# Nonaccrual Loans Explained: Definition, FDIC Guidelines, and Solutions

## What Is a Nonaccrual Loan?

A nonaccrual loan is an accounting term for a loan, often [unsecured](https://www.investopedia.com/terms/u/unsecuredloan.asp), that stops generating interest income for the lender because the borrower has failed to make payments for 90 days or more. For the lender, the loan shifts to [nonperforming](https://www.investopedia.com/terms/n/nonperformingloan.asp#:~:text=Key%20Takeaways,is%2090%20days%20past%20due.) status, meaning interest can no longer be recorded as income and is instead recognized only when cash payments are received.

The FDIC generally classifies loans as nonaccrual if they are 90 days past due, in default, or unlikely to be repaid in full. Lenders may pursue repayment plans, restructure the loan, or take other actions to recover losses, while borrowers can sometimes restore the loan's status by catching up on overdue payments or offering collateral.

### Key Takeaways

*   A loan becomes nonaccrual if no payment has been made for 90 days, ceasing interest accrual for the lender.
*   Lenders must report nonaccrual loans to credit agencies, which can negatively impact a borrower's credit score.
*   Returning to accrual status requires catching up on overdue payments and may involve securing a repayment plan.
*   The FDIC considers a loan nonaccrual if payment is unlikely or overdue by 90 days, unless well-secured.
*   Troubled debt restructuring can lower interest, erase part of the debt, or modify repayment terms.

## Understanding the Functionality of Nonaccrual Loans

 If a loan isn't paid for 90 days, it becomes nonaccrual, and banks label it as substandard, reporting this to [credit agencies](https://www.investopedia.com/terms/c/credit-reporting-agency.asp), which lowers credit scores.

Lenders adjust their loan loss reserves and might pursue legal action against the borrower.  

Lenders usually expect regular principal and interest payments. If a loan is nonaccrual, expected interest isn't paid, making it a [cash basis](https://www.investopedia.com/terms/c/cash-basis-loan.asp) loan. Interest will be recorded as income again only if payment is eventually collected.

The [FDIC](https://www.investopedia.com/terms/f/fdic.asp) states that an asset is in nonaccrual status if it meets one of three criteria:

*   It is maintained on a cash basis because of a deterioration in the financial condition of the borrower,
*   Payment in full of principal or interest is not expected, or,
*   Principal or interest has been in default for 90 days or more—unless the asset is both well-secured and in the process of collection. (A well-secured asset is one that is either backed by [collateral](https://www.investopedia.com/terms/c/collateral.asp)—such as a [lien](https://www.investopedia.com/terms/l/lien.asp), a pledge of real or personal property, securities valuable enough to cover the debt—or guaranteed by a financially responsible third party.)

> **Important**
>
> An unaccrued loan is classified as substandard and the borrower is reported to credit agencies.

## How to Restore a Loan to Accrual Status

After entering nonaccrual status, the borrower can usually work with the lender to determine a plan for paying off the debt.

A loan can return to accrual status if the borrower pays overdue amounts and resumes regular monthly payments.

If both parties agree, another option involves resuming the scheduled principal and interest payments for six months and providing the lender reasonable reassurance that the outstanding principal, interest, and fees will be paid within a set period of time.

A third option requires the borrower to provide collateral for securing the loan to the lender, repaying the outstanding balance within 30 to 90 days, and resuming monthly payments.

### Exploring Troubled Debt Restructuring (TDR) Options

After reviewing the borrower's income and expense status, another option is for the lender to create a [troubled debt restructuring](https://www.occ.treas.gov/news-issuances/bulletins/2012/bulletin-2012-10.html) (TDR). The TDR may erase part of the loan's principal or interest payments, lower the interest rate, allow interest-only payments, or modify the repayment terms in some other way. Lower debt payments may be accepted until the borrower's financial situation improves.

## Can Any Loan Become Nonaccrual?

Lenders can put almost any loan into nonaccrual status if payments are 90 days behind, with the exception of secured loans backed by solid collateral (e.g., a mortgage backed by a house). If a secured loan goes into default, the lending institution can seize the collateral and liquidate it to recover the unpaid balance.

## What Are the Requirements for Troubled Debt Restructurings (TDRs)?

The Office of the Comptroller of the Currency (OCC) lists accounting and reporting requirements for lenders seeking to establish [troubled debt restructurings](https://www.occ.treas.gov/news-issuances/bulletins/2012/bulletin-2012-10.html) (TDRs) for nonaccrual loans. A borrower in financial difficulties can work with the lender to determine whether a TDR is appropriate in their situation.

## What Does Cash-Basis Loan Mean?

Cash basis means that the lending institution has sent the loan into nonaccrual status. Because the lender hasn’t received interest for 90 days or more, they can’t record it as accrued income—they have to record it on a cash basis.

## The Bottom Line

Nonaccrrual loans are debts overdue by 90 days or more that stop accruing interest for lenders, affecting both income and reporting. Under FDIC guidelines, these loans are classified as nonaccrual when repayment is uncertain or the borrower is in default, which can harm a borrowers credit standing.

Lenders may respond by setting aside reserves for potential losses, restructuring the debt, or taking legal action to recover the funds. Borrowers can work to restore a loan to accrual status by catching up on overdue payments, offering collateral, or entering a troubled debt restructuring plan to manage their obligations and avoid further penalties.