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Borrower Passes Away: Charge-off Entire Balance?

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Question: 
When we have a loan secured by real estate and the borrower has passes away, should the entire loan balance be charged-off, or just the amount above fair market value less cost to sell? Should the remaining balance be classified Substandard and moved to OREO?
Answer: 

I am confused. Why would you charge off the entire balance if the borrower died? You have both a claim against the estate and the collateral. Whether you need to classify the loan would be based on your assessment of the loan being paid. You won't know that until you contact the executor and potentially any possible heirs. You don't move balances to OREO until you obtain ownership of the property. Sounds like you need to sit down with your accountants.

First published on 04/05/2020

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