BB 93-50
BANKING ISSUANCES

Comptroller of the Currency
Administrator of National Banks
Type:  Banking Bulletin
Subject:  Loan Refinancing

TO:  Chief Executive Officers of All National Banks and Federal Branches
     and Agencies, Deputy Comptrollers (Districts), District
     Administrators, District Counsels, Regional Bank Directors,
     Department and Division Heads, and All Examining Personnel

Purpose

The purpose of this banking bulletin is to clarify the OCC's policy on
refinancing and renegotiating loans where market interest rates have
declined, including loans secured by real estate collateral that has
declined in value.

Background

Declining interest rates make refinancing appealing to many borrowers
whose present contractual interest rate is higher than market interest
rates. Strong borrowers in normal market conditions generally have the
opportunity to refinance their debts either with their existing bank or
elsewhere in the market.

In some parts of the country, the value of the collateral pledged on many
loans, particularly real estate loans, may have declined. The OCC has
heard that some banks are reluctant to refinance or renegotiate loans
where collateral value has declined. Some contacts even indicated a belief
that the agency has a policy that would prohibit or discourage a national
bank from working with such borrowers, even if the borrower's ability to
repay the loan is demonstrated. In other cases, restructuring the loan
actually would improve the prospects for repayment and the continued
viability of the borrower.

Policy

The decision to refinance or renegotiate loans is a business decision that
rests with the lending bank. The OCC has long encouraged banks to work
constructively with borrowers. The OCC will not criticize a bank solely
for refinancing or renegotiating a loan at current market rates, even when
the collateral has declined in value. Refinanced and renegotiated loans
will be evaluated based on the borrower's creditworthiness and repayment
capacity. A refinancing by itself is not a reason for criticism of the
credit.

Refinancings and renegotiated loans are a normal part of the business of
banking. Refinancings or renegotiated loans may benefit both parties by
improving borrowers' ability to repay their loans. Borrowers get the
opportunity to lower their interest rates, adjust amortization schedules,
change collateral, or gain additional funds. Although bankers may give up
some income, terms can be adjusted to improve prospects for repayment,
improve collateral position, and/or obtain guarantees. Additionally, the
bank is able to maintain business relationships that can generate
additional income in the future.

There are many decisions and considerations a bank must make when
refinancing or renegotiating, including:

* The bank should determine whether or not an appraisal is needed when
  refinancing a real estate loan. Refinancing does not automatically
  trigger the need for a new appraisal. Refinancing a loan simply to
  provide the borrower a lower interest rate may not constitute a real
  estate related financial transaction requiring an appraisal. Management
  should review the real estate appraisal regulation and OCC policies that
  have been issued in this area for guidance.

* The bank also must determine if the refinancing would be classified as a
  troubled debt restructuring (TDR). Guidelines for determining if the
  transaction should be accounted for as a TDR are outlined in Banking
  Circular 195, "Accounting for Restructured Loans and Sales of Foreclosed
  Properties." As discussed in the issuance, lowering an interest rate
  does not always trigger a TDR classification.

Summary

OCC policy is to encourage banks to work with their borrowers. It will
often be in the bank's, and the borrower's, long-term interest to
refinance or renegotiate a loan where market interest rates have fallen.
Every lending situation is unique. Bank management should consult previous
OCC policy issuances to determine ways to constructively and prudently
work with borrowers.

Responsible Office

Questions concerning this issuance or any of the policies discussed in it
may be addressed to the local supervisory office or the Office of the
Chief National Bank Examiner in Washington at (202) 874-5170




Donald G. Coonley
Chief National Bank

Date:  September 3, 1993