On October 3, the OCC issued Bulletin 2024-29, providing guidance for managing credit risk in connection with refinancing commercial loans.
The bulletin is directed at all banks with commercial loan portfolios, and highlights the heightened risk for borrowers struggling to refinance existing debt under reasonable terms, especially in rising interest rate environments and weaker markets. The OCC notes that refinancing risk mainly affects loans with remaining principal balances at maturity and borrowers reliant on recurring debt for their capital structure or operations, including “interest-only loans, commercial real estate loans, leveraged loans, and revolving working capital lines.”
At the transaction level, the OCC recommends banks evaluate risk throughout the lifecycle of the loan. This means assessing refinance risk during underwriting and conducting ongoing monitoring, as loans approach maturity. The agency also encourages banks to apply multivariable stress testing to assess how changes in borrower financial health or market conditions could affect refinancing prospects.
Moreover, the bulletin details how banks can structure loans to reduce refinance risk through appropriate underwriting standards and covenants. For example, at origination, banks can utilize underwriting standards that include debt service coverage or loan-to-value requirements, which provide a cushion in case a borrower’s financial condition declines or market conditions deteriorate.
At the portfolio level, banks should track the volume and timing of upcoming loan maturities and consider refinance risk when assigning credit risk ratings. The bulletin further suggests that banks develop “refinance plans for borrowers with near-term refinancing needs” and account for refinance risk when planning loan workout strategies.
Putting It Into Practice: While not breaking any new ground, the OCC’s guidance aligns with federal and state banking regulators’ recent efforts to implement tighter controls on commercial lending transactions. As regulators continue their efforts to ratchet up scrutiny of the commercial lending industry, banks should review their commercial lending protocols and procedures to ensure alignment with the latest federal and state regulations and guidance.
