Why this is in front of examiners now
The FDIC’s 2026 Risk Review reports that modified commercial real estate loans totaled $11.6 billion, or 0.38 percent of CRE-secured loans, and that 82 percent of them were performing. The review counts the whole industry, and more than half of the volume sat at banks with more than $100 billion in assets, so it does not describe a typical community bank. For community banks the review shows past-due and nonaccrual loans at 1.36 percent, still below the pre-pandemic average of 1.50 percent, and net charge-offs at 0.29 percent, above the pre-pandemic average of 0.15 percent.
The OCC’s Spring 2026 Semiannual Risk Perspective makes a related point in a different setting: it says the growing use of debt restructurings and payment-in-kind features may mask credit deterioration in private credit fund portfolios. It also says refinancing risk deserves attention because many CRE loans made when rates were lower mature over the next several years. The OCC report is not about community bank loan modifications, but the concern carries over: a restructuring can improve how a loan looks without improving the credit.
What the agencies say a prudent accommodation looks like
The interagency policy statement on CRE loan accommodations and workouts, revised in 2023, sets out what examiners expect. These are the points that decide how a modified loan is judged.
| Area | What the statement says |
|---|---|
| Basis for the workout | Updated financial information on the borrower, the project and the guarantors, current collateral valuations and a sound loan structure. Global debt service should be analyzed using realistic cash flow projections. |
| Risk rating | A modified loan to a sound borrower is generally not adversely classified unless well-defined weaknesses jeopardize repayment, though it may be on the watch list. Classification reflects the risk over the remaining term of the loan, not only its payment history. |
| Accrual | A loan that was accruing before the restructuring should be evaluated for nonaccrual at the time of modification. It can stay on accrual only if a current, well-documented credit assessment supports repayment under the new terms. Returning a nonaccrual loan to accrual generally takes sustained repayment, typically at least six months of cash payments. |
| Collateral values | Update the valuation when project performance, market conditions or key assumptions have materially deteriorated. An evaluation can replace a new appraisal if it reasonably updates the original assumptions. |
| Interest reserves | The statement warns that an interest reserve can keep a stalled project’s loan contractually current while repayment of principal is at risk. |
| Examiner approach | Examiners will not criticize prudent workouts, even when the modified loans end up adversely classified. They review the bank’s valuation instead of performing their own, and they adjust it only where the bank’s facts or assumptions are irrelevant or inappropriate. |
Where the stress hides
The examiner’s concern is not that a bank modified a loan. It is a modification file that cannot show why the new terms will work. In practice the questions fall in four places.
- The rating did not move. The loan was modified because the borrower was struggling and is still rated as it was before. The statement says the rating should reflect repayment risk over the remaining term, so the file needs a reason for the rating after the change.
- The loan stayed on accrual without a written reason. The test is a current credit assessment that supports repayment under the revised terms. A payment history alone is not that assessment.
- The collateral value is old. If conditions changed enough to need a modification, they may have changed enough to need a new value.
- The loan stays current because of how it is funded. An interest reserve or capitalized interest keeps the loan from showing as past due without showing that the borrower can repay.
The policy statement does not single out payment-in-kind or capitalized interest by name. The same test applies to them: does the credit assessment support repayment under the revised terms?
What to do now
- List every modified or extended loan. For each, record the date, what changed, the rating before and after, and whether it was on accrual before and after. If that list is hard to build, that is the first finding.
- Write a short credit memo at every modification. It should state the borrower’s repayment capacity, the guarantor support, the collateral value and the reason the rating is what it is.
- Document the accrual decision at the time of the change. Record the credit assessment that supports keeping the loan on accrual, or move it to nonaccrual. Track the six months of payments before any return to accrual.
- Refresh collateral values when conditions change. Use the type of value that fits the plan for the loan. A documented update of the original assumptions can be enough.
- Watch repeat accommodations. A loan extended twice or three times deserves independent review of whether the plan is working. Have credit review sample modified loans, including those that are performing.
Prudent workouts are not a mark against a bank, and examiners are told so. The files that show the reasoning are what make that protection real.
Our loan review team helps community banks test their modification and workout files the way an examiner would.