Reichwald Talks About Resurgence of A/B Loan Modifications in American Banker

Back to the Future: Old Mod Tool Is Made New
American Banker

November 30, 2009 - American Banker interviewed Harold P. Reichwald, Manatt’s Banking and Specialty Finance practice group co-chair, for a story on lenders with large commercial real estate (CRE) books that are resurrecting a workout method common in the sharp economic downturn two decades ago: splitting loans to cash-strapped clients into two pieces and charging off the bad slice.  The healthier piece stays on their books at new terms that are easier for the borrower to meet. 

Some banks, according to American Banker, are using this 1980s model - also known as an "A/B" modification - on commercial real estate loans for troubled retailers, home developers and other businesses.  Cutting a note in two can keep a borrower afloat while stopping a lender from having to collect on a money-losing asset through foreclosure. 

American Banker reports that the Federal Deposit Insurance Corp., the Federal Reserve Board and other regulators outlined how lenders should modify CRE loans in a prudent fashion in a 33-page policy statement released in October.  A section on splitting loans stated that "a restructuring may involve a multiple note structure" and that "lenders may separate a portion of the current outstanding debt into a new legally enforceable note that is reasonably assured of repayment." 

The other piece that is "not reasonably assured of repayment" should be "adversely classified" and "charged off as appropriate." 

Reichwald notes that the paper urges banks to consider the strategy when it makes sense. 

"What regulators were doing was encouraging banks to think creatively," he said in the American Banker article.  "I don't know that I'd say [it was] a 'stamp of approval,' but I would certainly say they were being encouraging - that you should look more favorably than not on such a process."