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Appeal of Loan Classification (First Quarter 2020)


A national bank supervised by the Office of the Comptroller of the Currency (OCC) appealed to the District Deputy Comptroller the loss rating assigned by the supervisory office (SO) to a commercial land development loan relationship, as communicated in a supervisory letter issued to the bank's board of directors.


The appeal contended that the SO erred in applying the loan classification definitions by requiring the bank to write off the loan relationship despite its demonstrable value. The appeal noted that the examiners deemed the appraisal on file as invalid despite relying on it for classification purposes during previous examinations. The appeal also contended that the SO did not grant bank management additional time to cure the appraisal deficiencies or obtain a new appraisal before requiring the charge-off.

Supervisory Standards

The Deputy Comptroller thoroughly reviewed the appeal using the supervisory standards outlined in the "Rating Credit Risk" (April 2001) booklet of the Comptroller's Handbook.


The Deputy Comptroller concurred with the SO's classification of loss for the loan relationship. The Deputy Comptroller determined that the subject loan was not a bankable asset as it represented a failed development project, secured by undeveloped land, with an unknown collection period and amount.

The Deputy Comptroller concluded that the project was highly speculative and there has been little progress since loan origination in developing the land to sell the lots. The loan is also severely past due and matured. Collection of the loan has been lengthy, and long-standing lawsuits and other legal issues related to the land development may extend collection for many additional years. Banks should not maintain an asset on the balance sheet if realizing its value would require long-term litigation or other lengthy recovery efforts. Refer to the "Rating Credit Risk" booklet of the Comptroller's Handbook.

The Deputy Comptroller concluded that the collateral and the resulting appraisal were irrelevant to the classification decision due to bank management's decision that it was in the best interest of the bank to not pursue foreclosure of the collateral. In addition, the appraisal on file at the time of the examination and the updated appraisal provided during the appeal failed to opine on the "as is" value for the property.