance controls. 

Reliance on third-party vendors does not relieve an institution of its compliance 

responsibilities or liability. 

21. Q: In addition to considerations regarding health and safety violations, how should 

institutions determine which repairs to make before disposition? 

A: Expending funds to repair a property is one strategy for an institution to consider for 

improving potential recovery on the sale of OREO assets. For instance, repairs may be 

necessary for the property to qualify for a Federal Housing Administration (FHA)-insured 

loan, which in turn may attract a greater number of qualified buyers. Institutions should have 

controls in place to comply with all federal, state, and local laws, including fair housing laws. 

For example, institutions may not avoid or delay the maintenance or repairs of dwellings 

based on the racial or ethnic composition of the geographic area where they are located. 

22. Q: What steps should an institution take to comply with existing laws protecting 

tenants? 

A: Institutions should have controls in place to comply with all federal, state, and local laws 

related to protecting the rights of tenants, including the federal Protecting Tenants at 

Foreclosure Act of 2009 (CA letter 09-5), Servicemembers Civil Relief Act (CA letter 05-3), 
Page 12 of 19 

the Fair Housing Act, and the Americans with Disabilities Act. For example, an institution 

or its agent should have consistent processes in place to provide proper and timely notice of 

the institution's ownership of the foreclosed property and provide the tenant with the 

allowable timeframes, as established under law, to remain in the foreclosed property before 

eviction proceedings commence. Institutions that lack experience as a landlord may wish to 

engage the services of a property management firm. However, as previously stated, reliance 

on third-party vendors does not relieve an institution of its compliance responsibilities or 

liability. 

VI. SALE AND TRANSFER OF OREO 

23. Q: What is the primary source of accounting guidance for sales of OREO? 

A: The primary accounting guidance for sales of real estate (including foreclosed real estate) 

is Accounting Standards Codification Subtopic 360-20, "Property, Plant, and Equipment -

Real Estate Sales" (formerly FASB Statement No. 66, "Accounting for Sales of Real Estate") 

(ASC 360-20). This standard, which applies to all transactions in which the seller provides 

financing to the buyer of the real estate, establishes several methods (discussed in questions 

25 to 27) to account for the disposition of real estate. The methods established in 

ASC 360-20 are the full accrual, installment, cost recovery, reduced-profit, and deposit 

methods. Each of these methods is also summarized in the Call Report Glossary entry titled 

"Foreclosed Assets." 

While the methods established in ASC 360-20 are briefly described in the questions below, 

this document does not contain a comprehensive list of all considerations that need to be 

made when analyzing sales of real estate. This area of GAAP is very complex and requires 

significant judgment; therefore, a thorough review of ASC 360-20 is usually required when 

analyzing sales of real estate because it provides detailed guidance necessary to determine 

the appropriate accounting for these transactions. As a result, it is not possible to cover all of 

the details of this area of GAAP in this document. 

24. Q: When an institution sells an OREO asset, how is a gain or loss on the sale reported 

on the Call Report? 

A: Any loss on the sale of an OREO asset should be recognized immediately and reported as 

"Net gains (losses) on sales of other real estate owned" on the Call Report. A gain on the 

sale of an OREO asset is also reported on the same line; however, recognition of a gain 

depends on the accounting method used in the transaction, as noted in Questions 25-26. 

25. Q: When may an institution immediately recognize the gain on an institution-financed 

sale of OREO? 

A: Under GAAP, when the transaction meets the qualifications for the full accrual method of 

sale accounting, the following applies: (1) a sale is recognized, (2) the asset resulting from 

the institution's financing of the transaction is reported as a loan, (3) the gain or loss on the 
Page 13 of 19 

sale is recognized immediately, and (4) interest income is accrued on the new loan. This 

method may be used when all of the following conditions have been met: 

• A sale has been consummated, [Footnote 11 

-- Under GAAP, a sale has been consummated when all of the following conditions are met: (1) the parties are 

bound by the terms of a contract, (2) all consideration has been exchanged, (3) any permanent financing for which 

the seller is responsible has been arranged, and (4) all conditions precedent to closing have been performed. 

Usually, these four conditions are met at the time of closing or after closing, not when an agreement to sell is signed 

or at a preclosing. End of Footnote 11.] 

• The buyer's initial investment (for example, a cash down payment) and continuing 

investment (periodic payments) are adequate to demonstrate a commitment to pay for 

the property, 

• The receivable is not subject to future subordination, and 

• The usual risks and rewards of ownership have been transferred. 

Further details regarding the minimum initial investment, including detailed guidance 

regarding what must be included or excluded in this amount, can be found in ASC 360-20. 

The Appendix to this Q&A document contains guidance on the minimum initial investment 

for various types of real estate that is provided in ASC 360-20-55. To meet the continuing 

investment (periodic payment) requirement, the contractual loan payments must be sufficient 

to repay the loan in level annual payments over the customary term for the type of property 

involved. In order for the usual risks and rewards of ownership to be transferred, the 

institution cannot have substantial continuing involvement with the property. ASC 360-20 

provides detailed guidance on the forms of continuing involvement that result in prohibition 

on the use of the full accrual method. 

26. Q: What other accounting methods could apply to an institution-financed sale of 

OREO? How are gains on sales and interest income recognized under those methods? 

A: The following methods are used when a sale has been consummated as prescribed by 

GAAP, but the conditions for full accrual have not been met: 

• Installment method: For use when the buyer's initial investment is not adequate for 

full accrual, but recovery of the cost of the OREO asset is reasonably assured if the 

buyer defaults. This method recognizes a sale of the OREO asset and the 

corresponding new loan. Any gain on the sale is recognized as payments are received 

and interest income may be accrued, when appropriate. 

• Cost recovery method: For use when the disposition does not qualify for full accrual 

or installment methods. This method recognizes a sale of the OREO asset and the 

corresponding new loan on nonaccrual status, and all income recognition is deferred. 

Principal payments reduce the loan balance and interest increases unrecognized gross 

profit. No gain or interest income is recognized until either the aggregate payments 

exceed the recorded amount of the loan, or a change to another accounting method is 

appropriate. 
Page 14 of 19 

• Reduced-profit method: For use when the down payment is adequate, but the 

amortization schedule does not meet full accrual method requirements. This method 

recognizes a sale of the OREO asset and a corresponding new loan. However, only a 

portion of the gain on the sale is recognized as payments are received based on the 

present value of the lowest level of periodic payments required under the loan 

agreement. 

If the transaction eventually meets the requirements for the full accrual method, the 

institution may switch to that method at that time and recognize any unrecognized gain on 

the sale. As stated in Question 24, any loss on the sale of the OREO asset is recognized 

immediately under all methods. 

27. Q: Under what circumstances would an institution-financed sale of OREO not result in 

a sale for accounting and reporting purposes, and what method of accounting would be 

appropriate for the transaction? 

A: Under GAAP, certain conditions exist for a sale to be consummated for accounting 

purposes (see Question 25). If a sale is not consummated for accounting purposes, the 

transaction is accounted for under the deposit method. Because there is no sale for 

accounting purposes, the asset remains reported as an OREO asset and no gain on sale or 

interest income for the new loan is recognized. If, however, the net carrying amount of the 

OREO asset exceeds the sum of the deposit received, the fair value of the unrecorded note 

receivable, and the debt assumed by the buyer, the institution must recognize the loss on the 

date the agreement to sell is signed. Payments received from the borrower are reported as a 

liability until sufficient payments have been received to qualify for a different accounting 

method. The deposit method may also be used if a sale is consummated for accounting 

purposes, but the initial investment is inadequate and recovery of the cost of the property is 

not assured. 

Finally, certain forms of continuing involvement in the OREO asset by the institution may 

limit its ability to recognize a sale. One example is when the institution may be required to 

initiate or support operations for an extended period of time, which results in accounting for 

the transaction as a financing, leasing, or profit-sharing arrangement. One common type of 

condition that indicates a presumption of support is when the institution holds a receivable 

from the buyer for a significant part of the sales price and collection of the receivable 

depends on the operation of the property. ASC 360-20 includes detailed guidance on the 

types of continuing involvement that should be considered when determining whether a sale 

has occurred for accounting and reporting purposes. 

28. Q: May an institution sell or transfer an OREO asset to a related party (such as the 

bank holding company or a non-bank affiliate)? 

A: The Federal Reserve does not have a regulation prohibiting the sale of an OREO asset to a 

related party. When a transaction with a related party occurs, an institution should verify that 

the asset is recorded at fair value. The sale of an asset to an affiliate must comply with the 

market terms requirement of the Board's Regulation W (12 CFR 223.51). The terms must be 

substantially the same, or at least as favorable to the institution, as those to nonaffiliates for 
Page 15 of 19 

comparable transactions. Similarly, if an insider purchases an OREO asset, the transaction 

must be recorded at fair value in accordance with GAAP and not create a disadvantage to the 

institution by an artificially low sales price. Additionally, the Board's Regulation O 

(12 CFR 215) limitations apply when an institution finances an OREO asset sale to an 

insider. Moreover, transfers of an OREO asset within a holding company do not extend any 

period for the required divestiture of the property. Refer to the Board's Regulation Y 

(12 CFR 225.22(d)(l)(iii)). 

29. Q: What procedures and internal controls should an institution have in place to assess 

the reasonableness of an offer to purchase an OREO asset and to support the decision 

to sell the property? 

A: The institution's procedures should ensure that the sale of an OREO asset maximizes 

recovery and adheres to applicable federal and state laws and regulations. The procedures 

should also address the approval process for the sale of a particular property, including the 

level of management required to approve a sale. Moreover, the procedures should address 

whether the institution will consider an offer to purchase an OREO asset from a related party 

(for example, a member of the board of directors, an employee, or a relative of an employee). 

Procedures should address documentation requirements for the institution's plans to market 

and sell the property, the approval of the sale, and, if applicable, the approval of a loan to 

finance the purchase of an OREO asset. Such documentation should include: 

• A plan for the marketing and sale of the property in accordance with applicable 

federal and state laws, including the Fair Housing Act. The plan should be revised as 

needed to reflect changes in market conditions; 

• A record of inquiries and purchase offers made by potential buyers, including reasons 

for rejecting an offer or accepting an offer. Acceptance of an offer should include 

confirmation that the potential buyer has the financial ability and motivation to close 

the sale; 

• Methods used to market, advertise, and sell the property, whether by the institution or 

its agent (for example, documentation should address the method of sale, including 

bulk sales or auction); 

• The establishment of the property's sales listing price and any changes to the listing 

price; 

• An assessment of market conditions affecting the ability of the institution to sell the 

property, including regular updates; 

• Listing and sales agreements with the institution's agent, including terms of sales 

commissions; 

• The purchase agreement and the terms of sale, including any representations and 

warrants made by the institution, transaction closing costs to be paid by the 

institution, and documentation on the transfer of ownership and recordation of the 

title; 
Page 16 of 19 

• Legal review of the sale transaction documents; 

• Approval of the sale by the appropriate level of management and, if applicable, the 

approval of the institution's loan to the purchaser of the property and executed loan 

documents; 

• Confirmation of the institution's receipt of the funds from the purchaser of the 

property; and 

• Other documentation related to the sale and transfer of ownership, including 

cancellation or assignment of a property management agreement, transfer of property 

management documents (for example, lease agreements) to the new owner, and 

notification to the institution's insurance company of the sale. 

30. Q: What incentives exist to encourage institutions to sell residential OREO properties 

to owner-occupants and groups involved in neighborhood stabilization efforts, before 

considering selling to investors? 

A: Many institutions have implemented "first look" programs that give prospective 

homeowners brief exclusive opportunity to purchase bank-owned properties in certain 

neighborhoods so these homes can either be rehabilitated, rented, resold, or demolished. 

Giving prospective homeowners and communities a "first look" can help to limit 

neighborhood blight, stabilize property values, maximize recovery, and mitigate reputational 

risk for a financial institution. 

Under the Community Reinvestment Act (CRA) and the Neighborhood Stabilization 

Program rules, institutions can receive investment credit for OREO donations made in 

U.S. Department of Housing and Urban Development-designated Neighborhood Stabilization 

Areas, in line with this provision of CRA. 

31. Q: What legal requirements should institutions consider when deciding how to market 

and sell residential properties, including whether to sell residential properties (or pools 

of properties) to investors or at auction? 

A: An institution should ensure that its policies and procedures governing the marketing, 

sale, and disposition of OREO properties comply with applicable laws, including the Fair 

Housing Act and the Equal Credit Opportunity Act (if the institution makes or facilitates 

credit). For example, an institution's marketing and sales strategies may not be based on the 

racial or ethnic composition of the geographies where the properties are located. 

Additionally, when selling to investors, an institution should conduct proper due diligence to 

ensure they have no prior criminal history and do not engage in practices that could have an 

adverse impact on property values. Institutions may also consider implementing controls to 

evaluate purchaser actions following the sale of OREO property to an investor. Some 

institutions now evaluate bulk purchasers to determine whether properties are resold to 

responsible buyers or are contributing to neighborhood blight due to negligence. Robust 

oversight of investor purchase transactions of OREO properties can reduce an institution's 

financial, legal, and reputational risks. 
Page 17 of 19 

Appendix 

GAAP Guidance on Minimum Initial Investment Requirements 

As noted in ASC 360-20-40, a buyer's initial investment shall be adequate to demonstrate 

the buyer's commitment to pay for the property and shall indicate a reasonable likelihood that 

the seller will collect the receivable. The minimum initial investment requirements for various 

types of real estate are provided in ASC 360-20-55 (see the following table). The minimum 

initial investment is expressed as a percentage of sales value. Although the table does not cover 

every type of real estate property, an institution may make analogies to the types and associated 

risks of properties specified in this table to evaluate initial investments for other property types. 

Further, institutions need to consider the other requirements in ASC 360-20-55 to 

determine whether the institution needs to modify the minimum initial investment requirement. 

If a recently placed permanent loan or firm permanent loan commitment for maximum financing 

of the property exists with an independent, established lending institution, the minimum initial 

investment should be whichever of the following is greater: 

a. The minimum percentage of sales value of the property specified in the ASC 360-20-55 

table, or 

b. The lesser of: 

1. The amount of the sales value of the property in excess of 115% of the amount of 

a newly placed permanent loan or firm permanent loan commitment from a 

primary lender that is an independent established lending institution; or 

2. 25% of the sales value. 
Page 18 of 19 

Table from ASC 360-20-55 

For Land Section: • Minimum initial investment expressed as a percentage of sales value held for commercial, industrial, or residential development to commence within two years after sale is 20 •Under Commercial and Industrial Property Section: Minimum initial investment expressed as a percentage of sales value held for commercial, industrial, or residential development to commence after two years is 25 • For office and industrial buildings, shopping centers, and so forth: o Minimum initial investment expressed as a percentage of sales value held for properties subject to lease on a long-term lease basis to parties with satisfactory credit rating; cash flow cu

sufficient to service all indebtedness is 10 o Minimum initial investment expressed as a percentage of sales value held for single-tenancy properties sold to a buyer with a o Minimum initial investment expressed as a percentage of sales value held for all other is 20 satisfactory credit rating is 15 • For other income-producing properties (hotels, motels, marinas, mobile home parks, and so forth): o Minimum initial investment expressed as a percentage of sales value held for cash flow currently sufficient to service all o Minimum initial investment expressed as a percentage of sales value held for start-up situations or current deficiencies in indebtedness is 15 Under Multifamily Residential Property Section: cash flow is 25 • For primary residence: o Minimum initial investment expressed as a percentage of sales value held for cash flow currently sufficient to service all o Minimum initial investment expressed as a percentage of sales value held for start-up situations or current deficiencies in indebtedness is 10 cash flow is 15 • For secondary or recreational residence: indebtedness is 15 Under Single-Family Residential Property (including condominium or cooperative housing) Section: cash flow is 25 • Minimum initial investment expressed as a percentage of sales value held for primary residence of the buyer is 5 (Note A - If collectibility of the remaining portion of the sales price ca

supported guaranteed by reliable evidence of collection experience, the minimum initial investment shall be at least 60 percent of the difference between the sales value and the financing available f

by regulatory bodies such as the Federal Housing Authority (FHA) or the Veterans Administration (VA), or from independent, established lending institutions. This 60 percen

test applies when independent first-mortgage financing is not utilized and the seller takes a receivable from the buyer for the difference between the sales value and the initial investment

End of Note A.) If independent first mortgage financing is utilized, the adequacy of the initial investment on sales of single-family residential property should be determined in accordance with ASC 360

• Minimum initial investment expressed as a percentage of sales value held for secondary or recreational residence is 10 (Note A - If collectibility of the remaining portion of the sales pr

supported guaranteed by reliable evidence of collection experience, the minimum initial investment shall be at least 60 percent of the difference between the sales value and the financing available f

when by regulatory bodies such as the Federal Housing Authority (FHA) or the Veterans Administration (VA), or from independent, established lending institutions. This 60 percenindependent first-mortgage financing is not utilized and the seller takes a receivable from the buyer for the difference between the sales value and the initial investment. If independ

financing is utilized, the adequacy of the initial investment on sales of single-family residential property should be determined in accordance with ASC 360-20-55-1. End of Note A) 
Page 19 of 19 

A seller of owner-occupied single-family residential homes that finances a sale under an 

FHA or VA government-insured program may use the normal down payment requirements or 

loan limits established under those programs as a surrogate for the down payment criteria set 

forth above and may record profit under the full accrual method, provided that the mortgage 

receivable is fully insured from loss under the FHA or VA program. In that specific 

circumstance, departure from the minimum initial investment criteria above is justified because 

all of the credit risk associated with the receivable from the sale is transferred to the 

governmental agency. However, in all other circumstances (for example, FHA or VA programs 

that provide for less than full insurance or seller financing using private mortgage insurance), the 

minimum initial investment criteria set forth above shall be followed.