Is it possible to reinstate a loan in 2011 that was charged off in 2010? I always thought that once you charged off a loan, you could not reinstate it.

If you can reinstate the loan, how would you account for this? Would you run it back through the Allowance? Debit the loan and credit allowance?

I have looked for guidance on this and can't find any reference.

no you cannot rebook a charged off loan.

lrj, do you know where this is stated? I need some kind of written guidance that I can show to management.

If they were to do a new loan for this customer, how would you account for it? You really wouldn't be extending cash again so what would be the offset of the loan?

You can execute a new agreement with the borrower, but I am not aware of any provisions for reinstatement of a charged-off loan. It would have to be taken as a recovery.

rlcarey, aren't recoveries only recorded when cash is received?

The problem is that no cash is exchanging hands.

This might be a better question for your external auditors or CFO.

I would talk to your accountant. I am speaking as a former regulator and can't remember the cite, it was just burned into memory. Maybe GAAP. Typically we make an off the books agreement with the borrower, book it in our shadow processing and apply any payments as a recovery.

I think in the Call Report instructions, in the Glossary for the ALLL there is something about this. Also probably in the Interagency Policy Statements for the ALLL.

Bottom line, I don't think you can "rebook" a charged off loan. And you wouldn't need to make a new loan to the borrower, he is in fact still owing on the charged off note, unless you negotiated a settlement with him. While technically able to make a new loan, you can't disburse the new loan funds to "recover" the funds on the charged off loan. So if the borrower begins to pay, I would book the payments as a recovery, and if a miracle occurs and they repay all of prinicpal, then I think you could book the remaining payments as interest.

It is all accounting rules. You can't change your mind and reinstate a charged off loan from a prior year. If they have now agreed to make payments, you take in the payments as recoveries through the reserve.

CRL was correct about this being in the Call Report instructions. Thank you CRL for pointing me there. Below is the text from the Call Report:

When a bank makes a full or partial direct write-down of a loan or lease that is uncollectible, the bank establishes a new cost basis for the asset. Consequently, once a new cost basis has been established for a loan or lease through a direct write-down, this cost basis may not be "written up" at a later date. Reversing the previous write-down and "re-booking" the charged-off asset after the bank concludes that the prospects for recovering the charge-off have improved, regardless of whether the bank assigns a new account number to the asset or the borrower signs a new note, is not an acceptable accounting practice.

I think this may be along the same lines as this question but wanted to get another opinion: customer applies for a residential mortgage loan, has charge-off loan with bank, would it be acceptable for the new loan request to be granted with part of proceeds used to payoff the chargeoff?

Nothing in Federal regulations would prevent it.

So the new loan wouldn't be considered a re-booking of the prior charge-off?

I don't think so, in this case. You aren't just re-booking the old loan as suggested by the OP. As long as the new loan was normally unwritten with the standard ATR and collateral requirements, the fact that some of the proceeds were used to pay a charged off loan, would not subject the current loan to classification. It might depend on the nature and circumstances of the original charge-off. You should check with your external accountants to be sure.

Thanks your help!