What is the down payment required when the bank finances property held in OREO? Does the down payment still apply if new loan is secured by another piece of property or certificate of deposit? Thanks

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Any rules would be found by your primary regulator and the accounting industry. We are a state chatered bank that may loan up to 100% of the purchase price of OREO. With no money down though, it may be considered a financing and not an arm's length sale. We don't let the accounting rules govern what we do though; turning the asset back to earning a return, even if it can't be recorded as interest income, is more important than where the asset is recorded on the balance sheet. Wouldn't you rather have a loan with additional collateral than turning down an offer simply because of accounting rules or regs ?

How about this scenario? Bank is selling real property held in OREO to customer. Loan will be secured by certifi ate of deposit only. Does borrower still have to pay 10% down? Thanks

The accounting rules do not "forbid" this type of transaction, however, if you do not refinance OREO property within the provided standards you are required to record the transaction in a certain manner. You are required to continue to carry the new loan as OREO on your CALL report but may carry it as a loan on G/L. In addition, if a gain resulted from the sale the amount may not be taken straight to income but must be deferred. Although some examiners will not balk if the gain is not material. These types of transactions are referred to as "covered transactions" as Andy mentioned. In the past, if the down payment requirement was not met we would monitor the loan until principal payments applied to loan were equal to that of the "required" down payment. In most cases, at that point it was no longer considered a "covered transaction".

You may want to visit with your regulator and the CPA firm that conducts your external audits. They should be able to provide guidance on the transaction in question.

NOTE: Another common error I find when auditing OREO is improper recording of expenses incurred during the holding period. These expenses generally cannot be "netted" from the sale when calculating the gain or loss. IOW - they usually cannot be capitalized.