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Appeal of Shared National Credit (SNC) – (Fourth Quarter 2010)


A participant in a SNC facility appealed the decision rendered by the SNC appeal voting team to assign a split classification of substandard and loss to the credit and to place the loan on nonaccrual. The appeal recognized the loan was problematic but the lender and borrower had taken steps to strengthen the credit.


The appeal stated the appropriate classification was substandard and accrual. The basis of the appeal centered on four factors:

  1. the loan was not collateral dependent as that term is used for regulatory purposes,
  2. the measurement for impairment was calculated incorrectly,
  3. the loan was restructured to bolster the creditor position and gain additional support from the borrower/guarantor, and
  4. the SNC analysis drew the most conservative conclusions about several key factors, in contradiction of the facts.


The ombudsman thoroughly reviewed the appeal and conducted a comprehensive review of the documentation supplied by the SNC appeal voting team. The ombudsman relied on the credit classification definitions as defined in the Comptroller's Handbook for Rating Credit Risk (the Handbook) and the Policy Statement on Prudent Commercial Real Estate Loan Workouts (Policy Statement) as the standard for the analysis.

The Handbook defines a substandard credit as an asset that is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

Based on the review of the information submitted by the bank and the SNC appeal panel, the ombudsman made the following determinations:

  1. The primary source of repayment (cashflow) was insufficient to meet debt service. While the borrower was able to meet the required interest only payments, its financial performance did not support amortization of the credit on reasonable terms.
  2. The loan was collateral dependent in accordance with General Accounting and Auditing Principles (GAAP) because repayment was expected solely by sale or operation of the underlying collateral.
  3. The borrower was, and continued to be even after the restructure, outside covenant requirements for the loan to value ratio and was unable to re-margin the credit.
  4. The guarantor/sponsors did not demonstrate an ability or willingness to support this credit.

The above factors represent well-defined weaknesses in the borrower's primary repayment source. The most recent appraisal of the underlying collateral resulted in a loan to value of 132%. The guarantors provided no additional support. Therefore, the ombudsman concurred with the assigned classifications of Substandard and Loss. Additionally, the nonaccrual designation was appropriate because payment in full of interest or principal was not expected.

The ombudsman's conclusion was based on the specific facts and circumstances of this appeal and is not intended to be a broad conclusion regarding all cases involving the lodging sector.