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#574593 - 06/27/06 03:41 PM 0% Rate Instead of Non-Accrual
Connie Ollis Offline
Connie Ollis
Joined: Nov 2001
Posts: 83
Western NC, US
We have a loan with a customer with a terrible hardship with a handicapped child that we have been working with. Recently our credit admin area determined to change the rate on the loan to 0%. There were circumstances that the borrower had to quit her job and is receiving limited funds each month. They determined to not put the loan in non-accrual status since there are not "performance" issues. The file is fully documented in the decision as well. Does anyone see a problem with this. From a Fair Lending perspective we don't know of any other situations of this same severity but we would probably do the same thing if we were presented with a similar situation. I guess my only concern would be from a Safety and Soundness position. Does anyone see issues?

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#574594 - 06/27/06 03:55 PM Re: 0% Rate Instead of Non-Accrual
02bonne Offline
Platinum Poster
Joined: Nov 2005
Posts: 620
I think you'll have an issue if your examiners get wind of this....specifically because instead of putting this as a non-accrual item, you're forgoing an interest rate. They may perceive that you're trying to hide low quality assets. If the customer is not able to make her payments, you do have a performance issue! A better way to handle it may be to defer payment for a certain period of time and capitalize (*gasp*) the interest. This will only be a short term solution and should not be used to give the customer a better rating, but may prevent you from getting criticized for not putting the customer in non accrual status for a short period. Just my $0.02.
Last edited by 02bonne; 06/27/06 03:59 PM.
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#574595 - 06/27/06 04:00 PM Re: 0% Rate Instead of Non-Accrual
Kathleen O. Blanchard Offline

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Kathleen O. Blanchard
Joined: Dec 2000
Posts: 21,293
I hope they discussed this with the CFO prior to making the change! How can a problem loan, regardless of the reason, not be deemed to have performance issues? If the loan were being paid as agreed, you wouldn't be "working with them".

Your bank needs to review the FFIEC Uniform Retail Credit Classification rules here and treat this loan appropriately. Putting a loan on non-accrual is proper accounting and does not dictate how you allow the customer to pay you back. The loan needs to be in the proper category for call report and financial statement purposes.
Kathleen O. Blanchard, CRCM "Kaybee"
HMDA/CRA Training/Consulting/Mapping
The HMDA Academy

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