WASHINGTON — The federal and state banking regulators on Friday provided guidelines for prudent workouts of troubled commercial real estate loans.

The 33-page guidance outlined scenarios where modifications of CRE loans should take place, provided examples of model workouts and informed institutions they will not be penalized by examiners for prudent workout efforts even if a restructured loan still has weaknesses.

"The regulators have found that prudent CRE loan workouts are often in the best interest of the financial institution and the borrower," the agencies said.

The guidance said lenders could consider providing commercial developers with additional credit through a renewal or extension of loan terms if a project ran into trouble and the original loan had become delinquent.

The regulators advised banks to analyze a borrower's repayment ability, support from guarantors and underlying collateral value to assess whether a workout is needed.

"Loan workout arrangements need to be designed to help ensure that the institution maximizes its recovery potential," the guidance said.

The guidelines came after several bank failures have been attributed to high levels of CRE loan delinquencies, and as the industry remains highly exposed to the CRE sector. As of June, CRE loans backed by nonfarm, nonresidential properties totaled almost $1.1 trillion, or 14.2% of total loans and leases, according to the Federal Deposit Insurance Corp.

The guidance said the analysis of repayment ability should take into account a borrower's overall financial condition, the cash flow from the borrower's business operations and any market conditions that may hamper repayment prospects.

To illustrate a prudent workout process, the guidelines included several examples of hypothetical modifications. For example, one scenario involved a builder who had used a $400,000 construction loan on a single-family home, but needed a workout after the loan had matured and no buyer for home had been found.

Under the example, the original lender negotiated a restructured loan for another year to give the builder more time to find a buyer, and considered further changes if the builder decided to rent the home.

But regulators also warned against going too far. In a letter to examiners Friday, Timothy Long, senior deputy comptroller and chief national bank examiner, said lenders should not be too lenient.

"Working with troubled borrowers, however, does not mean that a bank can circumvent prudent underwriting standards or defer recognition of losses," he said.

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