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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:
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:
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.